“I need $30,000 from my IRA for a new car, vacation, roof repair, or whatever.” – Standard Client Call

I’m a second-generation financial advisor so I grew up reading plenty of quarterly marketing reviews and even contributing the occasional paragraph or two. So, like most people, I thought the only job of a financial advisor was to invest people’s money in a way that will achieve their financial goals.

Portfolio selection is a big part of the job, but what I didn’t realize before starting in the career is the importance of managing tax exposure over one’s life. The government is always entitled to collect taxes, but through proper planning we have a lot of control over when we pay taxes and what assets we use to pay them.

Let’s look at a case study: A client calls in to request $30,000, after taxes, from their Traditional IRA to buy a new car. The husband and wife are both age 74, have a total of $1.4 million in their IRAs, a $300,000 joint investment account, and are projected to have total income of $175,000 this year. To make things simple, the husband and wife live in Washington state and don’t have a state income tax. Federal withholdings will be based off their highest marginal tax bracket which is 22%. Below is what the transaction looks like if we follow the client’s request:

On the one hand it’s great the client is using the account to live a little. Plenty of people spend their entire life investing and never touch their retirement accounts except for the required minimum distributions. However, people pay their financial advisor to provide advice (at least I hope that’s what they do) and not to blindly follow orders when a better alternative exists. This is where the $300,000 joint investment account comes into play.

In our example, our clients have $31,000 in a short-term corporate bond ETFs (exchange traded fund) in their joint account. The ETFs have an unrealized gain of $3,000. Below is the difference between the IRA and Joint Account.

Quite a difference in the tax bill! The reason is that the IRA is pre-tax money where any money taken out is taxed at ordinary income rates, while the joint account is an after-tax account. This means money added to the joint account has already been taxed, so when you buy share in a stock or fund, you are establishing a cost basis. And you are only taxed on the gain between your cost basis and what you sell the asset for. As a bonus, if you hold an asset for a year or more, the gain is taxed at a preferential rate called long term capital gains. In our scenario, the long-term capital gains rate is 15%.

But wait, there’s more! When you sign up for Medicare, you have monthly premiums for Part B and these premiums are determined by your total income (Modified Adjusted Gross Income or MAGI), which is higher than your taxable income. The first tier of premium increases for a married couple starts at $212,001 and increases the monthly premium by 40% from $185 to $259. This premium increase is effective two years after you cross the $212,001 threshold. In our scenario, the IRA distribution pushes the clients above this threshold since they must take out more money to pay federal taxes. This means the IRA withdrawal doesn’t just increase taxes - it also triggers higher Medicare premiums two years later. The withdrawal from the joint account does not push the clients above the premium increase limit.

For the Traditional IRA distribution, most of the expenses are paid in the year the distribution occurred, but total expenses amount to $10,237.54. That’s $9,787.54 more in unnecessary taxes and expenses than if money for the new car was taken out of the joint investment account.

In summary, when it comes to withdrawing money from your accounts, it’s not just about how much you need—it’s also about where that money comes from. As this example shows, choosing the right account can save you thousands in taxes and Medicare premiums. It’s a reminder that thoughtful planning today can protect your finances tomorrow. So before making a big withdrawal, let’s talk through your options and find the approach that keeps more money in your pocket, not Uncle Sam’s.

Addendum: Technically, when comparing withdrawals between an IRA and another type of account, we are determining whether we want to pay taxes on the IRA distributions today or in the future, because pre-tax money in IRAs must be distributed out of the account and taxed someday (unless distributed via qualified charitable distributions or inherited by a charity). This leads us to a larger conversation over whether to take distributions in the future at a lower tax bracket or at a higher bracket today, whether a family member will inherit the IRA and what their tax situation looks like, or if the IRA will go to a charity. For simplicity’s sake, our scenario assumes the clients want to punt on paying more taxes today and entirely avoid the Medicare premium increases.