Why sequencing withdrawals matters

Retirement is not just about having enough money; it’s about using savings in a tax-efficient way so those dollars last. Sequencing withdrawals — deciding which account to tap first, second and last — can change the amount you pay in federal and state taxes, whether your Social Security becomes taxable, and if you pay higher Medicare premiums through IRMAA or the Net Investment Income Tax (NIIT). In my 15+ years advising clients, disciplined sequencing regularly trims taxes, preserves government benefits, and improves long-term portfolio longevity.

Sources: IRS guidance on distributions and conversions (see IRS Pub. 590-A and 590-B), and Consumer Financial Protection Bureau retirement tools (https://www.consumerfinance.gov).

Core account types and how taxes differ

  • Taxable brokerage/cash accounts: Withdrawals are after-tax; only realized gains trigger capital gains tax. You can often sell low-basis lots or use tax-loss harvesting to limit taxes now.
  • Tax-deferred accounts (Traditional IRAs, 401(k)s): Withdrawals count as ordinary income and can push you into higher tax brackets or change benefit thresholds.
  • Tax-free accounts (Roth IRAs, Roth 401(k)s): Qualified withdrawals are tax-free and do not increase taxable income.

Understanding these differences is the foundation of sequencing. See detailed rules on traditional vs. Roth accounts and conversions at FinHelp: Roth Conversion Basics: When It Makes Sense to Convert and practical Roth conversion tactics at How to Use Roth Conversions Strategically in Low-Income Years.

Typical sequencing approaches (and when they make sense)

  1. Taxable-first, tax-deferred middle, Roth-last
  • Best when you retire before RMDs and expect higher taxable income later. Using taxable dollars first lets tax-deferred accounts grow tax-deferred and keeps reported income lower in early retirement.
  • Pros: Lowers reported taxable income now, may reduce tax on Social Security, and avoids early dipping into tax-deferred balances that would normally be taxed at higher ordinary rates later.
  • Cons: Large taxable account withdrawals can trigger capital gains and may still impact Medicare/benefit thresholds.
  1. Tax-deferred-first (or partial conversions) in low-income years
  • If you have one or two low-income years (for example, between job end and Social Security/RMD start), converting a portion of tax-deferred assets to a Roth can make sense. Doing conversions in small amounts lets you fill lower tax brackets and avoid pushing future distributions into higher brackets.
  • Pros: Roths grow tax-free and later withdrawals won’t affect Medicare premiums or taxable Social Security.
  • Cons: You pay taxes on conversions today and must watch marginal tax brackets and NIIT thresholds.
  1. Roth-first (in limited cases)
  • Rarely the default, but advisable if you need to avoid large taxable events that would follow from withdrawing from tax-deferred accounts — or to reduce future RMD-driven taxable income when you expect high required distributions.
  • Pros: Protects future tax profile and benefits by keeping taxable income lower in later years.

There is no single correct order — the optimal sequence depends on personal cash needs, current and expected future income, health care considerations, estate goals, and state tax rules.

Important tax and benefit interactions to model

  • Tax brackets: Small increases in taxable income can move you into higher federal or state brackets. Project multiple years to see how distributions affect long-term average taxes.
  • Social Security taxation: Withdrawals that increase provisional income can raise the portion of Social Security that’s taxed.
  • Medicare IRMAA and premiums: Higher reported income can trigger higher Part B/D premiums in future years; these are calculated from IRS income reported two years prior.
  • RMDs and the timing of required distributions: Required distributions from retirement accounts can force taxable income later in life; planning can reduce that shock (see IRS guidance at https://www.irs.gov).
  • Net Investment Income Tax (NIIT): High investment income may trigger the 3.8% NIIT on top of regular taxes.
  • State income taxes: States tax retirement income differently; some treat Social Security or pensions differently.

Citing authoritative rule sources (example): IRS publications on IRAs and distributions (Pub. 590-A and 590-B) and the IRS website on taxation of Social Security help explain the mechanics (https://www.irs.gov).

A practical step-by-step process to build a sequencing plan

  1. Run a multi-year cash flow projection
  • Include expected Social Security, pension income, interest/dividends, portfolio withdrawals, and expected RMDs. Project out 10–30 years and create a baseline tax projection.
  1. Identify low-income windows
  • Years between retirement and RMDs/SS/pension start are opportunities for Roth conversions or taking tax-deferred distributions at lower marginal rates.
  1. Decide a working withdrawal order and test alternatives
  • Typical starting plan: taxable → tax-deferred/partial Roth conversions during low-income years → Roth.
  • Use tax projection tools or a CPA to test how different orders affect lifetime taxes and Medicare premiums.
  1. Implement flexibility
  • Set rules (e.g., withdraw taxable funds up to X% of portfolio; convert $Y each year until Roth target reached) but revisit annually.
  1. Re-evaluate after major changes
  • Market returns, tax-law changes, health events, or changes to Social Security timing can shift the optimal sequence.

In my practice I build a three-scenario model (conservative, expected, optimistic) for each client and run withdrawal permutations to see which sequence consistently minimizes lifetime taxes while maintaining cash needs.

Simple hypothetical example

Assume you need $50,000/year and have:

  • $200,000 in a taxable account
  • $600,000 in Traditional IRA
  • $150,000 in Roth IRA

Year 1–7 (before Social Security and RMDs): take most spending from taxable account to keep taxable income low and allow Traditional IRA to grow. In low-income years, convert modest portions of the Traditional IRA to the Roth to “fill” the lower tax brackets without pushing you into higher rates later. After RMDs begin, income from the Traditional IRA may rise; Roth withdrawals will be handy tax-free sources if you want to avoid higher brackets.

This blend reduced one client’s projected lifetime taxes by multiple percentage points versus an unsequenced plan. Exact savings depend on bracket dynamics, state taxes, and market returns.

Common mistakes and pitfalls to avoid

  • Treating sequencing as one-and-done: You must revisit annually.
  • Ignoring benefits interactions: Higher income can reduce net after-tax benefits via Social Security taxation and higher Medicare premiums.
  • Over-converting to Roth: Paying too much tax now for too-small long-term gain if you don’t outlive the tax break or if your tax rate will be lower later.
  • Forgetting capital gains management: Large taxable account sales can generate capital gains; plan sales to use low-rate brackets and loss harvesting.

Tools and professional help

  • Tax projection tools: Many financial planning platforms and tax software can simulate multiple years of withdrawals and convert scenarios.
  • Work with a CPA and CFP: A CPA is essential for accurate tax projections and to execute conversions; a CFP can incorporate sequencing into broader financial and estate planning.

For Roth-specific conversion rules and strategies, see FinHelp’s guides: Roth Conversion Basics: When It Makes Sense to Convert and How to Use Roth Conversions Strategically in Low-Income Years. Also review the recent FinHelp coverage of Roth catch-up rules under SECURE 2.0 for high-income earners: IRS Finalizes SECURE 2.0 Roth Catch-Up Rule: A Major Shift for High-Income Retirement Savers.

Quick checklist before you execute

  • Project taxes for the next 10–20 years under different withdrawal orders.
  • Confirm RMD timing and amounts with current IRS rules (see IRS Pub. 590-B).
  • Consider timing of Social Security and pension start dates.
  • Account for state taxes and Medicare IRMAA thresholds.
  • Decide on an annual review cadence and set rebalancing/conversion targets.

Final notes and disclaimer

Sequencing withdrawals can reduce lifetime taxes and stabilize benefits, but it requires careful modeling, attention to tax-law changes, and coordination between tax and financial planning. This article is educational and does not replace personalized advice. Consult a qualified CPA and fee-only financial planner to build a sequencing strategy tailored to your situation.

Author note: In my 15+ years helping over 500 clients, sequencing and selective Roth conversions have been among the most effective levers to reduce lifetime taxes when applied thoughtfully and revisited regularly.

Authoritative resources: IRS publications on IRAs (Pub. 590-A and 590-B) and the IRS website (https://www.irs.gov); Consumer Financial Protection Bureau retirement resources (https://www.consumerfinance.gov).