IRA withdrawal vs selling taxable investments for spending

The household

A retired couple, both 67, file jointly. They receive $48,000 of Social Security and a $20,000 pension, and this year they need $40,000 more to spend. They can withdraw it from a traditional IRA, where every dollar is taxable income because the IRA holds no after-tax (nondeductible) contributions^[1], or sell $40,000 of shares in a taxable brokerage account bought years ago for $20,000, where only the $20,000 gain is income, taxed in the long-term capital-gains bands^[2]. The comparison is this year’s federal income tax only; the simulator’s marginal-rate evaluator computes each case.

Side by side

The IRA withdrawal adds $5,804 of federal tax this year; the sale adds $0.

Why they differ

• The withdrawal puts $40,000 of ordinary income on the return; the sale puts only the $20,000 gain, because the $20,000 cost basis comes back tax-free.
• Both raise provisional income for Social Security^[3]: taxable benefits go from $6,000 to $40,000 with the withdrawal and to $23,000 with the sale. The newly taxable benefits are ordinary income in both cases.
• The gain stacks on top of $0 of taxable ordinary income, and for a joint return the 0% capital-gains band runs to $98,900 of taxable income, so the tax on the gain itself is $0.

When each tends to come out ahead

In a single year, raising money from a taxable account usually costs less tax than the same amount from a traditional IRA, because only the gain is income and it is often taxed at 0% or 15%. That is not the whole comparison. The IRA money is still taxable whenever it comes out, and required minimum distributions later force it out on a schedule; drawing some of it in a low-income year can mean paying a lower rate than it would face later, on top of larger required distributions. Shares held until death generally get a new basis equal to their value^[4], so their gain may never be taxed at all, which argues for spending other money first. A common middle path is to take IRA withdrawals up to a chosen bracket and fund the rest from the taxable account; the right split depends on future income, rates and heirs, which this one-year table cannot show.

What would change this

• Shares with no basis left (the whole $40,000 is gain): the sale adds $1,250 against $5,804 for the withdrawal.
• A larger need of $80,000 at the same basis: $10,700 from the IRA against $1,250 from the sale.
• A state income tax, a Roth IRA (whose qualified withdrawals add nothing to income), or Medicare premium surcharges two years later would all change the comparison.

What this comparison leaves out

• Taxes in later years: future required distributions, rates and the heirs’ taxes.
• Investment returns given up on the money spent, which are the same either way here.
• State income tax and Medicare’s income-related premiums.

See it over a full plan

Related

• Guide: The 0% capital-gains bracket is real: LTCG stacking explained
• Guide: The Social Security tax torpedo
• Guide: Asset location: which investments belong in which account
• Calculator: 0% capital gains calculator
• Calculator: Marginal-rate map
• Topic: Withdrawal strategy & market risk
• All comparisons
• Worked examples, line by line