Spend Taxable First? Why That Conventional Wisdom Can Backfire for Doctors with Large IRAs

Most of us learned the standard retirement withdrawal order: spend taxable accounts first, then tax-deferred accounts (traditional IRA and 401k), and leave tax-free Roth accounts for last.

For many people, that’s fine. But if you’ve done everything right, maxing out your 401k and IRA for decades, you may be sitting on a seven-figure tax-deferred balance. For you, the conventional order can set up a significant problem.

The Required Minimum Distributions (RMD) Problem

Required Minimum Distributions (RMDs) force you to withdraw money from tax-deferred accounts whether you need it or not. A single RMD year can:

• push you into a higher tax bracket,

• increase the portion of your Social Security that’s taxable, and

• trigger IRMAA, the Income-Related Monthly Adjustment Amount, a surcharge on Medicare premiums for higher-income retirees.

All of this hits in the same year, on money you never asked to take.

The math is simple: take your prior year-end balance and divide it by the distribution period in the IRS Uniform Lifetime Table (Publication 590-B). RMDs begin at age 73 for those born 1951 to 1959, and at 75 for those born in 1960 or later.

Consider a hypothetical Dr. Mina, who maxed out her retirement accounts every year and reaches age 73 with a $4M IRA. The table factor at 73 is 26.5, so her first RMD is roughly $151,000. Layer on Social Security and investment income, and she’s likely well into the upper brackets whether she needs the money or not. The balance keeps compounding and the divisor keeps shrinking, so RMDs tend to grow year after year.

Qualified Charitable Distributions (QCDs) can help. After age 70½, you can send up to $111,000 per year directly from an IRA to qualified charities. The transfer counts toward your RMD without being taxed as income. But that only helps if you’re charitably inclined, and it doesn’t solve the underlying problem.

So is the conventional order really best for owners of large tax-deferred accounts? What about converting to Roth early, filling up specific tax brackets while you have the chance? Let’s run the numbers.

A Hypothetical: Dr. Larry and Dr. Lucy

Dr. Larry and Dr. Lucy were both born in 1966 and retire at 60. We assume they’ve already optimized their Social Security claiming, as covered in an earlier post. To keep the comparison clean, we assume current tax law, brackets, IRMAA thresholds, and RMD rules stay unchanged for 30 years. They have $2.2M in pre-tax IRA assets.

Most people ask only one question: “Should I spend taxable first?” But that’s one strategy among many. Planning software lets us model pro-rata withdrawals, every ordering of taxable, tax-deferred, and tax-free accounts, and Roth conversions that fill each tax bracket or stay below each IRMAA threshold. Each can be compared on average tax rate, total taxes paid, total net income, and net legacy. 

Partial list; additional strategies not shown. Values in today’s dollars.

The first four rows are the usual suspects: pro-rata withdrawals and the conventional orderings of taxable, tax-deferred, and tax-free accounts. They all land around $1.28 to $1.29 million in lifetime taxes. As the Roth conversion strategies fill higher brackets, taxes fall quickly. Filling the 22% bracket brings the total to $816,000, and from the 24% bracket on it sits near $700,000, about 45% less than the conventional approach.

For this couple, filling the 32% bracket produces the lowest lifetime taxes ($703,000) and the highest net income ($5.04 million). But the 24% and 35% strategies are within a few percent of it, so the optimum is a plateau, not a cliff. Net legacy tells a different story: the tax-deferred-first approach shows the highest figure at $4.85 million, while the conversion strategies land between $4.70 and $4.75 million. What you optimize for, lifetime spending or what you leave heirs, can change the answer.

That’s the point. The conventional order is one row in a long list, and you can’t know which strategy fits your numbers until you run them.

Here is the 32% conversion strategy head to head with the conventional taxable → tax-deferred → tax-free order, in nominal dollars:

Relative to the conventional order, the conversion strategy:

• lowers the average tax rate from 15.71% to 9.15%,

• reduces lifetime taxes by about $583,000 in today’s dollars,

• raises total net income by about $583,000 in today’s dollars, and

• increases net legacy by about $302,000 in today’s dollars.

The Trade-Off

This isn’t free. The couple pays more tax up front in exchange for control later.

The blue bars show annual taxes under the conversion strategy. Taxes are heavy in the first four years, roughly $167,000 to $170,000 a year for the first three, while the conversions happen. After that they drop to a small fraction of that and stay low for the rest of the projection.

The yellow bars show the conventional path. Early taxes are small, but they climb steadily through the 2040s and 2050s as RMDs begin and grow. By 2053, the couple’s annual tax bill under the conventional approach reaches roughly $168,000, about what the conversion path cost in each of its heaviest years, except now it recurs every year.

“How Long Do We Need to Live for This to Make Sense?”

That’s the right question. Paying a large tax bill in years one through four is only worth it if you live long enough to benefit.

The blue line rises steeply at first, then flattens. The yellow line starts slowly, then accelerates. They cross around 2043, when Larry and Lucy are 77, at about $712,000 in cumulative taxes. Beyond that point, the longer they live, the further ahead they are. By 2053, the conventional path has reached roughly $1.9 million in cumulative taxes, against about $750,000 for the conversion path.

The Takeaway

For physicians with large pre-tax balances, “spend taxable first” is a default, not a plan. Whether early Roth conversions make sense depends on your balances, your brackets today versus later, your health and longevity, your charitable intentions, and your estate goals. But it’s worth running the numbers before RMDs run them for you.

This is a hypothetical illustration for educational purposes only, not tax, legal, or investment advice and not a projection of actual results. It assumes current tax law remains unchanged, which is unlikely, and relies on stated assumptions about returns, income, and longevity. Individual results will vary. Consult your tax professional before making Roth conversion decisions.