Tax Withdrawal Sequencing

Choosing Which Retirement Accounts to Use and When

The order of withdrawals can change your retirement

A retirement account balance is not the same as money available to spend. A dollar taken from a traditional IRA is usually taxable. A dollar withdrawn from a bank account is generally not. A dollar taken from a taxable investment account may include both your original investment and taxable gains. Qualified Roth withdrawals are generally tax-free. Choosing which account to use can change today’s tax bill, future required minimum distributions (RMDs), Medicare costs, and the amount left for a spouse or heirs.

There is no single withdrawal order that works for everyone. A good plan considers income needs, tax brackets, future account growth, Social Security, market conditions, and the years that remain in retirement. Sometimes paying a little more tax today can prevent a much larger tax burden later. Other times, avoiding a large withdrawal today is the better choice.

Understanding the three main account types

A taxable brokerage withdrawal is not automatically tax-free. Selling a $30,000 investment with a $20,000 cost basis generally realizes $10,000 of gain. Whether the gain is taxable, and at what rate, depends on the investment, holding period, other income, and applicable rules. A bank withdrawal from previously taxed cash usually does not create that gain.

Three common withdrawal approaches

1. Taxable accounts first

Some retirees use cash and taxable investments before traditional IRAs, while leaving Roth money for later. This may keep ordinary income lower in early retirement and allow tax-deferred accounts to grow. But large traditional IRA balances may then produce higher RMDs. Selling appreciated investments can also create capital gains.

2. Traditional accounts first

Other retirees draw from traditional IRAs earlier to reduce future RMDs. This may be useful in years with low taxable income, such as after work ends but before Social Security starts. Yet taking too much can push income into a higher bracket, make more Social Security taxable, or cause future Medicare premium surcharges.

3. Blended withdrawals

A blended approach draws from more than one account in the same year. For example, a retiree may take enough from a traditional IRA to use part of a lower tax bracket, sell some taxable investments, and use Roth funds for the rest. The goal is not always the lowest tax in one year. It is to manage taxes and keep useful choices available over many years.

Worked example: Funding $50,000 of spending

Assume a retiree needs $50,000 from savings after other income. They have a traditional IRA, a taxable brokerage account, and a Roth IRA. The examples below use simple, illustrative tax assumptions, not a full tax return. They show why the source of the money matters.

This does not mean the Roth-only option is best. Using $50,000 of Roth assets today gives up the chance to use that tax-free money later, perhaps when tax rates are higher or a surviving spouse faces single tax brackets. The best choice depends on the entire plan.

The tax cost of a withdrawal can be larger than expected

Social Security can become more taxable

Federal taxation of Social Security uses “combined income,” sometimes called provisional income. It generally includes adjusted gross income, tax-exempt interest, and half of Social Security benefits. As combined income rises, a larger share of benefits may become taxable, up to 85% of benefits. This does not mean Social Security is taxed at an 85% tax rate.

Consider a retiree with $32,000 in annual Social Security and $18,000 of other countable income. Combined income would be about $34,000 before a new IRA withdrawal. A $20,000 pretax IRA withdrawal could raise combined income to about $54,000. Depending on filing status and the other details, the withdrawal may cause additional Social Security benefits to become taxable. The increase in taxable income can therefore be larger than the IRA withdrawal alone.

Medicare premiums can change later

Medicare generally uses modified adjusted gross income from two years earlier to decide whether higher Part B and Part D premiums apply. This is called IRMAA. A large traditional IRA withdrawal or Roth conversion may cross a threshold and increase premiums in a later year. IRMAA thresholds, premiums, and appeal rules change over time. A retiree should compare the future Medicare cost with any long-term tax benefit, rather than avoid every threshold automatically.

Capital gains may be taxed differently

Long-term capital gains often have different federal rates from ordinary income. A taxable investment sale can also be partly a return of cost basis. However, gains can affect adjusted gross income, Social Security taxation, and Medicare thresholds. Selling at a loss may help offset gains, subject to tax rules. The account chosen for withdrawals can therefore affect several parts of a tax return.

RMDs can undo an early tax-saving strategy

RMDs generally begin at age 73 for people born from 1951 through 1959, and at age 75 for those born in 1960 or later. Most traditional IRAs and many employer retirement accounts are subject to these rules. Roth IRAs have no lifetime RMDs for their original owners. RMD amounts depend on the prior year-end account balance and an IRS life-expectancy divisor.

Imagine a retiree leaves a $900,000 traditional IRA untouched for ten years. At an illustrative 6% annual return with no withdrawals, it could grow to about $1.61 million. At age 75, using the Uniform Lifetime Table divisor of 24.6, an IRA of that size would produce an RMD of roughly $65,500. The actual RMD would use the prior December 31 balance and the correct divisor. That forced income may arrive alongside Social Security and pensions.

Taking some traditional IRA withdrawals or making carefully sized Roth conversions earlier may reduce the future RMD. But the taxes paid earlier must be weighed against the future savings. Reducing an RMD by $100,000 is not the same as saving $100,000 in taxes.

Roth conversions and withdrawal sequencing work together

A Roth conversion moves eligible pretax retirement money into a Roth account. The converted amount is generally included in taxable income for the conversion year. A conversion can be useful in a lower-income year, but a large one can increase taxes and future Medicare premiums. RMD amounts for a year cannot be converted to Roth.

How conversion taxes are paid also matters. If a retiree converts $60,000 and owes an illustrative $13,200 of additional tax, paying the tax from available cash may leave the full $60,000 in the Roth. Paying the tax by withholding from retirement funds reduces the amount transferred or requires more retirement assets to be distributed. For someone under age 59½, amounts not converted may also face an early-distribution penalty unless an exception applies.

A conversion plan should compare the future Roth balance, the value of money used to pay the tax, the reduction in future pretax balances, and the taxes that might otherwise have been paid later. Simply comparing tax rates in the conversion year is not enough.

Market declines can change which account to use

Withdrawals during a market decline may force a retiree to sell investments when prices are low. This is one form of sequence-of-returns risk. Suppose a $600,000 invested account falls 20% to $480,000. Taking $40,000 then leaves $440,000 before any recovery. A 25% rebound brings that balance to $550,000, still below the original $600,000. The withdrawal reduced the amount available to recover.

A cash reserve or a more stable portion of a portfolio may help fund near-term spending during a decline. Yet keeping too much cash can create inflation risk and lower long-term growth. The source of withdrawals should be considered alongside the investment mix, not as a separate decision.

Inflation can increase both withdrawals and taxes

At 3% annual inflation, $60,000 of spending rises to about $80,600 in ten years and $108,400 in twenty years. If Social Security or pension income grows more slowly, the amount needed from savings may rise. Taking larger withdrawals from pretax accounts can raise taxable income. Some tax brackets adjust for inflation, but the rules for taxing Social Security benefits use thresholds that are not routinely indexed. This can create extra tax pressure over time.

Spousal survival changes the tax picture

When one spouse dies, the survivor may lose one Social Security benefit while many household bills continue. In later tax years the survivor generally files as Single, unless a special filing status applies. Single brackets and deductions are often less favorable than those for a married couple filing jointly. A survivor may therefore pay a higher effective tax rate even with less household income.

For example, a couple might draw from traditional accounts while they have access to joint tax brackets, preserving Roth funds for the surviving spouse. That can be useful, but not always. A survivor with lower income may have room for low-rate traditional IRA withdrawals. The plan should compare both lives, not just the years when both spouses are living.

Long-term care can create a sudden withdrawal need

A care event may require tens of thousands of dollars beyond normal spending. If the funds come from a traditional IRA, the distribution may create a large taxable-income spike. Some qualifying medical and long-term care costs may be deductible when itemized and subject to IRS rules, but a deduction should not be assumed. A mix of cash, taxable assets, insurance benefits, and Roth savings may offer more choices. The healthy spouse’s income and future care needs must also be considered.

What about heirs?

Traditional retirement accounts generally pass future income tax obligations to beneficiaries when they withdraw the money. Qualified inherited Roth distributions are generally free from federal income tax, although inherited Roth accounts may still have distribution deadlines. Many non-spouse beneficiaries must empty inherited retirement accounts within ten years, subject to exceptions and additional RMD rules. The best lifetime withdrawal plan should consider what remains for heirs, not just the owner’s final account balance.

A practical year-by-year withdrawal review

A useful review starts with the amount of spending needed after guaranteed income, then looks at taxes and the balances in each account. It should be updated when income, family needs, tax laws, or markets change.

Common mistakes to avoid

• Always taking from one account type without reviewing taxes each year.
• Assuming a low tax bill today means the best lifetime outcome.
• Ignoring how traditional IRA growth can increase future RMDs.
• Treating a taxable brokerage withdrawal as fully taxable or fully tax-free.
• Using Roth money too quickly without considering later-life or survivor needs.
• Making large conversions without checking Medicare and Social Security effects.
• Focusing only on gross portfolio value instead of after-tax spendable wealth.

The bottom line

Tax withdrawal sequencing is the process of choosing which dollars to spend, which dollars to keep invested, and when to recognize taxable income. A thoughtful sequence can help manage taxes, reduce forced future withdrawals, and preserve options for unexpected expenses or a surviving spouse. But no fixed order is best for everyone. The strongest approach reviews the full retirement timeline and the after-tax value of the money left, not just this year’s tax return.

Educational illustration only. Figures are rounded and do not represent an individualized tax calculation. Federal and state rules, Medicare schedules, account rules, and personal circumstances can change. Consult qualified tax and financial professionals before acting on a specific strategy.

Related Retirement Guides

• Retirement Income Planning
• Roth Conversions
• Required Minimum Distributions
• Income Sustainability

See a practical example in the tax withdrawal sequencing case study.