The Common Rule for Retirement Account Withdrawals

The Common Rule is a withdrawal strategy that uses the following 4-step sequence*:

First, withdraw any Required Minimum Distributions (RMDs) from your tax deferred accounts. These accounts include 401(k)s, 403(b)s, 457 plans, as well as Individual Retirement accounts (IRAs) created with direct contributions or rollover from employer provided retirement plans.
Next, withdraw funds from your taxable brokerage account, until they reach a $0 balance.
Third, continue to withdraw funds from your tax deferred accounts (IRAs, 401(k)s, 403(b)s, 457 plans), until they reach a $0 balance. These accounts are all treated the same, so if you have more than one tax deferred account, it doesn’t matter which you withdraw from at this step.
Lastly, withdraw funds from your tax free accounts, like Roth IRAs, Roth 401(k) and Roth 403(b). If these funds reach a $0 balance, you have no remaining retirement savings. Then, only lifetime annuities, such as pensions and social security, are available to cover your retirement expenses.

* source: Sumutka et al. (2012)

The Common Rule is often what is advocated by large brokerage firms, including Fidelity and Vanguad. Unfortunately, it is well known to provide suboptimal recommendations. Consequently, the Common Rule can reduce the longevity of your retirement portfolio, and decrease the inheritance you may pass on to your heirs or your favorite charitable organization.**

** source: DiLellio and Ostrov (2017)

Like the Modified Common Rule, this rule also follows a zero-dividend taxable stock account strategy when other sources of retirement income plus RMDs exceed a retiree’s income need. So, all additional retirement income generated by other sources (e.g. pensions, social security, etc.) that exceed the retiree’s needed income are re-invested in a zero-dividend taxable stock ETF, like the First Trust Dow Jones Internet Index Fund (ticker: FDN). This approach is advocated by DeMuth (2019) and DiLellio and Ostrov (2020), since these funds will all be eventually passed to the retiree’s heirs tax-free since they will receive a step-up in costs basis.