Why an order matters
Retirement isn’t just about how much you saved — it’s about how you spend it. The sequence you use to withdraw from different account types affects your taxable income, tax brackets, the timing and size of required minimum distributions (RMDs), potential Medicare premium surcharges (IRMAA), and the long-term growth of your assets. A tax-efficient withdrawal order aims to smooth taxable income over time, take advantage of lower capital gains rates, and preserve tax-advantaged buckets for future flexibility.
Key tax rules to keep in mind
- Taxable (brokerage) accounts: Withdrawals are generally tax-free up to your cost basis; selling appreciated assets may trigger capital gains tax (long-term vs. short-term rates apply). You can harvest losses to offset gains. (See IRS guidance on capital gains.)
- Tax-deferred accounts (Traditional IRA/401(k)): Withdrawals are taxed as ordinary income. RMDs apply (current RMD age is 73 for most retirees under SECURE 2.0 rules). See IRS Publication 590-B for RMD details.
- Roth accounts: Qualified withdrawals (meeting the 5‑year rule and age 59½) are tax-free. Contributions can often be withdrawn penalty- and tax-free at any time. Roths are valuable for tax diversification and legacy planning. (IRS Publication 590-A)
How the “typical” order works — and why it’s common
A frequently recommended, simple order is:
- Taxable accounts
- Tax-deferred accounts (Traditional IRA/401(k))
- Tax-free accounts (Roth IRA)
Why start with taxable accounts? Selling from a brokerage lets you use preferential long-term capital gains rates, access cost basis, and preserve tax-deferred growth. Holding tax-deferred accounts longer allows tax-deferred compounding. Saving Roths for later preserves a tax-free growth engine you can tap to manage future tax spikes or leave a tax-free inheritance.
But it’s not one-size-fits-all
This rule-of-thumb fails in several common situations. Consider alternatives when:
- You’re in a very low tax bracket early in retirement — converting some Traditional IRA funds to Roth can make sense.
- RMDs at age 73 will push you into a higher bracket; pre‑RMD Roth conversions or partial withdrawals can smooth that spike.
- You need to control your Modified Adjusted Gross Income (MAGI) for Medicare premiums (IRMAA), Social Security taxation, or Medicare Part B/D surtaxes.
- Your brokerage account holds much higher-cost-basis positions or carries losses you can harvest.
Practical strategies and why they work
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Roth conversions in low-income years: Convert a portion of a Traditional IRA to a Roth when your taxable income is low. You pay tax at a lower rate now to secure tax-free growth and withdrawals later. This strategy also reduces future RMDs. (See FinHelp guide: “Converting a Traditional IRA to Roth: Timing and Tax Strategies” https://finhelp.io/glossary/converting-a-traditional-ira-to-roth-timing-and-tax-strategies/)
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Use taxable accounts first, but be tactical: Selling high-basis shares first can provide cash without generating much gain. Use tax-loss harvesting to offset realized gains. If you’re in the 0% long-term capital gains bracket (depending on taxable income), you can sell appreciated assets tax-free up to the threshold.
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Stage withdrawals to manage tax brackets: Take just enough from tax-deferred accounts to fill the bottom of the next tax bracket or to stay under thresholds that increase Medicare premiums.
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Qualified Charitable Distributions (QCDs): For those who give generously, directing IRA distributions to charity (QCDs) can satisfy charitable goals and reduce taxable income; discuss timing and rules with a tax pro.
Real-world examples (illustrative)
Example 1 — Taxable-first works: A 63-year-old retiree has $300,000 in a brokerage account, $400,000 in a Traditional IRA, and $100,000 in a Roth IRA. Withdrawals from the brokerage can cover living expenses for several years while the Traditional IRA continues tax-deferred growth. This delays RMDs and may keep taxable income lower during early retirement.
Example 2 — Roth conversion window: A retiree with a few low-income years before collecting Social Security converts $50,000 from a Traditional IRA to a Roth over two years. They pay tax at a low rate now, reduce future RMDs, and create a tax-free source of income in later retirement — useful for managing Medicare IRMAA or for leaving tax-free assets to heirs.
When to deviate from the textbook order
- When you need to manage Medicare IRMAA or Social Security taxation. Large IRA withdrawals can increase MAGI and boost Medicare Part B/D premiums or increase the taxable portion of Social Security benefits.
- If you have a large pension or other steady income that already consumes your lower tax brackets, tapping Roth funds (tax-free) may be preferable to taking taxable IRA income that would be taxed heavily.
- If you want to leave a tax-free legacy, preserving Roth assets and using taxable accounts first can support that goal.
Tax mechanics and timing considerations
- Watch the calendar: Roth conversions are taxed in the year you convert. Coordinate conversions when you expect lower income.
- RMDs must be taken once the RMD age applies (current general rule: age 73). Failing to take RMDs incurs harsh penalties from the IRS. (IRS Publication 590-B)
- Report capital gains and losses correctly; keep good records of cost basis in taxable accounts to avoid paying more tax than necessary.
Coordination with Social Security and Medicare
Plan withdrawal timing alongside decisions about when to claim Social Security. Delaying Social Security increases your benefit but changes taxable income dynamics. Withdrawals that raise MAGI can increase the taxable portion of Social Security and Medicare premiums. Annual tax projections that include expected Social Security benefits help optimize withdrawal sequencing.
Common mistakes to avoid
- Withdrawing equally from all accounts without modeling tax outcomes.
- Ignoring RMD planning until the mandatory age (73). Last-minute large withdrawals can create big tax years.
- Forgetting Medicare/IRMAA and the interaction with MAGI.
- Overlooking capital gains rules and missing opportunities to harvest losses or use the 0% long-term capital gains window.
Tools and annual tasks
- Run yearly tax projections that include expected withdrawals, Social Security income, and projected RMDs.
- Revisit withdrawal order after major life changes: widowhood, inheritance, changes in health, or tax law updates.
- Use spreadsheets, tax software, or advisor modeling to test scenarios for 5–20 years.
Related FinHelp resources
- For a deeper look at Roth conversion timing and tax trade-offs, see: “Converting a Traditional IRA to Roth: Timing and Tax Strategies” (https://finhelp.io/glossary/converting-a-traditional-ira-to-roth-timing-and-tax-strategies/).
- To compare account types and the long-term consequences of keeping Roths versus Traditional accounts, see: “Roth IRA vs. Traditional IRA” (https://finhelp.io/glossary/roth-ira-vs-traditional-ira/).
Professional tips from practice
In my work with retirees, a few patterns repeat:
- Run three scenarios: conservative (taxable-first), aggressive Roth-conversion, and hybrid (partial taxable, partial Roth conversions). Compare lifetime taxes and projected balances.
- Small, regular Roth conversions over several years often beat one large conversion when trying to limit tax-bracket creep.
- Keep an emergency reserve outside tax-deferred plans to avoid forced taxable withdrawals during market downturns.
Frequently asked questions
Q: Should I always withdraw from taxable accounts first? A: Not always. Taxable-first is a sensible starting rule, but the optimal approach depends on your tax brackets, RMD timeline, cash needs, and Medicare considerations.
Q: When should I consider Roth conversions? A: Convert in years when your taxable income is unusually low — before RMDs begin or when income gaps exist between jobs and benefits.
Q: Will Roth withdrawals affect Medicare premiums? A: Qualified Roth withdrawals do not increase taxable income, so they do not raise MAGI-based Medicare surcharges. But Roth conversions (the year you convert) do increase taxable income.
Professional disclaimer
This article is educational and does not constitute individualized tax or investment advice. Tax rules change and individual circumstances vary. Consult a qualified tax advisor or financial planner before implementing withdrawal orders or conversion strategies.
Authoritative sources
- IRS Publication 590-A and 590-B (rules on IRAs, distributions, and RMDs): https://www.irs.gov
- Consumer Financial Protection Bureau (retirement planning guidance): https://www.consumerfinance.gov
If you want a simple worksheet template or scenario examples based on your numbers, I can outline the inputs a planner would use to run the models.
