Why sequencing withdrawals matters

Tax drag is the drain that taxes create on investment returns and retirement cash flow. Over a 20–30 year retirement, small differences in effective tax rates compound and can materially change how long assets last. Sequencing withdrawals isn’t about paying zero taxes; it’s about timing taxable events so you pay the least tax overall while meeting spending, Medicare, and Required Minimum Distribution (RMD) rules (see IRS guidance on distributions) (https://www.irs.gov/retirement-plans/retirement-plan-and-ira-rollovers).

In my 15+ years as a financial planner I’ve seen retirees increase sustainable retirement income by tens of thousands of dollars simply by changing withdrawal order, using modest Roth conversions, and aligning Social Security and RMD timing. The approach requires coordination among investment, tax, and benefits rules.

Core principles of sequencing withdrawals

  • Prioritize taxes, not just account labels. A withdrawal’s tax effect depends on your total taxable income that year (wages, Social Security, pensions, IRA distributions) and how that interacts with capital gains rates and Medicare adjustments.
  • Preserve tax-free growth when it’s valuable. Roth accounts grow tax-free; keeping some Roth balance can limit future taxable distributions and reduce RMD pressure.
  • Use tax brackets as a tool. Take advantage of lower-bracket windows (early retirement, delayed Social Security, or years with large deductions) to move taxable dollars into tax-free vehicles via Roth conversions.
  • Manage RMDs proactively. Required minimum distributions begin per IRS rules (commonly age 73 for many retirees as of 2025) and can create large taxable years if not planned for (see IRS Publication 590-B) (https://www.irs.gov/pub/irs-pdf/p590b.pdf).

Practical sequencing framework (step-by-step)

  1. Model your baseline: estimate retirement cash needs, expected Social Security, pensions, Medicare premiums (IRMAA), and taxable investment income. Use a multi-year tax projection, not a single-year view.

  2. Identify low-income windows: these are years with especially low taxable income (e.g., between retirement and RMDs, years with large deductions, or market downturns). These years are often the best times to take taxable events or convert to Roth.

  3. Order withdrawals by tax efficiency generally as:

  • Taxable brokerage accounts (long-term capital gains and qualified dividends get preferential rates when held long term)

  • Tax-free accounts (Roth IRA/401(k)) to preserve tax-free growth and reduce future RMD pressure

  • Tax-deferred accounts (traditional 401(k)/IRA) last, except when a strategic Roth conversion or annuitization makes sense

    Note: This is a general rule—not universal. For example, if you need to keep adjusted gross income (AGI) below a threshold for Medicare or tax credits, you might use Roth funds to avoid bumping AGI.

  1. Use partial Roth conversions in low-income years. Converting modest amounts each year can smooth taxable income, avoid spiking into higher tax brackets, and reduce future RMDs. For details on timing and mechanics, see our guide on Roth conversions (When to Convert a Traditional IRA to a Roth: Key Considerations) (https://finhelp.io/glossary/when-to-convert-a-traditional-ira-to-a-roth-key-considerations/).

  2. Harvest capital gains and losses in taxable accounts. Realize long-term capital gains in years with low ordinary income to take advantage of lower capital gains rates, and use tax-loss harvesting to offset realized gains.

  3. Coordinate Social Security timing. Delaying Social Security increases monthly benefits but also raises taxable income later. Balance delayed benefits with your taxable distributions strategy.

  4. Revisit annually. Tax law, markets, and personal circumstances change—re-run the model each year and adjust.

Illustrative example (numbers simplified)

Assume a retired couple with these balances: $250k taxable, $500k traditional IRA, $150k Roth IRA. They expect modest Social Security and no pension. If they withdraw only from the traditional IRA early to cover yearly cash needs, distributions will be fully taxable and could push them into higher brackets and higher Medicare IRMAA surcharges. Instead, a sequencing plan could:

  • Use $15k–$30k a year from taxable brokerage first (capital gains taxed at preferential rates),
  • Use Roth for emergency or to avoid small bracket creep when capital gains are low,
  • Do a $20k–$30k partial Roth conversion in a low-income year to take advantage of the 12% tax bracket,
  • Delay tapping the traditional IRA until RMDs begin.

Over a decade this approach can reduce total taxes paid and limit Medicare premium surcharges. The exact savings depend on bracket widths and future tax law.

Advanced tactics and trade-offs

  • Partial Roth conversions vs. lump conversions: spreading conversions over several years can keep you in lower tax brackets and avoid Social Security/Medicare surcharges. See our article on conversion windows for detailed scenarios (Roth Conversion Roadmap: When and How to Convert for Retirement) (https://finhelp.io/glossary/roth-conversion-roadmap-when-and-how-to-convert-for-retirement/).

  • Tax-loss harvesting: selling losing positions to offset gains can be paired with withdrawals to minimize taxable events in a given year.

  • Asset location: place high-growth, tax-inefficient assets (taxable-bond-coupons, REITs) in tax-deferred accounts and tax-efficient assets (index funds, ETFs) in taxable accounts to reduce overall tax drag.

  • Municipal bonds: consider muni bonds in the taxable bucket if state and federal tax advantages apply for your situation.

  • Annuities and income layering: fixed or variable annuities inside tax-deferred or taxable structures can change sequencing decisions because of their income guarantees and tax treatment.

Common mistakes to avoid

  • Treating all accounts as identical. Each account type has different tax rules that matter in sequencing.
  • Ignoring Medicare IRMAA thresholds. Large IRA distributions or conversions can raise Medicare premiums for several years (see Medicare and IRMAA rules at Medicare.gov) (https://www.medicare.gov).
  • Waiting until RMDs force taxable income. Proactive Roth conversions and gradual tax management beat last-minute, large taxable events.
  • Overlooking state taxes. Withdrawals may trigger state income tax, so consider state-specific timing.

Checklist for implementing sequencing withdrawals

  • Run a multi-year retirement cash-flow and tax projection.
  • Identify low-income years and bracket windows for Roth conversions.
  • Decide an ordering rule for your household (taxable first, Roth second, tax-deferred last is a common starting point).
  • Plan partial Roth conversions sized to stay within desired tax brackets.
  • Monitor Social Security timing and Medicare premium impact.
  • Rebalance asset location to match tax efficiency goals.

When to call a professional

Sequencing withdrawals interacts with tax law, Medicare, estate planning, and investment strategy. If you have six-figure retirement accounts, expected large RMDs, or complex income sources (rental income, business income, odd-year retiree income), consult a certified financial planner (CFP®) and a tax advisor. In my practice I run scenario models that include tax bracket stacking, Social Security timing, and IRMAA sensitivity to quantify trade-offs.

Sources and further reading

Professional disclaimer: This article is educational only and does not constitute personalized financial, tax, or legal advice. Rules change; verify current IRS and Medicare guidance and consult a qualified advisor before executing conversions or making large withdrawals.

If you’d like a worksheet-based approach to begin sequencing withdrawals, start with a three-year projection that maps expected Social Security, planned withdrawals by account, and anticipated taxable income—then run alternate scenarios where you swap $10k–$30k per year of tax-deferred distributions into Roth conversions to compare net present value of after-tax cash flows.