Consumerist had a great post last week about the order of retirement withdrawals, a post inspired by Vanguard’s recent Autumn 2007 report. The order they list is:
- Taxable accounts
- Tax-deferred accounts
- Tax-free accounts
So, why taxable accounts first? Because you want your tax deferred and tax free accounts to be able to grow as long as possible before you make any withdrawals from them. They have more momentum than taxable accounts because they either start with a larger balance (tax deferred) or they can be withdrawn without being reduced by taxes (tax-free), so both are better off than taxable accounts which have already paid taxes on the front end (they’re post-tax dollars being invested) and the back end (appreciation will be reduced by capital gains taxes).