A taxable account, such as a brokerage account, exposes investment income, dividends, interest, and realized capital gains to taxation each year. This recurring tax drag can reduce returns compared with tax-advantaged accounts. section 9.1.1
Retirement withdrawal planning commonly treats taxable accounts as less tax-efficient than IRAs and Roth IRAs. Liquidating taxable assets first lets tax-advantaged assets continue compounding, but the best sequence depends on tax brackets, expected returns, and conversion decisions. section 9.2.4 section 9.2.6
A taxable account matters because it:
- Creates an annual tax drag when investment income and realized gains are taxed instead of compounding tax-free. section 9.1.1
- Can serve as the spending account while an IRA remains invested and grows without the same assumed tax drag. section 9.2.4
- Provides spending capacity during Roth conversions, allowing IRA withdrawals to fill a tax bracket while converted funds remain tax-advantaged. section 9.2.6
Comparing withdrawal sequences
A modeled retiree with taxable, IRA, and Roth assets receives markedly different results from alternative sequences: IRA-first lasts 40.0 years, taxable-first 48.7 years, and Roth conversion 53.2 years. These results depend strongly on the assumed tax drag: reducing it from 1% to 0.5% narrows the IRA-first versus taxable-first difference from 8.7 to 6.6 years. section 9.2.4 section 9.2.6
order = ['taxable', 'IRA', 'Roth']
compute_years(order, ret, starting_values, max_years,
spending, deduction, TaxTable)
A short Python configuration shows how to model taxable assets alongside IRA and Roth accounts by changing the liquidation order and passing returns, balances, spending, deductions, and a tax table. section 9.2.4
