Most retirement advice is about one thing: how much to save. Save more. Contribute more. Get the match. All of that is sound and good advice and things I talk about on this site. But it addresses only half of the issue. Having just turned 60 years old as I write this, I am living the other half: what happens on the other end. When can you actually use the money. And what does it cost you to use it.
I am actively answering those two questions personally. I have two kids recently delivered to college. I have money in stocks and mutual funds and I have retirement accounts. I have net worth but I am cash poor, so I have to access these accounts to write those tuition checks.
Many people are unclear on the answers to these two questions, and it is easy to see why. You have been saving faithfully for decades without really thinking about getting old. Then, what happens…… you wake up and you are old.
When the time comes to access savings, a dollar is not simply a dollar, and when you can touch your money depends on where you directed those savings, investments and retirement funds. Most people think the cost of access is just the tax rate. It is not. Before a certain age, the cost could be an outright penalty, which is why the timing question hits hardest in exactly the years most families are paying for college.
This is not a recommendation post. It is how I think about my own accounts, and the framework underneath that thinking, after 25 years in senior finance roles and from the CFO chair I sit in today. Your situation is yours. Tax outcomes depend on your income, your filing status and the state you live in. But the framework is applicable, and the framework is the point.
The accounts, in order of how easily you can reach them
You cannot view your savings as one pile. Picture several accounts instead, each with three things worth knowing.
- The timing lock, meaning when you can access the funds without a penalty.
- The tax treatment, meaning what rate applies when you do access it.
- The tax base, meaning how much of the withdrawal is even taxable in the first place.
Here are the account types, ordered by that timing lock, from the most accessible to the least. Real estate sits at the end for a different reason, and I will flag it when I get there.
Taxable brokerage account
A taxable brokerage account is the most flexible money you own. There is no age lock and no penalty at any age. You can sell stocks today and have the cash in a couple of days. Its tax treatment is the friendliest of the group: gains on anything held longer than a year are taxed at long-term capital gains rates, which sit below ordinary income rates. And its tax base is small, because only the growth is taxed. The money you originally put in represents your cost basis. You put it in after tax, so it is always available to you tax free. Long-term capital gains also have a zero percent bracket. In a low enough income year, a long-term gain can be taxed at nothing at all.
Roth IRA
For a Roth IRA, your contributions, the money you actually put in, can come out at any age, tax free and penalty free, because the tax was already paid on the way in. This is the same as the brokerage account. The difference ties to the growth, or gain, sitting in the account. To take this out tax free you generally need to be 59½ with the account open at least five years. So a Roth is more reachable than people assume for the money you contributed, and locked like a retirement account for the money it earned. On the tax base, a qualified Roth withdrawal is not taxable at all. None of it.
So how does it actually work to pull out your contribution vs the gain? You do not fill out a form asking for only your contributions back. You request a withdrawal like any other, and the IRS decides the order. That order is fixed and it runs in your favor: contributions come out first, then any converted amounts, then growth last. So a withdrawal is contribution money until your contributions are used up. What you do need is records. Your custodian does not necessarily track what you contributed, particularly if the account has moved between firms over the years, and it is you who reports the basis on Form 8606. Make sure you keep track of all the money you put in.
One limit matters at higher incomes. You cannot contribute directly to a Roth IRA above a certain income. For 2026 the ability phases out between $242,000 and $252,000 for married couples filing jointly, and between $153,000 and $168,000 for single filers. I will come back to that, because it is my story.
Roth 401(k)
A Roth 401(k) sounds similar to a Roth IRA but behaves differently in ways that are important. There is no income limit at all, which makes it available to people locked out of a Roth IRA. But it does not carry the Roth IRA’s best accessibility feature. You cannot pull out only your contributions. An early withdrawal comes back pro rata, part contribution and part earnings, with the earnings portion taxed and penalized. It does get the same early-access door at 55 that the traditional 401(k) has, described next, which a Roth IRA lacks.
There is one more thing about the Roth 401(k), and it is worth checking on your own statement. Your contributions go in as Roth. The employer match does not. Unless your plan specifically offers a Roth match, and most do not, the match goes into a pre-tax source instead. So someone who elected Roth for twenty years does not have a 401(k) that comes out tax free. They have one account holding two kinds of money: their own contributions, tax free at withdrawal, and the match plus its growth, fully taxable as ordinary income. Both sit under the same plan and the same balance. A lot of people find this out at withdrawal.
Traditional 401(k)
A traditional 401(k) is the account most people are contributing to, and it is where that match money sits. For the most part you cannot touch it until age 59½. Pull it before that and you generally owe ordinary income tax plus a 10 percent penalty. Its tax base is the entire withdrawal, because no tax was paid on the way in, so every dollar out is taxable as ordinary income. There is one exception worth knowing. If you leave your job in or after the calendar year you turn 55, you can usually withdraw from that employer’s 401(k) without the penalty, earlier than 59½. This is commonly called the rule of 55. It applies only to the plan of the employer you actually left, not to old plans from earlier jobs and not to an IRA. Many plans also restrict you to a lump sum rather than partial withdrawals, so ask before you count on it. And it removes the penalty, not the tax. The withdrawal is still ordinary income but it is a real door a traditional IRA does not have. This is the account most people mean when they refer to retirement savings, and it is exactly why a 401(k) is not a savings account. It is a locked box, with a good reason for the lock.
Traditional IRA
A traditional IRA ends up in the same place as the traditional 401(k), but it starts differently. A 401(k) contribution never shows up as taxable wages, because it comes out of your paycheck before withholding. That money never touched your hands. A traditional IRA contribution is made with money that already ran through payroll, and you recover the tax by taking a deduction on your return. It is an above-the-line deduction, so you get it whether or not you itemize deductions. You end up in the same ‘tax’ situation as a 401(k) but take a different path to get there.
From there the traditional IRA and 401k match. Locked until you turn 59½, ordinary income on the way out, and if you took the deduction the whole balance is taxable base. That last part carries a condition. The deduction for the IRA phases out if you are covered by a workplace plan and your income is high enough, and above that range you can still contribute but get no deduction at all. Those dollars give you basis in the account, which means only the growth is taxable later and every withdrawal comes out proportionally, part basis and part taxable.
What differs from the 401(k) is access and control. There is no employer match and no early door at 55, but there is far more freedom in what you invest in, and it is the account that you can transfer your 401(k) balance when you roll it over after leaving a job. Watch one thing when you do. Rolling a 401(k) into an IRA is the standard move and it is usually the right one, but if you left that job at 55 or later and might need the money before 59½, the rollover permanently forfeits the rule of 55 on those dollars. Take what you need from the plan first, then roll the rest.
529 plan
A 529 is education money. It grows tax free and comes out tax free when it is spent on qualified education, which can be a genuinely powerful deal. The lock for this investment is tied to its use. Use it on something other than school and the earnings portion owes income tax plus a 10 percent penalty. That purpose lock is what scared a generation of parents, myself included, and I will come to that shortly. The lock is looser now than it used to be. The SECURE 2.0 law, passed at the end of 2022 and effective from 2024, allows up to $35,000 of leftover 529 money to be rolled into a Roth IRA for the person the account was meant for. The conditions are real, and the one to know right now is that the account has to have been open at least 15 years. Open it early even if you fund it slowly. I will lay out the rest of the conditions later.
Health savings account
A health savings account is the only account that is tax free on all three ends. Money goes in untaxed, grows untaxed and comes out untaxed, as long as it is spent on qualified medical care. The lock is once again a purpose lock. Before 65, spending it on anything but medical costs means income tax plus a 20 percent penalty. At 65 the penalty disappears and the account turns into a traditional IRA. It is a medical account that becomes a retirement account once you no longer need it for medicine.
Real estate
This one is last for a different reason than everything above. There is no age lock and no penalty at all, so by the standard I have been using it should sit near the top. The lock is time. I own rental property, so I will say plainly what that means. Selling takes months rather than days, and the depreciation you claimed along the way gets recaptured at up to 25 percent on the way out. You can refinance to reach the equity without a taxable event, but you are adding debt and a payment. It is real wealth. It is just the slowest to turn into money, and I go deeper in How to Evaluate an Investment Property.
The whole list in one place
| Account | When you can reach it | What is taxed when you do |
|---|---|---|
| Taxable brokerage | Any age, any time. No penalty ever. | Only the gain, at long-term capital gains rates. |
| Roth IRA | Contributions any time. Growth at 59½, account open five years. | Nothing on a qualified withdrawal. |
| Roth 401(k) | Age 59½, or 55 if you leave that employer. No contributions-only withdrawal. | Nothing on a qualified withdrawal. Early withdrawals come out pro rata. |
| Traditional 401(k) | Age 59½, or 55 if you leave that employer. | The entire withdrawal, as ordinary income. |
| Traditional IRA | Age 59½. No rule of 55. | The entire withdrawal, as ordinary income, unless some of your contributions were made without a deduction. |
| 529 | Any age, but only for qualified education. | Nothing when spent on school. Otherwise income tax plus 10 percent on the earnings. |
| HSA | Any age, but only for qualified medical care until 65. | Nothing when spent on care. Otherwise income tax plus 20 percent before 65. |
| Real estate | Any age, no penalty, but months to sell. | Gain, plus depreciation recapture up to 25 percent. |
Which account should you spend first?
The standard answer is your taxable brokerage account first, then the tax-deferred accounts, then the Roth. That order is right and it is the order I follow myself. What is worth understanding is why it is right.
The tax rate is the part most folks understand. Long-term capital gains rates sit below ordinary income rates, which is accurate and useful. But it is only half of the advantage. The other half is the base that rate is applied to.
The same $50,000, two different tax bills
Let me show it with a simple example:
Suppose you need $50,000. Pull it from a traditional IRA and the entire $50,000 is taxable as ordinary income. Hypothetically using a 24 percent tax rate, that is $12,000 in tax.
Pull the same $50,000 from a taxable brokerage account, and only the gain is taxable. Say half of that $50,000 is your original investment, your basis, and half is growth. The basis comes back to you tax free, because you already paid tax on it. So only $25,000 is taxable, and it is taxed at long-term capital gains rates rather than ordinary income rates. Using a long term capital gains tax rate of 15 percent, that is $3,750 in tax.
Same $50,000 in your pocket. One route costs $12,000, the other costs $3,750. That gap comes from two advantages stacked on top of each other. A smaller base, $25,000 taxable instead of $50,000. And a lower rate on that base, capital gains instead of ordinary income. Work through it and you will see the rate is doing a little over half the job. The base is doing the rest.
That does not make the brokerage account free. You paid tax on its dividends along the way, and you paid tax on the income that funded it in the first place. It also certainly does not make brokerage-first the right answer for everyone. Someone in an unusually low-income year might rationally pull from the IRA on purpose. I am just giving you information so you can evaluate what is best for you.
How this lands on my own accounts
A framework is easier to trust when the person explaining it is standing inside it, so here is how all of this looks in my own accounts.
Why I pull from the brokerage first
I turned 60 while working on this post. On paper I am at the point where I could pull from an IRA without a penalty. But being allowed to does not mean it is the smart move. At my income, an IRA withdrawal is fully taxable as ordinary income at my marginal rate. Pulling the same amount from my taxable brokerage means only the gain is taxable, taxed at long-term capital gains rates plus the 3.8 percent net investment income tax that applies above $250,000 of income for a couple filing jointly. Even with that surtax added on, the math is not close. So the taxable brokerage account is where I am pulling from to fund my kids’ college right now. Not because a rule told me to, but because, given the accounts I actually have, it is by far the cheaper route.
Notice something about my situation, though. For me this is only a tax question. No account is off limits because of my age and I simply get to choose the cheapest bucket to pull from. Most parents writing tuition checks are nowhere near there (Yes I am old!). They are in their 40s or early 50s, and for them this is not a tax-base question at all. It is an access question. Money in a 401(k) is an expensive place to pull from: there is a 10 percent penalty on top of the ordinary income tax you owe on every dollar you withdraw, and it is money no longer left to compound for retirement. If the only real savings you have are locked behind an age you have not reached, you can do everything right and still be stuck choosing between a penalty and a loan when the first tuition bill arrives.
Why I have no Roth money
I also want to be honest that I have no Roth money. None. Not a Roth IRA, not a Roth 401(k), nothing. I just told you that some money in a Roth is part of a balanced plan, so let me walk through why I do not have any.
Part of that was not my choice. Between my income and my wife’s, we have been above the Roth IRA limit for as long as it has mattered. It was not accessible to me so there really was no decision to make.
But there was a side door to a Roth I did not pursue. Since 2010, anyone at any income has been able to fund a nondeductible traditional IRA and convert it to a Roth. This is often referred to as the backdoor Roth. In my case, the math never worked. The IRS treats every traditional IRA you own as a single pool, and I have several rollover IRAs from old employer plans. One I manage myself and the others I have consolidated with my broker, but for this purpose they are one balance. A conversion would have been mostly taxable for me. If you are in the same position, that is worth knowing before someone recommends the backdoor Roth to you.
And then there is the Roth 401(k), which has no income limit at all. That door was open to me the whole time, and I know it was open because I am the one who opened it. I put the Roth option into the plan at my company because I believed it was valuable for our employees. I, however, have never put a dollar of my own money into it.
I told myself I was too old for it to matter. The Roth option went live with my current employer when I was 55, and my contribution is capped at around $9,000 per year tied to highly compensated employee limitations within the company. Money going in at 55 that I do not touch for 20 years does have real growth potential, but a deduction at my marginal rate carries weight when you are close to the end of your career. You could argue either side of that and not be wrong. I argued to keep contributing to my traditional 401k. This is not the version of the choice you get if you are 25, 35 or even 45. With decades in front of you, tax free growth wins and it is not a hard decision. I never had the easy version. If you are younger, you do.
One rule worth knowing if you are 50 or older. Once you turn 50 the IRS lets you contribute an extra amount above the normal limit, called a catch-up contribution. Under SECURE 2.0, if your wages exceeded $150,000 in the prior year, that catch-up is required to go in as Roth. It is not optional and the plan is required to enforce it. So for a lot of high earners, the Roth decision gets made for them at the exact point in their career when they were least likely to make it themselves. I am not in that group. I feel I have saved plenty and I do not need the catch-up.
The 529 is the other place my accounts do not match my advice. I did not open one for my kids, and I admitted as much, briefly, in an earlier post, Should You Pay Off Debt or Invest?
My children were born in 2004 and 2008, and the 529 I was looking at then was a far stricter program than the one that exists now. It was college or nothing. Use the money on anything else and the earnings owed income tax plus a penalty. Every parent lived with the same quiet fear too, the fear of a child who might not go to college at all. There was also a wrinkle people forget: when my son was born, the tax-free treatment of 529 withdrawals was scheduled to expire in 2010. Congress made it permanent in 2006, but for the first stretch of this decision the main benefit had an expiration date on it.
Nearly everything that makes a 529 flexible today arrived after I had already decided. Computers became a qualified expense in 2015. K-12 tuition in 2017. Student loans and apprenticeships in 2019. The Roth rollover in 2022. None of that existed when I was choosing.
There was also a math problem. If you are seriously saving for college you are trying to build at least $100,000. For me, with two kids going out of state, the number is closer to $400,000. A 529 was never going to carry that on its own, which meant I would need reachable money for the rest of it no matter what I did.
So I started contributing $250 per month early in life to a T. Rowe Price mutual fund that I knew would be used to fund my children’s education. I gave up the tax-free growth. I kept the flexibility, and I kept the money reachable.
The rules have improved since then. SECURE 2.0 added a safety valve that did not exist when I was making these decisions: up to $35,000 of unused 529 money can now be rolled into a Roth IRA for the child it was meant for.
The conditions for this $35,000 rollover are important. The account has to have been open at least 15 years. The rollover moves across several years, capped each year by the child’s own Roth contribution limit, which is $7,500 in 2026. The child needs earned income at least equal to what moves that year. And here is the condition that catches people. Contributions made in the last five years, along with the earnings on them, are not eligible to move at all. Opening the account early is what makes the whole thing work, and opening it late is not something you can fix later by funding it heavily.
One more caution, and it is a real one if you live where I live. All of that is federal treatment of the rollover. California does not conform. The state includes the rollover in your California taxable income and adds a separate 2.5 percent tax on top. California is the only state that does both, and it is the worst state in the country for this particular move. Most states do conform, but check yours before you count on it.
If you are still building, start here
Most of this post is about reaching for money you already have. If you are younger or new to the journey, the withdrawal order is not the whole lesson. The younger you are, the more this next part matters.
If you plan your savings entirely for the tax deduction you can get today, you risk building a future that is cash-poor and that can hit you sooner than you anticipate. Pour every spare dollar into pre-tax accounts and you will arrive in your late 50s with an impressive statement balance and almost nothing you can touch without either a penalty or a full ordinary-income tax bill. The first time you need real money before 59½, a tuition bill at 52 or a job loss at 45, a locked account is not a resource you can use. It is a penalty waiting to happen.
The disciplined position is not to chase the biggest deduction. It is to build a mix that gives you access at different stages of life. Some money locked away for the long haul. Some in a Roth, where the growth eventually comes out clean. And some in a plain taxable account, reachable at any age and taxed gently when you sell. That balance is what lets you handle a surprise at 45, pay for college at 58 and retire at 65 without every move triggering the worst possible tax.
Accessible money has another important benefit that is easy to overlook. Every year you wait to file for Social Security raises your benefit for life, roughly 7 to 8 percent for each year you wait, anywhere from 62 to 70. The way you buy that increase is by living on your own accounts in the meantime. So accessible savings are not only a cushion against emergencies. They are what lets you afford to wait. I worked through that decision in When Should You Actually Take Social Security?.
This connects to something I wrote about in $1M Isn’t Enough. Let’s Build a Path. A large balance on a statement is not the same as a life you can actually pay for, and a plan that only grows money you cannot access is only half a plan.
A few simple moves
So the same framework points to a few simple moves.
Take the employer match first, always. It is the one return in finance that is guaranteed and immediate, and no tax-timing argument beats free money. Fund that before anything else.
After the match, look hard at a Roth before you pile everything into a traditional 401(k), especially if you are early in your career and your tax rate is likely lower now than it will be later. Paying the tax now, while it is cheap, buys you a bucket of money that comes out clean for the rest of your life. And if your income has grown past the Roth IRA limit, check whether your employer offers a Roth 401(k), because that one has no income limit at all.
If you have kids, open a 529 early even if you start slowly at first. The 15-year clock runs from the day the account opens, and starting it costs you almost nothing. Then fund the 529 to what you are confident will actually go towards school, and build the rest of your savings somewhere you can reach without a penalty.
And keep some money in a traditional taxable brokerage account even if you have not maxed out the tax advantaged ones. This is the money you can access before age 59½ if your kids are off to college before then.
Having a balance across account types is truly what is important. I talk about diversification a lot here and to anyone that will listen. This is no different.
Conclusion
I am 60 years old with two kids in college, writing tuition checks out of a brokerage account, because that is the cheapest dollar I own. Not the biggest account I have. The cheapest one to use.
That is the whole point. Locked wealth and reachable wealth are not the same thing. Every dollar you save has a date attached to it and a price attached to it, and the statement balance shows you neither. Know when you can reach each dollar, and know what the tax will be built on when you do. Then build a mix where the answer to those two questions is different across your accounts, so you are never forced to sell the wrong one at the wrong time.
That is the part nobody teaches you until you need the money.
Start investing. Stay consistent. Give your money time to grow.
Cheers!
Christopher
