Tax-Smart Withdrawal Order for Retirees with Multiple Accounts

Overview

A tax-smart withdrawal order for retirees is a practical framework for choosing which accounts to tap and when. Rather than withdrawing the same percentage from every account each year, a tax-smart approach uses the tax characteristics of each account, your projected income in retirement, RMD rules, and benefit interactions (Social Security taxation, Medicare Part B/D IRMAA surcharges) to reduce total taxes and fund living expenses.

I’ve helped many clients convert this concept into a year-by-year plan. In my practice, the optimal sequence often looks like this: taxable accounts first, tax-deferred accounts second, and Roth accounts last — but there are important exceptions. A tailored plan requires modeling several scenarios and revisiting them annually.

Sources and rules change: for current RMD and other tax rules, see the IRS and related guidance (e.g., IRS publications on RMDs and Roth IRAs) and the Consumer Financial Protection Bureau for retirement decision resources (IRS: https://www.irs.gov; CFPB: https://www.consumerfinance.gov).

Why the order matters

Each account type has different tax consequences:

• Taxable accounts (brokerage, cash): Withdrawals generally trigger capital gains taxes only on gains realized, and you can control timing of gains/losses and use tax-loss harvesting. Withdrawals do not count as ordinary income and therefore may help keep you in lower ordinary-income tax brackets early in retirement.
• Tax-deferred accounts (traditional IRAs, 401(k)s): Withdrawals are taxed as ordinary income. Large withdrawals can push you into higher brackets, increase the percent of Social Security benefits that are taxable, and raise Medicare Part B/D surcharges (IRMAA).
• Tax-exempt/Roth accounts (Roth IRAs, Roth 401(k)s): Qualified withdrawals are tax-free and do not increase your taxable income; preserving these accounts preserves tax-free growth and flexibility later.

These distinctions drive the conventional sequencing advice, but real-life planning is nuanced.

General withdrawal-order framework (common starting point)

1. Taxable accounts first: Use cash, short-term bonds, and brokerage accounts to meet spending early in retirement. This preserves tax-advantaged balances and gives space for traditional accounts to grow or be converted strategically.
2. Tax-deferred accounts second: Pull from IRAs/401(k)s as needed, mindful of RMD timing and tax brackets.
3. Roth accounts last: Leave Roth IRAs to grow tax-free and provide a tax-free buffer in high-tax years or for heirs.

This order helps smooth taxable income, reduce the impact of RMDs, and create years with lower taxable income that are ideal for Roth conversions or harvesting long-term capital gains at favorable rates.

Important exceptions and tactics

The ‘‘taxable-first’’ rule is not universal. Consider these common exceptions:

• Roth conversions in low-income years: If you expect low taxable income early in retirement (before RMDs and before Social Security starts), converting some traditional IRA dollars to a Roth can be a tax-efficient move. Partial conversions taken while in a low bracket reduce future RMDs and shift future growth into the tax-free bucket. (See our internal guide: Roth Conversion Roadmap: When and How to Convert for Retirement: https://finhelp.io/glossary/roth-conversion-roadmap-when-and-how-to-convert-for-retirement/).
• Protecting means-tested benefits: If a modest increase in taxable income will cause substantial Medicare IRMAA surcharges or higher taxation of Social Security, you may prioritize Roth funds or partial Roth conversions to limit spikes in ordinary taxable income. For IRMAA and Medicare rules, consult Medicare.gov.
• Charitable goals: If you plan to give to charity and qualify, Qualified Charitable Distributions (QCDs) from IRAs (subject to age rules) can satisfy RMDs and exclude the distribution from taxable income.
• Large near-term liquidity needs: If selling assets in a taxable account would trigger large short-term capital gains or concentrated stock exposure, it may make sense to draw from tax-deferred accounts earlier.

Required Minimum Distributions (RMDs) and timing

RMD rules affect sequencing. As of 2025, the RMD age was adjusted by federal law (SECURE Act 2.0). Many retirees now face required distribution rules beginning at age 73 or later depending on birth year; future law phases may raise the age further. RMDs force taxable income from tax-deferred accounts and must be integrated into the withdrawal plan to avoid surprises. See our detailed RMD resources: Required Minimum Distribution (RMD): https://finhelp.io/glossary/required-minimum-distribution-rmd/ and RMD Strategies and Timing: https://finhelp.io/glossary/rmd-strategies-and-timing-reducing-taxes-on-required-withdrawals/.

Always confirm the current RMD age and calculation method on the IRS website before finalizing a plan (IRS RMD guidance: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-required-minimum-distributions).

Modeling taxes and benefits together

A tax-smart plan is not just about the order; it’s about interactions:

• Social Security taxation: Withdrawals from tax-deferred accounts increase “provisional income,” which can make more of your Social Security benefits taxable.
• Medicare premiums (IRMAA): Higher modified adjusted gross income (MAGI) can increase Medicare Part B and D premiums, which are adjusted based on your reported MAGI two years earlier.
• Capital gains placement: Selling appreciated assets in taxable accounts in low-income years can take advantage of 0% or reduced long-term capital gains rates.

I recommend running at least three scenarios: best case (low market returns, low income needs), base case (expected returns and spending), and stress case (higher spending or large one-time expenses). Each scenario should project taxable income, RMDs, Social Security taxation, and Medicare premium implications.

Practical step-by-step plan (annual checklist)

1. Project next 5 years of income needs and RMDs.
2. Estimate taxable income and bracket each year, including expected Social Security benefits and capital gains.
3. Decide whether to take Roth conversions in low-income years and how large they should be.
4. Sequence withdrawals for the coming year (taxable → tax-deferred → Roth), then re-evaluate after any major events.
5. Use tax-loss harvesting, lot selection, and charitable giving (QCDs) to blunt taxable spikes.
6. Revisit the plan annually, and after life changes (health, inheritance, market shocks).

Example (illustrative, not tax advice)

A married couple retired at 65 with $1M across accounts — $300k taxable, $500k traditional, $200k Roth — expects modest annual withdrawals of $40k plus Social Security later. By drawing the first years from the taxable account and some Roth conversions during a low-income year, they keep ordinary taxable income low, delay large withdrawals from traditional accounts, and reduce future RMD pain. Over a decade this lowered their cumulative tax bill while preserving Roth tax-free growth for later years.

Coordination with other planning areas

• Asset location: Hold tax-inefficient, high-turnover investments inside tax-deferred or Roth accounts and tax-efficient assets in taxable accounts. See our related article on Tax-Optimized Asset Placement: https://finhelp.io/glossary/tax-optimized-asset-placement-where-to-hold-each-investment-type/.
• Rollovers and consolidation: Consolidating old 401(k)s into IRAs can simplify RMD calculations, but keep employer-plan exceptions in mind.
• Estate planning: Roth IRAs can be powerful legacy vehicles because heirs often receive tax-free distributions; plan beneficiary designations accordingly.

Common mistakes to avoid

• Treating all accounts the same: Different tax treatment calls for different strategies.
• Ignoring RMD timing and underestimate tax effects.
• Not modeling Medicare and Social Security interactions.
• Overlooking Roth conversion taxes and the pro-rata rule if non-deductible contributions exist.

Practical tips from practice

• Start modeling before you retire. I routinely run simulations for clients two years before their planned retirement date so we can identify ideal Roth-conversion windows.
• Keep a three-year cash buffer to avoid forced sales in down markets.
• If you have concentrated stock in taxable accounts, consider donating appreciated shares to charity or using partial sales in low-tax years to rebalance.

When to get professional help

If you have multiple account types, pensions, rental income, or expect large inheritances, get a certified financial planner or tax advisor involved. They can run tax projections, model Medicare/IRMAA impacts, and coordinate Roth conversions. This article is educational and not individualized tax advice — consult a licensed advisor for personal recommendations.

Authoritative sources

• IRS — retirement plans and RMD guidance: https://www.irs.gov/retirement-plans
• Consumer Financial Protection Bureau — retirement tools and checklists: https://www.consumerfinance.gov
• Medicare — IRMAA and premium information: https://www.medicare.gov

Disclaimer

This content is for educational purposes only and does not constitute financial, tax, or legal advice. For tailored strategies, consult a qualified tax professional or certified financial planner.