The Order

Last week, we built a retirement paycheck by creating a financial floor, a bridge through the early retirement years, and a sustainable income flow. But even the strongest plan can fall apart if you withdraw money from the wrong accounts at the wrong time.

In this episode of The Real World Money Show, John concludes Ray's retirement journey by explaining why withdrawal order may be one of the most overlooked decisions in retirement planning. Through a practical discussion of taxable, tax-deferred, and tax-free accounts, he explores Roth conversions, required minimum distributions, health insurance subsidy cliffs, Medicare premiums, and tax strategies that can have a lasting impact on retirement income.

Whether you're approaching retirement or already enjoying it, this episode will help you understand how thoughtful planning can reduce taxes, avoid costly surprises, and make your retirement savings work more efficiently throughout your lifetime.

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SPEAKER_00 0:00

Last week we built the machine, a floor, a bridge that nearly swallowed the health insurance, and a flow. Today, the last piece, the order, and the $1 mistake that can cost a family every cent of their health insurance help in the exact year they need it the most. Bring your pencil.

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Securities and investment advisory services offered through LPL Enterprise. LPL, a registered investment advisor member, FINRA, SIPC, and an affiliate of LPL Financial. LPL and LPL Financial are not affiliated with Iron Eagle Advisors. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. Any guests are not affiliated with or endorsed by LPL Enterprise, LPL Financial, or Iron Eagle Advisors.

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Welcome back to Iron Eagle's Real World Money Show. I'm John Flick with Iron Eagle Advisors right here in Charlottesville, Virginia. And today we finish what we started. A quick recap and a reminder for anyone just joining us: Ray and Donna are not real people. They are fictional composites, characters built out of situations that I see all the time, so we can talk about real problems without talking about real people. Nobody in this story is a client. And here's where we left them. Ray is 62. He's retired from the warehouse with $612,000 in his 401k. Week one, we found a pile of money is not a paycheck. Week two, we built the actual machine, a floor made of Social Security, a bridge to cover the gap years, and a flow that draws the well down at a sane rate instead of a scary one. Along the way, the bridge nearly swallowed their health insurance whole until Donna found the help available on the marketplace and Ray found the cliff sitting right next to it. I told you to hold on to that cliff, and tonight it comes back. Bigger than either of us let on. Today's piece is the order, and I want to start by telling you what the order actually is because most people, Ray included, think of their savings as one big number. $612,000 is $612,000, right? Wrong. Money does not come in one flavor, it comes in three buckets. And which bucket you draw from and win is arguably a bigger decision than how you invested it in the first place. Bucket one is taxable. Regular savings, a brokerage account, the rain barrel we talked about last week that's holding two years of bridge money. You already paid tax on this money once, years ago, when you earned it. You pull it out and there's no new tax bill waiting. Maybe a little on some growth, but that's it. Bucket two is tax deferred. RAISE 401K lives here. Every dollar in it has never been taxed. Not one single time. Because the IRS let you skip paying on the way in as a reward for saving. That's a real deal, but it's also a loan. The bill comes due on the way out when it's taxed as regular income, whatever bracket you're in, the year you pull it out. Bucket three is a tax-free bucket. Think Roth IRA. Money you've already paid tax on going in, and here's the trade. It grows and comes out with no tax bill ever again. Not for you, and under current law, often not even whoever inherits it either. Now here is Ray's actual situation, and it's more common than you'd think for a 38-year warehouse career. He's got bucket one, the rain barrel, he's got bucket two, the well, and it's enormous, $612,000 worth, and bucket three, which is empty. Ray does not have an order problem yet. He has a one bucket problem, which might honestly be worse because there's no order to choose when there's only one real place the money can come from. His brother-in-law, meanwhile, has the opposite problem. Too many buckets and no plans for any of them, which is a different show. Last I heard, he'd moved on from the soup truck to vending machines to now, I'm told, alpacas. And if you're new here, no, I'm not going to explain that. Some things you just have to hear live. And on that note, if you want to hear any of our past episodes, go to Iron EagleAdvisors.com and click on the podcast link and you'll find them all there. Here's the thing though, Ray's situation isn't rare, and it's not a mistake either. It's actually what doing everything right for 38 years looks like if nobody ever mentioned bucket three to you along the way. Most 401k plans default every contribution into the tax-deferred bucket unless you go out of your way to ask for a Roth option. And most people never do because nobody hands you a bucket diagram at orientation. You just see the match, you take it. And 38 years later, you've built one very large, very lopsided well. That's not a failure of discipline. Ray had plenty of discipline. It's a gap in what anybody told him to think about. So that is today's real question. Not just which bucket does Ray draw from first, it's whether Ray can build himself a bucket number three while there's still time and what it costs for him to try. Stick with me. There's a wrinkle in bucket two you need to hear first because it's the reason bucket three matters at all. And here's wrinkle number one, and it's the one nobody warns you about at the retirement party. Bucket two does not let you wait forever. The IRS gave Ray 38 years of tax-deferred growth, and eventually it wants its cut, whether Ray needs the money that year or not, and that's called a required minimum distribution, and it's exactly what it sounds like: a forced withdrawal on a schedule the IRS sets, not Ray. And here's the number people get wrong constantly, including until recently, this show. For years, the rule everybody quoted was age 73. That's still true for a lot of people, but not all of them. Under the current law, the age depends on your birth year. Born 1951 through 59, your forced faucet opens at 73. Born 1960 or later, it opens at 75. Ray is 62 in 2026, which means he was born in 64, which means his real number is 75, not 73. That's not a small correction. That's 13 years from today, not 11. And if you're listening and you're not sure which line you fall on, that's question one for your CPA before you plan around either number. So why does this matter so much? Picture Ray at 75. Social Security is running, maybe Donna's is too. And now, on top of both checks, the IRS forces a withdrawal out of a well that's had 13 more years to grow. All of that stacks onto the same tax return, the same year, and stacking is how a comfortable retirement quietly slides into a higher tax bracket than Ray ever saw while he was working. Doing nothing which feels like the safe choice, the choice that requires no decisions, no CPA visit, no discomfort, can be the single most expensive order of all. Not because Ray did anything wrong, because he never made a choice. So the IRS chose one for him, and the IRS's order is always the same one. Take it all out eventually, on my schedule, tax as income. Now sit with that for a second. The forced faucet is not a penalty for being careless. It's just what happens by default to an entire life of careful saving that never got a second bucket. And here's the twist that makes today's topic worth your full attention instead of half of it. The years between now and 75 are not just a countdown to the faucet. For some households, the best chance they'll ever get to change the outcome. Not by avoiding the faucet, because you cannot avoid it, but by deciding on purpose how much water is even left in that particular barrel when it finally opens. That's bucket three, and that's next. And here is wrinkle number two, and it runs in the opposite direction of wrinkle one, which is exactly why this gets complicated enough to need a professional. Right now, in these bridge years, before Social Security starts and before the forced faucet opens, Ray and Donna are sitting in the lowest household income they may ever report again. Think about that. 38 years of a paycheck, and then the five or six years right after it ends might be the leanest tax picture of their entire adult lives. Some households use years exactly like this on purpose. They take money out of bucket two, which is the tax deferred well, pay tax on it now at today's rate while the bracket is low, and move it into bucket three, the Roth. It's called a Roth conversion. And the trade is simple to say and hard to execute well. You pay some tax now on your terms in a low year so that money grows for the rest of Ray's life and comes out later with no tax bill attached ever. And so it never adds a single dollar to that forced faucet at 75. Done well over several of these bridge years instead of all at once, a conversion can shrink the size of the well the IRS eventually forces open, which shrinks Ray's tax bill in his 80s, which is precisely the decade he'll have the least appetite for tax surprises. It can also mean less of Ray's and Donna's Social Security ends up taxable down the road, since a smaller bucket too means smaller required withdrawals stacking up on top of those checks. Now, I want to be careful here because this is exactly the kind of thing that sounds like advice and it isn't. Whether a Roth conversion makes sense for any specific household and how much to convert in a given year depends on your bracket, your other income, your estate taxes, and about a dozen details a 30-minute radio show has no business guessing at for you. I am not a tax professional, and this show has never once told you what to do with your own return. What I can tell you is the shape of the decision so that when you sit down with a qualified CPA, you're not hearing the words Roth conversion for the first time in your life while a clock is running. And here's a way to picture the size of the opportunity without me handing you a number. I have no business handing you. Every dollar Ray converts in a bridge year gets taxed at whatever bracket that dollar lands in today. Convert too little and bucket three barely gets built before Social Security and the forced faucet crowd back in and raise the income again, closing the window. Convert too much in a single year, and Ray pushes himself into a higher tax bracket than he needed to, paying more tax on the conversion than the strategy was ever meant to cost him. The sweet spot sits in the middle, usually spread across several years instead of done all at once. And finding that sweet spot for a specific household is precisely why uh we need a CPA involved. A CPA with a calculator and your actual return, not just what a radio host does with a general story. And Ray's version of this decision is not simple. And I want to be honest about that instead of making it sound tidier than it is, because right in the middle of Ray's best conversion years sits the exact same cliff that Donna found while shopping for health insurance in part two. The years that are perfect for building bucket three are the same years Ray needs to be careful about triggering a very different kind of bill. That's not a coincidence. That's the collision I told you to remember. And here it comes. Do you remember the cliff from the bridge segment? In 2026, marketplace health insurance does not taper off gently as your income rises. It runs at full strength right up to the 400% of the federal poverty line, and then it doesn't shrink, it just disappears. Every dollar of it for the entire year. The moment you cross that line by even one dollar. Now put that next to what we just spent 10 minutes building. A Roth conversion is on paper extra income. That's the entire mechanism. You're moving money from a bucket where it has not been taxed yet into a bucket where it has. And the IRS counts the amount you convert as income in the year you do it. Which means the same conversion that quietly protects Ray at 75 can, and if it's sized wrong, shove his household income over the marketplace cliff at 63. And that would cost him every cent of the help that was keeping his health insurance bill around $550 a month instead of $1,800. Read that trade again because it's the whole episode in one sentence. A well-timed conversion might save Ray thousands of dollars in taxes over the rest of his life. A badly sized one done in the wrong year without checking the ceiling first could cost him thousands of dollars in health insurance help in a single year, and it would not show up as a scary bill in the mail. It would show up quietly at tax time as help he'd already been receiving all year gets clawed back because his final income landed one dollar on the wrong side of a line nobody told him to watch. That's the collision. The exact tool that fixes Wrinkle One can trigger a brand new, completely different expense. But only if nobody's watching both numbers in the same conversation. So let's make it concrete. With Ray's illustrative numbers, stress tested and clearly labeled as a story, not a promise, if Ray converts a modest amount and stays under the marketplace's income ceiling for the year, he keeps his roughly $550 a month in health coverage and pays ordinary tax on the conversion. A clean, boring trade, exactly the kind we like to see on this show. If Ray converts too much in that same year and crosses the ceiling even by just the smallest of bits, the marketplace doesn't just raise his premium a bit, it eliminates the help retroactively for the entire year. Which on Ray and Donna's numbers is the difference between paying $550 a month and paying $1,800 a month backdated to January. That's a swing of roughly $15,000 in a single year for missing a line that most people have never even heard of. And it does not end at $65. Once Ray and Donna age into Medicare, the marketplace cliff goes away. But it's crazy cousin Leroy shows up. Medicare premiums themselves are income adjusted for high earners. And here's the part that catches so many people off guard. I don't know how many times I've had this conversation. The government looks back at your tax return from two years ago to set this year's premium. Only the government can come up with that. Which means a conversion Ray does at 63 while he's still on the marketplace does not just risk that year's health insurance help. Depending on the size and timing, it could echo forward and adjust what Ray and Donna pay for Medicare itself once they're 65 or even later if they waited to convert. The collision doesn't clock out at 65, it just changes clothes and shows up two years later with a different name. None of this means that Roth conversions are a bad idea. I want to be very clear about that because it would be very easy to hear this segment and decide the safest move is to do nothing. And remember what we just said two segments ago about doing nothing? Doing nothing has its own cost. It's just quieter and arrives later. The honest answer is that bridge, the health insurance, and the tax order are not three separate decisions. They're one decision wearing three different hats. And the right amount to convert in any given year depends on watching all three hats at once. So that makes it a math problem, not a gut feeling, and it's exactly the kind of math problem a CPA solves in an afternoon with your actual numbers instead of rays. So take a breath. That was the dense part. But here's the good news waiting on the other side of it. And yet there's one more piece on the table, and it's new enough that even a lot of CPAs are still getting used to advising around it. So it's worth knowing the shape of it before you walk in. Starting with the 2025 tax year and running through 2028, there's an extra federal deduction available to taxpayers 65 and older. It can be up to $6,000 per person on top of the standard deduction that seniors already get. It's available whether you itemize or not, and it phases out at higher incomes, above $75,000 for a single filer or $150,000 for a married couple filing jointly, and it's based on modified adjusted gross income. Ray is 62 years old, he's not there yet. But watch how this lands on top of everything we've built today. That deduction opens up right around the same age the marketplace cliff stops being a factor since Medicare replaces the marketplace at 65. Which means for a household like Ray and Donna, the years right after 65 can end up being a genuinely good window for larger conversions. You're past the health insurance cliff with an extra $12,000 of deduction between the two of them, shielding some of that conversion income from tax in the first place. Not because the show is telling you to wait until 65 to do anything, by the way. Some households convert earlier and it's still the right call for them. It's because the ceiling that matters most can move depending on your age, and a plan that only looks at this year's bracket and ignores the ceiling two or three years out is only doing half of the math. This is exactly why I keep saying the order is not a single decision you make at once at a kitchen table and file it away. It's closer to a dial that gets checked every year for several years running. Taxable income here, marketplace cliff there, Medicare premium two years out over here, and now a senior deduction phasing in right in the middle of it. Nobody expects you to hold all of that in your head at once. That's not a failure of yours if you cannot. That is what the next segment is for. And notice something else about the senior deduction while we're here. It's temporary, 2025 through 2028, on the books today. And nothing says Washington leaves it alone after that. Which means the households who benefit the most are the ones who are already paying attention year by year, not the ones waiting to think about any of this until the deduction or the cliff or the forced faucet shows up uninvited. Today's show has really been one long running argument for the same ideas, just said four different ways. The order rewards people who check in annually and it quietly costs people who check in only once, usually the year they retire and never again after that. So here's what I want you to actually do with today's show because an episode that just makes your head spin and gives you nothing to carry out the door probably is not worth your 30 minutes. So write down these five questions for a qualified CPA. Not for me, because these need your real numbers, not raise. Question one, given my accounts, which order should I draw from in my 60s and why? Question two, based on my actual birth year, what age does my required minimum distribution start? 73 or 75? And what will it look like if I do nothing between now and then? Question three, do my bridge years make sense as Roth conversion years? And if so, how much per year? Question four, if I'm on the marketplace health plan before 65, how much conversion room do I actually have before I cross the help cliff? And once I'm on Medicare, how would conversions affect my premiums two years later? Question five, how does my withdrawal order interact with how much of my social security ends up taxable and with the new senior deduction once I turn 65? That's it. Five questions. Say them out loud in a CPA's office and watch what happens. A good CPA can run actual numbers against those five questions in an afternoon. Your Your real accounts, your real bracket, your real birth year. Most people just never ask. And mostly because they just don't know these questions even exist until someone like me hands them over. The ones who do ask are the ones who end up being the quiet millionaire in the paid-off house everybody wonders about. Not because they got lucky, but because somewhere along the way somebody handed them a list just like this one. And they actually used it. Okay, so let's put this whole machine together, all three pieces, and let Ray have his moment, because across these three weeks he's earned it, and so have you. Picture the refrigerator card one more time. It's got a floor line in Donna's handwriting. It's got a bridge line, the $3,220 a month, the well covers, while the marketplace and the part-time hours and the trimmed spending carry the rest. And now after today, it gets a third line. This one in smaller writing underneath, because this one doesn't have a single dollar figure. It has a plan. The order. Convert some carefully in the leanest bridge years, small enough to stay under the marketplace ceiling. Hold off on anything bigger until 65 once Medicare replaces the cliff and the senior deduction open up opens up some room. Recheck it every single year with the CPA because the ceiling moves and raise income moves with it. That's not a dramatic plan. It's not a plan that ends with confetti. It's a plan that gets revisited every January with a folder and a cup of coffee. And I'll tell you something, that's what a good plan actually looks like in real life. Not one big decision made once at a kitchen table. A dial checked yearly by people who know what the dial is even measuring. Compare that to how Ray would have handled this three weeks ago, before this series even started. He would have kept doing exactly what he's always done. Nothing. Because nothing had never been explained to him as a choice. The well would have just sat there growing, untouched until 75 arrived and the IRS opened the faucet on its own schedule all at once, stacked up on top of two Social Security checks in whatever bracket that combination happened to land in. That version of Ray isn't reckless. He's just never been handed a diagram. Now he has one. And here's what changed for Ray today that he did not know three weeks ago. He walked into this series thinking he had one giant number, and he had no idea what to do with it. He's walking out with three buckets instead of one, a forced faucet he now knows how to open at 75 instead of 73, which buys him two extra years he didn't think he had, a health insurance cliff he already spotted with Donna in part two, and a senior deduction landing right when he needs it the most. None of that changes how much money Ray has, but all of it changes how much of it he actually gets to keep. His brother-in-law, last we heard, was still deep in the alpaca phase. No buckets, no order, no plan, just enthusiasm and, I'm told, an increasingly complicated fence situation. Ray, meanwhile, has become the guy at the block party who actually knows which account to touch first. It's a quieter kind of interesting. It's also the kind that keeps working when the market has a bad year, when the tax code changes again, and when Ray is 80 and doesn't want to think about any of this at all, because by then the order has already been set and it's been checked every year along the way. Real wealth is boring, folks. So is a well-run order. Boring is what winning looks like. And Ray, three weeks into retirement, is finally starting to look a little bored. In exactly all the right ways. Okay, folks, so here's your homework this week, and it's short on purpose. First, if you don't already know your own required minimum distribution age, find out. It's one phone call or five minutes with your account statements. And is the single fact tonight's whole show hinged on getting right? Second, if you're within 10 years of retirement and you've never asked a CPA about withdrawal order, book that conversation this month, not the month you actually retire. The bridge years only exist once. Third, bring the five questions from tonight with you, written down word for word, if you have to. A good CPA would rather answer five sharp questions than try to guess which one you actually came in for. And here is the moral of today's show and really of this entire three-part series. Your retirement paycheck is not just one number. It's a floor, so you always have a check coming in no matter what the market's doing. It's a bridge priced honestly, including the health insurance that it used to be hiding inside your pay stub for the last 38 or however many years without you ever seeing the bill. It's a flow drawn down at a rate that survives a bad decade instead of assuming a great one, and it's an order, chosen on purpose, year by year, instead of left for the IRS to choose for you by default. Manage well what you've been given is not just a nice sign-off. It's the whole series in five words. On next week's show, we're going to talk about the day you leave a job, whether it's by choice or not, and you get handed one of the biggest financial decisions many people ever make. There's four doors to walk through. Three of them are fine, and one of them costs people thousands of dollars. We'll walk through all four. Here is something worth saying quite plainly since today's show leans so hard on your CPA. The CPA answers the tax question. That's their lane, their license, their signature on the return. But today's show had four parts a floor, a bridge, a flow, and an order. And only one of those four is a tax question. The other three, like when to claim, how to price a health insurance gap, how fast to draw down a well, they live somewhere else. Somebody has to hold all four pieces at once so they don't quietly work against each other. That's the seat I sit in at Iron Eagle Advisors here in Charlottesville, alongside your CPA, not instead of them, with your full picture on the table. You can visit us at Iron EagleAdvisors.com or 434 465 6485. Before we go, let me leave you with this. Somewhere along the way, the financial world convinced us that money is about accumulation. Get more, beat the market, win. And if you have enough, you'll finally feel secure. But I don't believe that anymore, and maybe you don't either. Here at Iron Eagle Advisors, we believe you're not an owner. You're a steward. Everything you have was entrusted to you for a reason. And the real question isn't how much can you get, it's how well can you manage what you've been given. That changes everything. How you invest, how you plan, how you give, how you provide for the people you love long after you're gone. We're not here to sell you products, we're here to help you build a plan that fits your life, honors your values, and gives you peace. The kind of peace that comes from knowing your house is in order. So if you've been carrying that quiet worry, if you're not sure your money is working toward anything that actually matters to you, let's talk. No pressure, no jargon, just an honest conversation about where you are and where you want to go. You can reach us at Iron Eagle Advisors.com or call four three four four six five six four eight five. This is John Flick. Manage well what you've been given, and we'll see you next time.