Quick primer
A withdrawal order is a repeatable rule set you follow when you need cash in retirement. Done well, it can lower annual taxes, manage Medicare Part B/D premiums (IRMAA), and reduce taxes on Social Security. Done poorly, it risks higher lifetime tax bills and accelerated depletion of your portfolio.
Federal rules that affect withdrawal order include Required Minimum Distributions for tax‑deferred accounts (see IRS guidance on RMDs) and the tax treatment of Roth IRAs (see IRS Roth IRA rules). For planning context, the Consumer Financial Protection Bureau also publishes guidance on retirement income choices and tax impacts.
(IRS: https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds; IRS Roth IRAs: https://www.irs.gov/retirement-plans/roth-iras; CFPB: https://www.consumerfinance.gov/consumer-tools/retirement/)
How a withdrawal order usually works — and why it matters
Most planners use a default ordering that starts with taxable accounts, moves to tax‑deferred accounts (IRAs, 401(k)s), and saves tax‑free accounts (Roth IRAs) for last. That default aims to:
- Let tax‑deferred accounts continue to grow tax‑deferred while you access low‑tax capital gains in taxable accounts.
- Preserve Roth flexibility and tax‑free growth for later years or large unexpected expenses.
- Give room to manage RMDs and avoid bracket spikes.
But “default” isn’t a one‑size‑fits‑all rule. Important exceptions and complementary moves include partial Roth conversions, harvesting losses, timing Social Security, and coordinating with RMDs and Medicare. Below is a practical, step‑by‑step framework and when to vary it.
Step‑by‑step framework for tax‑efficient withdrawals
- Create an annual cash flow plan
- Estimate your non‑investment income (Social Security, pension, annuities).
- Estimate your spending needs and shortfalls.
- Project RMDs for tax‑deferred accounts (they are mandatory once they start). The IRS RMD rules are the baseline for required withdrawals.
- Use taxable accounts first—often
- Withdraw from taxable brokerage accounts to meet needs when doing so does not trigger large capital‑gains events. Long‑term capital gains are usually taxed at lower rates than ordinary income.
- Prioritize selling tax‑efficient holdings (index funds, tax‑managed funds) before selling concentrated or appreciated positions that would trigger big gains.
- Use tax‑loss harvesting in taxable accounts to offset gains and reduce current tax.
Why: Taxable withdrawals generally do not increase ordinary income the same way traditional IRA withdrawals do. This can keep you in a lower bracket and reduce taxes on Social Security and Medicare premiums.
- Consider partial Roth conversions in low‑income years
- If your projected taxable income is unusually low one year (early retirement, large deductions, temporary low wages), convert some traditional IRA funds to Roth. You’ll pay tax now at a low marginal rate and leave future growth tax‑free.
- Keep conversions small enough to avoid pushing you into a higher tax bracket or triggering large increases in Medicare IRMAA or taxation of Social Security benefits.
For mechanics and a tactical sequence, see our Roth Conversion Ladder guide: Roth Conversion Ladder.
- Withdraw from tax‑deferred accounts strategically
- Use traditional IRAs and 401(k)s after taxable accounts but before Roths when needed to meet income goals — except in years when a controlled conversion or lower taxable income window is preferred.
- Monitor your marginal tax bracket. Withdrawing a large sum from tax‑deferred accounts can push you into a higher bracket and increase the tax on the rest of your income.
- Preserve Roth accounts for late‑life flexibility
- Roth IRAs grow tax‑free and do not create RMDs for the original owner (Roth 401(k)s are different unless rolled to a Roth IRA). A Roth can be used to manage taxable income in high‑need years or to provide tax‑free legacy benefits.
See related guidance on Roth vs. traditional accounts and Roth planning in our glossary: Roth IRA vs. Traditional IRA.
Exceptions and timing considerations
- RMD years: Once RMDs begin (most are subject to the RMD rules; check current IRS age rules), you must withdraw at least the RMD amount from tax‑deferred accounts. This can force more ordinary income than you’d like; pre‑RMD Roth conversions can reduce later tax exposure (IRS RMDs: https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds).
- Medicare/IRMAA sensitivity: Small increases in taxable income can raise Medicare Part B/D premiums (IRMAA). That makes keeping taxable income below IRMAA thresholds valuable. Coordinate with a tax pro to model IRMAA cliffs.
- Social Security taxation: Up to 85% of Social Security benefits can be taxable depending on combined income. Withdrawals that increase provisional income can cause more of your benefits to be taxed.
- State taxes: State income tax rules differ. A withdrawal order that works well federally may be suboptimal in a high‑tax state.
Practical scenarios (simplified examples)
Example 1 — Early retirement bridge (ages 60–66)
- Assets: $150k taxable, $600k traditional IRA, $120k Roth IRA. Social Security deferred until 70.
- Strategy: Use taxable accounts to fund expenses while doing modest Roth conversions when annual taxable income is relatively low. This reduces large future RMDs and moves assets to Roth for tax‑free growth.
- Result: Smaller RMDs later, better bracket control, and tax‑free Roth assets at 70+.
Example 2 — RMD start at 73
- Assets: $50k taxable, $400k traditional IRA, $200k Roth IRA. Social Security at 67.
- Strategy: Use taxable for discretionary spending. Cover RMDs from traditional IRA as required; avoid extra large IRA withdrawals that spike bracket. If the couple expects higher tax rates later, consider modest Roth conversions several years before RMDs start.
These are simplified; always run numbers with tax rules, bracket thresholds, and RMD formulas.
Account‑level tax rules to keep top of mind
- Taxable brokerage: Capital gains and qualified dividends are taxed at capital gains rates; basis matters. Use lot accounting and tax‑loss harvesting.
- Traditional IRAs/401(k)s: Withdrawals taxed as ordinary income. Subject to RMDs once required. Early withdrawals before 59½ may incur penalties unless exceptions apply.
- Roth IRAs: Qualified distributions are tax‑free if the account passes the 5‑year rule and the owner is 59½+ (or meets other qualifying conditions). Roth IRAs do not require RMDs for the original owner.
For further reading on how to coordinate RMDs across accounts, see: Managing Retirement Required Minimum Distributions Across Accounts.
And for guidance on the best assets to hold in taxable vs. tax‑deferred vs. Roth accounts, see our asset‑location piece: Asset Location for Mixed‑Account Portfolios: Practical Examples.
Professional tips and a checklist
- Run a multi‑year tax projection, not just a single year. Model RMDs and Social Security interactions.
- Identify low‑income years for partial Roth conversions (e.g., early retirement, years with large itemized deductions, or loss years).
- Use tax‑efficient investments in taxable accounts: municipal bonds for state tax minimization, ETFs/index funds for lower turnover.
- Avoid large one‑time IRA withdrawals that spike marginal tax rate unless absolutely necessary.
- Coordinate withdrawals with timing of Medicare enrollment, IRMAA periods, and Social Security claiming decisions.
- Keep good records of basis in after‑tax IRA contributions and taxable account cost basis—this affects taxes and planning.
Common mistakes to avoid
- Treating Roths like the last‑resort only — sometimes, using Roth for modest withdrawals during high‑tax years is optimal.
- Ignoring capital gains timing — selling a highly appreciated holding in a taxable account without planning can trigger a large tax bill.
- Overlooking state tax and Medicare premium effects — federal‑only planning can miss real world costs.
When to get professional help
If you have multiple account types, complex income streams (pensions, business income, large IRAs), or live in a high‑tax state, work with a fee‑only financial planner or tax professional. They can run tax‑sensitivity analyses and project multi‑year outcomes.
Professional disclaimer: This article is educational only and does not constitute personalized tax or investment advice. Tax law and IRS guidance change; consult a qualified tax advisor or financial planner for decisions tailored to your specific situation.
Authoritative sources and further reading
- IRS — Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/required-minimum-distributions-rmds
- IRS — Roth IRAs: https://www.irs.gov/retirement-plans/roth-iras
- Consumer Financial Protection Bureau — Retirement: https://www.consumerfinance.gov/consumer-tools/retirement/
End of article.
