The Best Order to Withdraw from Retirement Accounts

Imagine two retirees, both with $1 million saved. Susan withdraws $50,000 per year and runs out of money at 82. Meanwhile, David also withdraws $50,000 annually but his accounts last until 89. What's the difference? David understood the strategic order of retirement withdrawals, while Susan simply pulled from whatever account seemed easiest.

The sequence in which you withdraw from your retirement accounts isn't just a minor detail. It's the difference between maximizing your wealth and leaving tens of thousands of dollars on the table in unnecessary taxes. If you're within five years of retirement or already enjoying your golden years, this guide will show you exactly how to make every dollar count.

Important disclaimer: The information in this article is for educational purposes only and should not be considered financial advice. We are not certified financial planners. Always consult with a qualified financial advisor before making any decisions about your retirement accounts.

Before we dive into withdrawal strategies, let's make sure we're speaking the same language. Your retirement savings likely sit in three different types of accounts, each with its own tax treatment:

Taxable Accounts (Brokerage Accounts)
These are your regular investment accounts without special tax advantages. You've already paid income tax on the money you contributed, so you only owe taxes on the gains when you sell. The good news? Long-term capital gains rates (0%, 15%, or 20%) are usually lower than ordinary income tax rates.

Tax-Deferred Accounts (Traditional 401(k)s and IRAs)
You got a tax deduction when you contributed, but now Uncle Sam wants his share. Every dollar you withdraw counts as ordinary income and gets taxed at your current tax rate. These accounts also have Required Minimum Distributions (RMDs) starting at age 73, whether you need the money or not.

Tax-Free Accounts (Roth IRAs and Roth 401(k)s)
You paid taxes upfront, so qualified withdrawals in retirement are completely tax-free. No RMDs for Roth IRAs (though Roth 401(k)s do have RMDs unless you roll them to a Roth IRA). This is your tax-free gold that you generally want to preserve as long as possible.

The conventional wisdom in retirement planning follows a simple pattern: taxable first, tax-deferred second, and Roth last. Here's the logic behind this classic approach:

Step 1: Drain Taxable Accounts First
Start by withdrawing from your regular brokerage accounts. Why? You'll likely pay favorable long-term capital gains rates rather than ordinary income rates. Plus, these accounts don't have RMDs forcing your hand later. Think of this as eating your vegetables first so you can save dessert for when you really need it.

Step 2: Tap Tax-Deferred Accounts Second
Once your taxable accounts are depleted, move to your traditional 401(k)s and IRAs. You'll pay ordinary income tax on these withdrawals, but you're still in control of the timing (until RMDs kick in at 73). This strategy helps you manage your tax bracket year by year.

Step 3: Preserve Roth Accounts as Long as Possible
Your Roth accounts are the crown jewels. They grow tax-free, have no RMDs (for Roth IRAs), and can be left to heirs who also get tax-free growth. By saving these for last, you maximize the years of tax-free compounding.

For many retirees, especially those with modest savings and predictable income, this traditional sequence works beautifully. It's straightforward, minimizes taxes in most scenarios, and helps your money last longer.

Here's where financial planning gets interesting. The traditional sequence assumes a steady tax situation, but real life is messier. Let's look at when you should consider deviating from the standard playbook:

1. You're in an Unusually Low Tax Bracket
Retired at 62 but not yet collecting Social Security? You might be in the lowest tax bracket of your adult life. This is prime time for Roth conversions. Convert some of your traditional IRA to a Roth IRA, paying taxes at today's low rate, and enjoy tax-free withdrawals later when your income (and tax bracket) might be higher.

2. Medicare Premium Cliffs Are Looming
Once you're on Medicare, your Modified Adjusted Gross Income (MAGI) determines your premiums through Income-Related Monthly Adjustment Amounts (IRMAA). In 2024, if your income jumps just $1 over certain thresholds ($103,000 for individuals, $206,000 for couples), your Medicare Part B premium can increase by $70+ per month. Strategic withdrawals that keep you under these cliffs can save thousands annually.

3. You Have Massive Tax-Deferred Balances
If you've been a diligent saver and have $1 million or more in traditional IRAs and 401(k)s, your future RMDs could push you into surprisingly high tax brackets. Starting withdrawals or conversions earlier, even while paying some tax now, can prevent a tax bomb in your late 70s and 80s.

4. You're Facing Required Minimum Distributions Soon
At age 73, the IRS forces you to start withdrawing from tax-deferred accounts based on your account balance and life expectancy. If you wait until then to start withdrawals, you might have no control over your tax bracket. Consider starting strategic withdrawals or conversions in your late 60s to reduce future RMDs.

5. Social Security Taxation Is a Concern
Up to 85% of your Social Security benefits can be taxable depending on your combined income. If withdrawals from tax-deferred accounts will push more of your Social Security into taxable territory, you might benefit from drawing down those accounts earlier or mixing in Roth withdrawals to manage your taxable income.

One of the most powerful but underutilized strategies is the Roth conversion ladder. This isn't about your withdrawal sequence per se, but rather about repositioning your assets during those early retirement years before RMDs kick in.

Here's how it works: Let's say you retire at 62 and delay Social Security until 70. During those eight years, your taxable income might be quite low. Instead of simply living off your taxable accounts, you could also convert portions of your traditional IRA to a Roth IRA each year, filling up lower tax brackets intentionally.

Example in Action:
Jim retired at 63 with $800,000 in his traditional IRA, $200,000 in taxable accounts, and $150,000 in a Roth IRA. Rather than following the traditional sequence, Jim's strategy looks like this:

• Years 1-7 (ages 63-69): Withdraw $35,000 from taxable accounts for living expenses AND convert $40,000 annually from traditional IRA to Roth IRA, staying in the 12% tax bracket
• Age 70: Start Social Security, which covers most expenses
• Ages 70-73: Continue modest Roth conversions to avoid future RMD spikes
• Age 73+: RMDs are much smaller because he's already converted $280,000 to Roth, so he stays in lower tax brackets

By his late 70s, Jim has significantly more in tax-free Roth accounts and faces much smaller RMDs. He's effectively prepaid taxes at 12% to avoid paying 22% or 24% later. That's real money saved.

So how do you actually implement this in your own retirement? Here's a step-by-step approach to finding your optimal withdrawal sequence:

Step 1: Map Your Income Timeline
Create a year-by-year projection from now until age 90. Include when you'll start Social Security, any pension income, part-time work, and when RMDs begin. Identify your low-income years (usually early retirement before Social Security starts).

Step 2: Calculate Your Tax Brackets
For 2024, the 12% federal bracket tops out at $47,150 for singles and $94,300 for married couples filing jointly. The 22% bracket extends to $100,525 and $201,050 respectively. Know these numbers because staying within a bracket is often worth adjusting your withdrawal strategy.

Step 3: Model Different Scenarios
Use retirement planning software or work with a financial advisor to model different withdrawal sequences. Compare total lifetime taxes paid under each scenario. Often, the difference between an optimized strategy and the default approach is $50,000 to $150,000 over a 30-year retirement.

Step 4: Consider a Proportional Approach
Instead of draining one account type completely before moving to the next, many retirees benefit from a blended approach. For example, you might withdraw 60% from taxable accounts, 30% from tax-deferred, and 10% from Roth each year to manage your tax bracket precisely.

Step 5: Review and Adjust Annually
Tax laws change. Your health situation changes. Required minimum distribution rules get updated by Congress. Make this an annual conversation with your financial advisor, ideally in December before the year ends and you can still make adjustments.

Even with good intentions, it's easy to stumble into costly errors. Watch out for these common pitfalls:

Ignoring State Taxes
Some states don't tax Social Security or retirement account withdrawals. If you live in one of these states, the traditional withdrawal sequence might need adjustment. Conversely, if you're in a high-tax state now but plan to move to a no-tax state later, delay conversions until after your move.

Forgetting About the Five-Year Rule
Roth conversions have a five-year waiting period before you can withdraw the converted amount penalty-free if you're under 59½. Even if you're older, each conversion starts its own five-year clock for the earnings. Plan your conversions with this timing in mind.

Withdrawing Too Much Too Soon
Excitement about retirement freedom sometimes leads to oversized early withdrawals. Remember, you might live 30+ years in retirement. A 4% withdrawal rate (adjusting for inflation) is a common guideline, though your personal situation might call for more or less.

Missing Qualified Charitable Distributions (QCDs)
Once you hit age 70½, you can donate up to $105,000 annually (as of 2024) directly from your IRA to charity. This counts toward your RMD but isn't included in your taxable income. If you're charitably inclined, this is a powerful tax strategy that changes your optimal withdrawal order.

Knowledge is only powerful when you put it into action. Here's what you should do in the next month:

Week 1: Gather statements for all your retirement accounts. Calculate your current balances in taxable, tax-deferred, and tax-free buckets. What's your ratio?

Week 2: Estimate your retirement income from all sources (Social Security, pensions, part-time work, RMDs). Use the Social Security Administration's online calculator at ssa.gov for accurate benefit projections.

Week 3: Run a quick tax projection. If you retired today, what would your tax bracket be? Compare that to what you expect in 5, 10, and 15 years. Identify your low-tax opportunity years.

Week 4: Schedule a meeting with a qualified financial advisor or tax professional. Bring your account information and ask them to model different withdrawal sequences for your specific situation. The few hundred dollars you might spend on this advice could save you tens of thousands in taxes over your retirement.

Remember, the best withdrawal strategy is the one that's customized to your unique circumstances. Your health, your legacy goals, your tax situation, and your lifestyle aspirations all factor into the equation. There's no one-size-fits-all answer, but understanding these principles puts you miles ahead of most retirees who simply wing it.