When you retire, you’ve done the hard work. You saved, invested, and made it through years of planning. Now comes the part that feels deceptively simple: drawing from your accounts to fund your lifestyle.
The order you take money out matters. The wrong sequence can bump you into higher tax brackets, raise your Medicare premiums, and shrink what you leave to your heirs. The correct sequence can save you thousands and help your money last longer.
Let’s walk you through effective withdrawal strategies.
Why order matters
Not all accounts are taxed the same. You probably have a mix:
- A traditional IRA or 401(k), where contributions went in tax-deferred. Those withdrawals are taxed as ordinary income at your marginal tax rate when withdrawn.
- A Roth IRA or Roth 401(k), where you already paid taxes up front. Withdrawals are usually tax-free.
- A taxable brokerage account is one where you can be responsible for paying capital gains taxes once you sell your investments.
Each of these accounts is taxed differently. That means the order you draw from them can either work for you or against you.
A typical sequence that works
There’s no one-size-fits-all answer. Still, this sequence often makes sense:
- Tap taxable accounts first.
- Then turn to tax-deferred accounts.
- Leave Roth accounts for last.
Why this order?
Taxable accounts are the most flexible. If you sell investments you’ve held for over a year, the gains are usually taxed at the lower long-term capital gains rate. That’s often less than your income tax rate. You also manage which assets you sell, giving you control over when and how much tax you trigger.
Tax-deferred accounts, like traditional IRAs, come next. You must take Required Minimum Distributions (RMDs) at some point, so it makes sense to start drawing from these accounts before those mandatory withdrawals kick in. The idea is to spread taxable withdrawals across years when your income and tax rate are more manageable.
Finally, Roth accounts. Since withdrawals are tax-free, it’s usually best to let them grow as long as possible. They’re also valuable as an emergency bucket, money you can draw on without increasing taxable income.
A simple example
Suppose you need $50,000 to live on this year. You have:
- $200,000 in a taxable brokerage account
- $500,000 in a traditional IRA
- $200,000 in a Roth IRA
If you take the $50,000 from your IRA, that entire amount will be taxed as ordinary income. Depending on your other income sources, like Social Security or a pension, that extra $50,000 might push you into a higher tax bracket.
What if you take that $50,000 from your taxable account instead? If most comes from long-term capital gains, you might pay a 15% capital gains tax, or about $7,500, depending on your total income. That’s far less than the tax bill you’d owe if the same amount were treated as ordinary income.
By carefully choosing which account to draw from, you keep more money working for you. Over ten or twenty years, those savings compound into a big difference
What about RMDs?
You must start taking Required Minimum Distributions (RMDs) from your IRA or 401(k) when you reach age 73.
However, if you turned 72 before January 1, 2023, you would need to start taking RMDs at that age. These distributions are taxed as ordinary income.
If you wait too long to draw from tax-deferred accounts, your RMDs could grow so large that they bump you into higher tax brackets later. That’s why some retirees strategically withdraw smaller amounts earlier. It’s about smoothing out your taxable income across retirement.
How Medicare fits in
Medicare is a federal health insurance program primarily for individuals aged 65 and older, but it also serves certain younger people with disabilities and specific health conditions. The program includes different parts, with Part B covering outpatient care and Part D focusing on prescription drug coverage.
The premiums for these parts can vary based on your income level. You will pay higher premiums if your modified adjusted gross income (MAGI) exceeds certain thresholds. These thresholds are determined by the IRS and are adjusted annually.
The standard premium amount for Part B is set each year, but higher-income earners may be subject to an Income Related Monthly Adjustment Amount (IRMAA), which increases their premium. Similarly, Part D premiums can also include an additional charge based on income.
This system requires higher-income beneficiaries to pay higher premiums.
It’s important to stay informed about the income thresholds and any potential changes annually because they can directly impact your Medicare costs.
Taking significant IRA withdrawals in one year could unintentionally put you into a higher premium bracket. A smart withdrawal sequence helps you avoid surprises.
The Roth advantage
Roth IRAs don’t have RMDs during your lifetime. That alone makes them powerful. You can let them grow tax-free for decades.
When it comes to inheriting a Roth IRA, there are specific rules that beneficiaries must adhere to. The designated beneficiaries can inherit the Roth IRA upon the account holder’s death. One of the primary benefits is that they will not owe income tax on qualified withdrawals. However, the distribution rules vary depending on the relationship to the deceased account holder.
Under the “SECURE Act” provisions that took effect in 2020, non-spousal beneficiaries are generally required to withdraw the entire balance of the inherited Roth IRA within 10 years of the original owner’s death. While there is no requirement for annual distributions during that period, beneficiaries can withdraw funds at any time within those 10 years.
For spousal beneficiaries of a Roth IRA, a minimum distribution (RMD) is not required during the original account owner’s lifetime. This means that if a spouse decides to treat the inherited Roth IRA as their own, they are not obligated to take any distributions at a specific age.
If the spouse chooses to keep the account as an inherited Roth IRA rather than converting it into their account, RMD rules will apply. The spouse must start taking distributions beginning in the year the original account owner would have turned 73.
Since Roth IRAs don’t require RMDs during the owner’s lifetime, surviving spouses often enjoy more flexibility in managing their distributions.
Flexibility is key
A strict order isn’t always the best answer. The right approach often blends withdrawals from different buckets depending on your situation.
For example:
- If the market is down, you might avoid selling from taxable accounts and instead draw from your IRA.
- If you’re close to entering a higher Medicare premium bracket, withdrawing from your Roth could keep you below the line.
- If you’re temporarily in a low tax year, you might take more from your IRA to fill lower tax brackets.
Flexibility is what matters most. The sequence is a guide, not a rigid rule.
Estate planning considerations
Your withdrawal order affects more than just your tax bill. It impacts what you leave behind.
- When you die, taxable accounts get a step-up in cost basis, which can eliminate capital gains for your heirs.
- Roth IRAs pass on tax-free.
- Traditional IRAs pass on as taxable, which means your heirs will owe ordinary income tax when they withdraw.
You leave behind the most tax-efficient assets by spending taxable and traditional IRA funds first. That can make a big difference for your family.
Final thoughts
You worked hard to build your savings. Don’t let poor withdrawal choices erode them. Your sequence can mean the difference between a comfortable retirement and unnecessary tax headaches.
The good news is you have control. With a thoughtful strategy, you can lower your taxes, manage your income, and give your money the best chance to last.
The order in which you withdraw isn’t just a detail. It’s one of the most powerful levers you have in retirement.
