Why sequencing withdrawals matters

When you retire (or reduce work hours) you stop deferring taxes through payroll withholding and must decide which accounts to draw down. The order — taxable brokerage accounts, tax‑deferred accounts (traditional IRAs/401(k)s), and Roth accounts — affects:

  • Your ordinary income tax rate and capital gains realization
  • How much of Social Security is taxable
  • Medicare Part B/D premiums and IRMAA surcharges
  • Required Minimum Distributions (RMDs) timing and tax bills

Good sequencing reduces unnecessary taxes and preserves flexibility. Poor sequencing can accelerate taxation, push you into higher Medicare surcharges, or force large, taxable RMDs later.

Source guidance: IRS rules for Roth IRAs, taxable income, and RMDs are the baseline for taxes and distribution rules (IRS). Consumer guidance on retirement accounts can help clarify account types (Consumer Financial Protection Bureau).

Quick rules for each account type

  • Taxable accounts (brokerage, savings): Withdrawals of basis (cost) are not taxed; selling appreciated assets triggers capital gains taxed at 0%, 15%, or 20% (long‑term) depending on taxable income. Qualified dividends generally receive preferential rates. Use tax‑lot accounting to manage gains. (IRS; see Capital Gains)

  • Tax‑deferred accounts (traditional IRAs, 401(k)s): Withdrawals are taxed as ordinary income. Withdrawals before age 59½ may incur a 10% early‑withdrawal penalty unless an exception applies. RMD rules apply once you reach the required age. (IRS Retirement Topics)

  • Roth accounts (Roth IRAs, Roth 401(k)s): Qualified distributions from Roth IRAs are tax‑free if the account meets the 5‑year rule and the owner is age 59½ or another exception applies. Roth IRAs have no lifetime RMDs; Roth 401(k)s do, but you can roll them to a Roth IRA to avoid RMDs. (IRS Roth IRAs)

Note: RMD age changed under SECURE 2.0 — many people now begin RMDs at age 73 (for those who reach 72 after 2022) and the age later rises to 75 for certain cohorts in 2033. Check current IRS guidance for your birth year. (IRS RMDs)

Common sequencing frameworks (practical approaches)

  1. Taxable → Tax‑Deferred → Roth (conventional)
  • Withdraw from taxable first to preserve tax‑favored accounts and allow Roths to grow tax‑free.
  • Pros: Keeps ordinary income low early in retirement; may let you take advantage of 0% capital gains/qualified dividend brackets in low‑income years.
  • Cons: Realizing gains in taxable accounts can still create tax; you may miss opportunities to convert to Roth while in a low bracket.
  1. Taxable + Tax‑Deferred (manage tax brackets) → Roth (conversion ladder)
  • Take a mix of taxable and modest tax‑deferred distributions to fill lower tax brackets, and do partial Roth conversions in those years.
  • Pros: Uses low‑income years for conversions; reduces future RMDs; can lower lifetime taxes.
  • Cons: Requires tax planning and year‑by‑year execution.
  1. Roth first (spend Roth early)
  • Use Roth withdrawals early when you want tax‑free income or to avoid pushing other income into higher brackets or IRMAA thresholds.
  • Pros: Can reduce taxation of Social Security and limit Medicare IRMAA; good if you expect higher future tax rates.
  • Cons: Depletes the most tax‑advantaged asset early if not replenished by conversions.

There is no one‑size‑fits‑all answer. The right path depends on projected income, expected longevity, health care costs, and estate plans.

How to choose an order — a decision checklist

  1. Project taxable income for each year (Social Security, pensions, rental, part‑time work).
  2. Identify low‑income windows (pre‑RMD years, early retirement, years with low wages) for Roth conversions or capital gains harvesting.
  3. Estimate Medicare IRMAA thresholds and Social Security taxation breakpoints — large taxable income increases can raise costs.
  4. Determine RMD timing (which accounts and how much). Plan conversions or QCDs to lower future RMDs.
  5. Consider beneficiary and estate tax effects (Roths pass tax‑free, taxable accounts get step‑up in basis at death).
  6. Revisit plan annually; tax law, income, and market returns change the optimal order.

Practical numerical example

Retiree profile:

  • Social Security: $18,000/year
  • Need from savings: $30,000/year
  • Accounts: Taxable $200,000 (basis $120,000), Tax‑Deferred $350,000, Roth $100,000

Year 1 objective: keep taxable income low to stay in the 12% bracket and avoid IRMAA.

Step A — Use taxable account first for cash needs up to the capital gains thresholds. Sell tax lots with long‑term gains strategically; long‑term gains may be taxed at 0% for single filers with taxable income below ~ $44,000 (2024 threshold example; check current brackets). This lets you cover some withdrawals tax‑efficiently.

Step B — If taxable account proceeds are insufficient without realizing large gains, take modest distributions from tax‑deferred accounts to use remaining room in the 12% bracket. Convert a small slice of tax‑deferred funds to Roth in years with unusually low income (a Roth conversion of $10,000 taxed at 12% may produce greater tax‑saving later).

Step C — Preserve Roth unless you need tax‑free flexibility (e.g., to avoid boosting Social Security taxation). Use Roth later to smooth income or to pay taxes on an unavoidable large taxable event.

This blended approach keeps ordinary income down, uses 0–15% long‑term capital gains windows, and preserves future Roth growth.

Roth conversions: when and how to use them in sequencing

  • Convert when your taxable income is unusually low (early retirement, job loss year, or before RMDs begin). Convert partial amounts to avoid pushing you into a higher bracket.
  • Track the 5‑year rule for each conversion if you plan to use converted funds soon.
  • Beware of Medicare IRMAA: a large conversion can increase your reported income for two years and trigger higher premiums.

See our in‑depth guides on Roth conversions for timing and bracket optimization: “Roth Conversion Basics: When It Makes Sense to Convert”. (internal link: https://finhelp.io/glossary/roth-conversion-basics-when-it-makes-sense-to-convert/)

Managing RMDs and charitable strategies

RMDs force taxable withdrawals from traditional IRAs and 401(k)s once you hit the IRS required age. To mitigate large RMD tax hits:

Tax harvesting and taxable account sequencing

Taxable accounts are useful tools: you can pick tax lots to sell (highest‑basis first to minimize realized gains), harvest losses to offset gains, or opportunistically realize long‑term gains in low‑income years (bracket harvesting). Combining tax‑loss harvesting with withdrawal sequencing can smooth taxable income across years and reduce lifetime tax. Our tax‑loss harvesting guide has practical workflows. (internal link: https://finhelp.io/glossary/tax-loss-harvesting-in-practice-when-to-sell-when-to-hold/)

Interactions with Social Security and Medicare (IRMAA)

  • Social Security taxation and Medicare IRMAA use modified adjusted gross income (MAGI). Large tax‑deferred withdrawals or conversions can increase MAGI and raise taxes and premiums.
  • Example: A Roth conversion that pushes MAGI above IRMAA thresholds can increase Medicare premiums for two years. Plan conversions and taxable withdrawals with IRMAA in mind.

Common mistakes to avoid

  • Waiting until RMDs force large taxable distributions without planning conversions or QCDs.
  • Doing a large one‑time Roth conversion without checking IRMAA/Medicare and state tax impacts.
  • Treating all taxable accounts the same—failure to use specific tax‑lot accounting and capital gains brackets wastes opportunities.
  • Spending Roth contributions and conversions interchangeably without tracking 5‑year rules for conversions.

Implementation checklist (first-year plan)

  1. Model projected income (Social Security, part‑time wages, pensions).
  2. Identify low‑income years for conversions or gains harvesting.
  3. Decide target annual tax‑deferred withdrawal and Roth conversion amounts.
  4. Map which taxable lots to sell first (highest basis or long‑term 0% bracket opportunities).
  5. Coordinate with tax preparer/advisor before large conversions or sales.
  6. Revisit plan before RMD start age; consider QCDs if you plan charitable gifts.

When to get professional help

If you have multiple income streams, pensions that complicate tax brackets, significant expected RMDs, or estate planning goals, work with a CPA or financial planner. In my practice, a simple projection across 10–15 years often uncovers opportunities to save tens of thousands of dollars in taxes and Medicare surcharges. Use the IRS and CFPB pages for rule references, but get personalized guidance for execution. (IRS RMDs; CFPB retirement account overview.)

Sources and further reading

Professional disclaimer: This article is educational and not personalized tax or investment advice. Tax rules change; check current IRS guidance and consult a CPA or certified financial planner before implementing conversion strategies or large withdrawals.