Introduction
Retirement income isn’t just about how much you have—it’s about how you take it. Tax-efficient withdrawal sequencing is the disciplined approach to taking income from different account types (taxable brokerage accounts, tax-deferred retirement accounts such as traditional IRAs and 401(k)s, and tax-free accounts such as Roth IRAs) in the order and timing that reduces lifetime federal (and often state) taxes, protects means-tested benefits, and preserves flexibility.
Why sequencing matters
Taxes, Medicare premiums (IRMAA), and Social Security taxation are all driven by your reported income and modified adjusted gross income (MAGI). Large, poorly timed withdrawals can push you into higher tax brackets, trigger higher Medicare Part B/D premiums through IRMAA, or increase the portion of Social Security subject to tax. A thoughtful sequence can smooth taxable income across years, leaving more after-tax dollars for spending and legacy planning (see Social Security and Medicare guidance: SSA and Medicare pages).
High-level sequencing framework (practical)
In my 15+ years advising retirees I follow a flexible three-bucket ordering rule, then refine it for each client’s constraints and goals. A common, baseline sequence is:
- Taxable accounts (brokerage, savings) first
- Tax-deferred accounts (traditional IRAs/401(k)s) next
- Roth accounts last (Roth IRAs and converted Roths)
Why this baseline works:
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Taxable accounts. Selling investments in taxable accounts lets you take advantage of long-term capital gains rates and the ability to harvest losses, while leaving tax-advantaged accounts growing. Withdrawals from taxable accounts don’t count as ordinary income the way ordinary IRA distributions do, giving more control over MAGI in early retirement.
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Tax-deferred accounts. Traditional IRAs and 401(k)s are taxed as ordinary income on distribution. Using them strategically—especially in years when your bracket is low—can smooth lifetime taxes.
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Roth accounts. Qualified Roth withdrawals are tax-free and can be used later in retirement to avoid pushing income-sensitive thresholds. Roth IRAs also do not have required minimum distributions (RMDs) for original owners, so preserving Roth IRAs can reduce future taxable RMD pressure (IRS RMD guidance).
Important caveats and modern wrinkles
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RMD timing. Under SECURE Act 2.0, required minimum distribution (RMD) ages changed: the RMD age moved to 73 starting in 2023 and will rise to 75 in 2033 (subject to current law). RMDs force taxable withdrawals from tax-deferred accounts, so planning before the RMD age (including Roth conversions) matters (IRS: Required Minimum Distributions).
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Roth conversions. Converting portions of traditional IRAs to a Roth during low-income years can reduce future RMDs and shift future growth into tax-free buckets. Conversions create current taxable income, so the decision must balance current tax cost with future tax savings. For tactical guidance, see our guide on using Roth conversions in low-income years (How to Use Roth Conversions Strategically in Low-Income Years: https://finhelp.io/glossary/how-to-use-roth-conversions-strategically-in-low-income-years/) and the broader Roth vs Traditional tradeoffs (Roth vs Traditional Retirement Accounts: Tax Tradeoffs Explained: https://finhelp.io/glossary/roth-vs-traditional-retirement-accounts-tax-tradeoffs-explained/).
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Social Security claiming. Your withdrawal plan should coordinate with when you claim Social Security. Claiming early or late changes taxable income and the portion of benefits taxed. Reducing taxable withdrawals before filing can lower the taxable portion of benefits (SSA guidance on taxation of benefits).
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Medicare IRMAA. Higher MAGI can trigger Income-Related Monthly Adjustment Amounts (IRMAA) on Medicare Part B and Part D. A single large conversion or distribution can have a two- to three-year IRMAA penalty impact because IRMAA looks back at prior-year income. Spread conversions or large withdrawals and watch timing (Medicare/SSA information on IRMAA).
A step-by-step decision checklist
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Project cash needs and guaranteed income first. Cover essential spending with Social Security, pensions, and annuities. Use liquid accounts for discretionary spending.
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Build a tax-projection model for 5–10 years. Estimate brackets, RMDs, Medicare IRMAA thresholds, and Social Security taxation. Small modeling differences can change the preferred sequence.
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Use taxable accounts early to take advantage of capital gains rates, loss harvesting, and the standard deduction. If you have sequence-of-returns risk concerns, keep a cash or short-term bond buffer to avoid selling equities in a downturn.
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Identify low-income or “conversion windows.” Years with unusually low taxable income (e.g., early retirement before RMDs and before Social Security claiming) are good times to do partial Roth conversions.
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Avoid large one-year spikes. A single large withdrawal or conversion can push you into higher brackets and trigger IRMAA or higher tax on Social Security. Spread distributions across multiple years when possible.
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Coordinate state taxes. State tax systems differ—some tax Social Security, some don’t; some have favorable treatment for retirement income. Include state tax in modeling.
Practical examples (illustrative)
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Example A: Early retiree age 62–66 with 401(k), brokerage account, and Roth IRA. Use brokerage and cash for immediate needs while performing small Roth conversions over several low-income years before claiming Social Security at 70. This reduces future RMD exposure and increases tax-free buckets later.
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Example B: Couple approaching RMD age with large traditional IRA. Use a partial Roth conversion plan beginning at age 72 (before RMDs begin) to lower taxable RMDs later and manage tax brackets across years.
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Example C: Retiree with massive taxable account and small tax-deferred accounts. Spend down taxable holdings first to take advantage of capital gains rates and leave tax-free Roth assets as a legacy or for late-life tax-free income.
Common mistakes and how to avoid them
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Ignoring the 5-year Roth rule. Roth IRA conversions have a five-year rule for penalty-free qualified distributions of converted amounts if you are under age 59½. Plan conversions and withdrawals with this in mind.
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Treating Roths as a last-resort emergency fund. While Roths can be excellent late-stage tax-free sources, using them carelessly early can forfeit decades of tax-free growth.
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Neglecting Medicare/IRMAA timing. A conversion that creates a high MAGI one year can raise Medicare premiums for at least the next year; plan and smooth conversions over time.
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Failing to update the plan when laws change. Tax law changes, and so do thresholds. Review sequencing annually or when life events occur.
Tools and tax items to track
- Form 8606 (nondeductible IRAs and Roth conversions) for tracking basis and conversion tax reporting (IRS Form 8606).
- RMD calculations and worksheets (IRS RMD pages).
- Social Security benefit taxation rules (SSA Taxation of Benefits).
- Medicare IRMAA thresholds (Medicare/SSA IRMAA information).
When to get professional help
In my practice I see the most value when clients engage a tax-aware advisor before making large conversions or distribution changes. Complexities like multi-state residencies, substantial capital gains, concentrated stock positions, or inherited IRAs often require bespoke modeling. A credentialed tax advisor or fee-only financial planner can run scenario analysis and produce a multi-year tax projection.
Two internal resources worth reading next
- For more on timing Roth conversions, see our guide: How to Use Roth Conversions Strategically in Low-Income Years (https://finhelp.io/glossary/how-to-use-roth-conversions-strategically-in-low-income-years/).
- For a deeper comparison of account types, read Roth vs Traditional Retirement Accounts: Tax Tradeoffs Explained (https://finhelp.io/glossary/roth-vs-traditional-retirement-accounts-tax-tradeoffs-explained/).
Authoritative sources and further reading
- IRS — Required Minimum Distributions (RMDs): https://www.irs.gov/retirement-plans/retirement-topics-required-minimum-distributions-rmds
- IRS — Form 8606: https://www.irs.gov/forms-pubs/about-form-8606
- Social Security Administration — Taxation of Benefits: https://www.ssa.gov/planners/taxes.html
- Medicare/SSA — IRMAA and Medicare premiums: https://www.ssa.gov/benefits/medicare/medicare_premiums.htm
- Consumer Financial Protection Bureau — Retirement planning basics: https://www.consumerfinance.gov/consumer-tools/retirement/
Professional disclaimer
This article is educational and does not constitute personalized tax or investment advice. Tax rules change and individual circumstances vary—consult a qualified tax professional or certified financial planner before implementing a withdrawal or conversion strategy.
Final thought
A tax-efficient withdrawal sequence can add years of spending power to a retirement portfolio. The goal isn’t to find a single “right” order for everyone but to build a dynamic plan that balances taxes, benefits, cash flow needs, and legacy wishes. Start by modeling multiple scenarios and update the plan as your income, laws, and goals change.
