She wasn’t in any shape to handle them herself. She had never been involved in the money. It wasn’t deliberate. It was simply how my parents had divided the responsibilities. He handled the finances, she handled other things, and the system worked until suddenly it didn’t.
She didn’t have much in retirement accounts. Between her income and my father’s pension, they had never needed to draw much from them. The balances sat there quietly.
Then she reached the age when the government required her to start taking money out.
None of us caught it.
I want to be clear about who missed it. Not her. Me. I had taken responsibility for the finances, and it had never occurred to me that a retirement withdrawal could be mandatory.
I paid the penalty out of my own pocket. She never knew there had been one.
At the time, the penalty for missing a required minimum distribution was 50% of the amount that should have been withdrawn. Half.
The rules are gentler now. The normal penalty is 25%, and it can fall to 10% when the mistake is corrected within two years. The IRS can also waive the penalty when the shortfall resulted from a reasonable mistake and the person takes steps to fix it.
That is good news if you’re reading this with a sinking feeling.
But I would rather you never need the good news.
Nobody Hands You the Rules
That’s the strange thing about retirement withdrawals. There is no orientation.
You spend thirty or forty years being told to put money into retirement accounts. Then one day you’re expected to understand which money is taxable, which withdrawals affect Social Security, when the government will force money out, and whether taking an extra $10,000 could raise your health insurance costs.
Most people don’t know these rules because nobody has given them a reason to learn them yet.
There is also no single withdrawal order that works for everyone. You may have heard that you should spend taxable savings first, traditional retirement accounts second, and Roth money last. That can be reasonable, but following it automatically can also leave years of low tax brackets unused and produce larger required distributions later.
The right starting point is not memorizing an order.
It is understanding what kind of money you own.
Start With the Reassuring Part
Retirees often assume that every dollar they withdraw will produce a large tax bill. That isn’t necessarily true.
For 2026, the standard deduction is $32,200 for a married couple filing jointly and $16,100 for a single filer. People who are 65 or older receive an additional standard deduction of $1,650 per qualifying married person or $2,050 for an unmarried person.
There is also a temporary senior deduction available from 2025 through 2028. It can provide another $6,000 per eligible person, or $12,000 for a married couple when both spouses qualify. The full deduction is available at modified adjusted gross income of up to $75,000 for a single filer or $150,000 for a married couple filing jointly, then phases out above those amounts.
Put those together, and a married couple who are both at least 65 and qualify for the full senior deduction could have $47,500 of federal deductions in 2026 if they use the standard deduction. A qualifying single filer could have $24,150.
That does not guarantee a zero tax bill. Social Security has its own tax calculation, other income matters, and state rules vary.
But it does mean that you should run the numbers before assuming that taking money from a retirement account will be painfully expensive.
Fear is not a tax strategy.
Your Three Tax Buckets
Most of the money you have saved falls into one of three buckets.
Traditional retirement money
This includes most traditional 401(k), 403(b), SEP-IRA, SIMPLE IRA, and traditional IRA balances.
You generally received a tax benefit when the money went in, and the investments grew without yearly taxes. When the money comes out, the taxable portion is treated as ordinary income.
If you withdraw $10,000, that does not mean you owe $10,000 in tax. It means $10,000 is generally added to the income used to calculate your tax bill.
Roth money
Roth contributions are made with money that has already been taxed.
Qualified Roth withdrawals, including the growth, are generally federal-income-tax-free. They also do not add to adjusted gross income. That makes Roth money particularly useful in years when another taxable withdrawal could affect Social Security taxation, an ACA subsidy, or Medicare premiums.
Already-taxed savings and investments
Money in a checking account or savings account does not become taxable again when you withdraw it. The interest is generally taxed as you earn it.
A taxable brokerage account is more complicated. Selling an investment can create a taxable capital gain or loss, but you are not taxed again on the entire amount you invested. You are generally taxed on the gain.
That can make taxable savings relatively inexpensive to use, but not always. Selling an investment with a large gain may cost more than taking a modest traditional retirement withdrawal in a low tax bracket.
The three buckets are a map. They are not an automatic spending order.
The Gap Years
One of the best planning opportunities may arrive between the year you stop working and the year required minimum distributions begin.
Your paycheck is gone. You may not have claimed Social Security yet. Required withdrawals have not started. For the first time in decades, you may have substantial control over how much taxable income appears on your return.
Most people spend these years trying not to touch their retirement accounts.
That can be a mistake.
Suppose you retire at 64 and leave your traditional 401(k) untouched until required distributions begin. You may preserve the balance, but you may also waste several years when you could have withdrawn some money at relatively low tax rates.
Later, Social Security, pensions, investment income, and required distributions may all arrive together.
There are two ways to use the gap.
You can withdraw traditional money and spend it. Or you can convert some traditional money to Roth, pay the tax now, and leave the converted money invested.
A Roth conversion can be useful, but it is not mandatory. The financial internet often treats conversions as the centerpiece of retirement planning because it is usually writing for households with very large retirement balances.
For many working families, the simpler move is enough: use some traditional retirement money during low-income years instead of treating the account as untouchable until the government forces withdrawals.
Do Not Claim Social Security Just to Avoid the 401(k)
Some people claim Social Security at 62 because they are afraid to withdraw money from a retirement account.
That decision deserves a second look.
Claiming Social Security early generally reduces the monthly benefit. Delaying beyond full retirement age increases the monthly benefit until age 70.
That does not mean everyone should wait until 70. Health, life expectancy, employment, spousal benefits, cash needs, and personal preference all matter.
But using some traditional retirement savings while delaying Social Security can sometimes accomplish two things at once:
It reduces the traditional balance that will eventually be subject to required distributions.
It allows the Social Security benefit to grow.
The mistake is not claiming at 62. The mistake is claiming at 62 because you believe touching the 401(k) is automatically worse.
Compare the two choices with real numbers.
Three Income Tripwires
A retirement withdrawal can cost more than its ordinary income tax. These are the three places I would watch most closely.
1. Social Security taxation
Whether Social Security becomes taxable depends on what the government calls combined income, sometimes described as provisional income.
It includes:
your adjusted gross income,
tax-exempt interest, and
half of your Social Security benefits.
For a married couple filing jointly, Social Security taxation begins when combined income exceeds $32,000. Above $44,000, as much as 85% of the benefit may be included in taxable income.
For a single filer, the corresponding thresholds are $25,000 and $34,000.
Two points matter here.
First, this does not mean Social Security is taxed at an 85% rate. It means that up to 85% of the benefit can become part of your taxable income.
Second, this is not a single cliff where one extra dollar suddenly makes 85% of your benefits taxable. The taxable amount grows as income rises. But the interaction can create surprisingly high effective tax rates across certain ranges.
The thresholds have never been adjusted for inflation, so more retirees are gradually being pulled into the calculation.
Tax-exempt municipal bond interest counts in the formula. The new senior deduction does not protect you here because it does not reduce adjusted gross income.
Qualified Roth withdrawals generally do not enter the calculation. That is one of the most practical reasons to have at least some Roth money available in retirement.
2. ACA premium tax credits
This one matters when you retire before 65 and buy health insurance through a Marketplace.
The credit is based on household income. Taxable retirement distributions, Roth conversions, and capital gains can all raise that income and reduce the credit.
The rules became less forgiving in 2026. In general, households with income above 400% of the federal poverty level are no longer eligible for the premium tax credit. The limits that previously capped how much excess advance credit some households had to repay also ended for 2026.
That creates a real planning risk.
A large December withdrawal could reduce your subsidy or push your income above the eligibility line after you have already received advance credits all year.
If you are using Marketplace insurance, model the health insurance effect before taking a large taxable distribution or Roth conversion.
The subsidy loss may cost more than the income tax.
3. Medicare IRMAA
IRMAA is the surcharge added to Medicare Part B and Part D premiums for people with higher incomes.
For 2026, the first surcharge begins above modified adjusted gross income of $109,000 for a single filer or $218,000 for a married couple filing jointly. CMS estimates that the income-related adjustments affect roughly 8% of Medicare Part B beneficiaries.
That means IRMAA is not the first concern for most of my readers.
But if your income is near one of the thresholds, a Roth conversion, capital gain, or large traditional withdrawal can affect more than your tax return. It can also raise Medicare premiums.
What a Required Minimum Distribution Actually Is
A required minimum distribution, or RMD, is the point at which tax deferral begins to end.
You spent decades contributing money to traditional retirement accounts without paying current income tax on it. Starting at a certain age, the government requires you to withdraw a minimum amount each year, whether you need the money or not.
You have to withdraw it. You do not have to spend it. Money you do not need can be reinvested in a regular taxable account.
When RMDs begin
For people born from 1951 through 1959, RMDs generally begin at age 73. For people born in 1960 or later, they generally begin at age 75.
There is an important exception. If you are still working, your employer’s plan may allow you to delay RMDs from that current workplace plan until you retire. This exception generally does not apply to traditional IRAs, SEP-IRAs, SIMPLE IRAs, or people who own more than 5% of the employer sponsoring the plan.
Which accounts have them
Traditional IRAs and most traditional workplace retirement accounts have RMDs.
Roth IRAs do not have lifetime RMDs for the original owner. As of 2024, designated Roth accounts inside workplace plans no longer have lifetime RMDs either.
How much you must take
The basic calculation divides the account balance from the previous December 31 by a life-expectancy factor from an IRS table.
At age 73, the standard factor is 26.5. That produces a withdrawal of about 3.8% of the prior year-end balance. At age 81, the factor is 19.4, producing a little more than 5%.
The required amount is often smaller than people imagine.
The first-year trap
Your first RMD can generally be delayed until April 1 of the following year.
That sounds helpful, but the second RMD is still due by December 31 of that same year. Waiting can therefore place two required distributions on one tax return.
That may increase the amount of Social Security subject to tax, trigger Medicare surcharges, or push income into a higher bracket.
Delaying the first RMD is an option, not an automatic good deal.
Who is responsible
An IRA custodian must report the RMD amount or offer to calculate it. A workplace plan administrator should generally calculate the amount for the participant.
But the legal responsibility for taking the correct amount on time still belongs to you.
Do not assume that receiving a calculation means the withdrawal will happen automatically.
What to do if you miss one
Correct it promptly. Take the missed distribution, file Form 5329, and explain what happened.
The normal penalty is 25% of the shortfall and can fall to 10% when corrected within two years. The IRS may waive part or all of the penalty if the failure resulted from a reasonable error and you are fixing it.
This is one of the rare places where panic makes the situation worse. Fixing it quickly matters.
What to Do Next
Make a list of every account you own.
For each one, write down:
the financial institution,
the owner,
the approximate balance,
whether it is traditional, Roth, or already-taxed,
whether it will eventually require an RMD, and
who is listed as the beneficiary.
Do not worry about developing the perfect withdrawal plan yet.
The first step is knowing what kind of dollars you have.
That list tells you which withdrawals create ordinary income. It identifies the money you can use without increasing adjusted gross income. It shows where future required distributions will come from.
It is the map you need before making any larger retirement decision.
I never made that map for my mother.
I was handling her money in good faith, with no idea what I did not know. The first time the system required something from us, I missed it and paid for it.
This is not a hard mistake to avoid.
It just requires someone to tell you that the rules exist.
In Part 2, we will use the same three buckets to answer a different question: what should you do if the market drops just after you retire?