how-to
How to Sequence Retirement Account Withdrawals for Taxes
Table of Contents
- Why Withdrawal Order Matters for Your Tax Bill
- The Standard Withdrawal Hierarchy: Taxable, Tax-Deferred, Then Tax-Free
- Roth vs Traditional IRA Withdrawal Order: Which Comes First?
- The Impact of RMDs on Tax Planning in Retirement
- Building a Tax-Efficient Retirement Withdrawal Strategy
- How Sequence of Returns Risk Affects Your Withdrawal Plan
- Common Mistakes to Avoid When Sequencing Withdrawals
- When to Get Professional Help With Your Withdrawal Plan
- Frequently Asked Questions
Last Updated: October 2, 2026
Why Withdrawal Order Matters for Your Tax Bill
Knowing how to sequence retirement account withdrawals for taxes can change your tax bill by thousands of dollars each year.
Withdrawal order is the sequence in which you take money from taxable, tax-deferred, and tax-free accounts to fund retirement spending while keeping taxes low.
Below, we'll show you how to build that sequence and where most people get it wrong.
The Standard Withdrawal Hierarchy: Taxable, Tax-Deferred, Then Tax-Free
The standard withdrawal hierarchy is taxable brokerage accounts first, tax-deferred accounts second, and tax-free accounts last. It works for many retirees because tax-deferred money keeps growing untaxed as long as possible.
But it is a starting point, not a rule, the right order depends on your income, age, and plans.
Taxable Brokerage Accounts First
A taxable brokerage account is funded with money you already paid income tax on. When you sell, you owe tax only on the gain, and long-term capital gains get their own rate schedule, often lower than ordinary income rates.
That makes it the most flexible place to pull spending money early in retirement, and you can use tax-loss harvesting to offset gains.
Tax-Deferred Accounts in the Middle
Tax-deferred accounts include traditional 401(k)s and traditional IRAs. You put money in before tax, it grew untaxed, and every dollar you withdraw counts as ordinary income.
Tax-Free Accounts Last
Tax-free accounts include Roth IRAs and Roth 401(k)s. Qualified distributions come out tax-free and do not count as taxable income.
That makes them the most valuable account to leave growing. Every year you delay a Roth withdrawal is another year of tax-free growth.
| Account Type | Tax on Withdrawal | Counts as Income | Best Use |
|---|---|---|---|
| Taxable brokerage | Gains only | No | Early retirement spending |
| Tax-deferred (401k, IRA) | Full amount | Yes | Middle years, fill low brackets |
| Tax-free (Roth) | None | No | Late years, tax spikes |
Roth vs Traditional IRA Withdrawal Order: Which Comes First?
Traditional IRA withdrawals usually come before Roth withdrawals, but that order flips in specific situations. The deciding factor is your marginal tax bracket that year.
Here is when to break the standard order:
- Low-income years: Pull from traditional accounts to fill up the lower brackets, then top off with Roth money.
- High-income years: Lean on Roth and taxable accounts to avoid pushing yourself into a higher bracket.
- Before Social Security starts: This window is often the cheapest time to take traditional withdrawals.
- Before RMDs begin: Drawing down traditional balances early can shrink future required distributions.
The mistake is treating the order as fixed. It is a tool you adjust yearly.
The Impact of RMDs on Tax Planning in Retirement
Required minimum distributions (RMDs) are forced withdrawals from tax-deferred accounts, traditional IRAs, traditional 401(k)s, 403(b)s, and most other employer plans. Once you hit the trigger age, the IRS requires a minimum annual withdrawal reported as ordinary income, whether you need the cash or not.
The RMD Age Has Changed, Get This Right First
The SECURE Act of 2019 pushed the RMD start age from 70½ to 72, and SECURE 2.0 pushed it again. Under current rules:
- If you turned 72 before 2023, your RMDs already started.
- If you reach age 72 in 2023 or later, your RMDs begin at age 73.
- If you were born in 1960 or later, your RMDs begin at age 75.
Because the age depends on your birth year, not the calendar year, two retirees the same age can have different start dates. Confirm your specific trigger age with the IRS required minimum distributions guidance before you build a plan around it.
How the RMD Amount Is Calculated
The annual RMD is your prior-year December 31 balance divided by a life expectancy factor from the IRS Uniform Lifetime Table. The factor shrinks as you age, so the required percentage rises every year, roughly 3.6% at 73, past 5% in your early 80s, and above 8% by your late 80s.
A few mechanics that trip people up:
- First-year deadline. For your very first RMD, you can delay the distribution until April 1 of the following year. Every year after that, the deadline is December 31.
- The double-up trap. If you delay your first RMD into the next calendar year, you take two RMDs in that year, stacking two taxable distributions into one tax return.
- Aggregation. IRA RMDs can be aggregated across multiple traditional IRAs, so you can take the total from any one of them. 401(k) RMDs generally cannot be aggregated across plans and must be taken from each plan separately.
- Roth IRAs are exempt. Roth IRAs have no RMDs during the owner's lifetime. Roth 401(k)s were once subject to RMDs, but SECURE 2.0 eliminated that requirement starting in 2024.
- Still-working exception. If you are still employed and not a 5% owner, your current employer's 401(k) may allow you to defer RMDs until you actually retire.
Why RMDs Reshape Your Tax Plan
Before RMDs, you control your taxable income. After RMDs, the IRS does. A large traditional balance can push you into a higher bracket, increase the taxable portion of your Social Security benefits, and raise Medicare Part B and Part D income-related monthly adjustment amounts (IRMAA) two years later.
The planning window is the gap between retirement and your RMD start age. Three moves to consider:
- Voluntary withdrawals before RMDs begin. Pulling from traditional accounts in low-income years shrinks the balance that future RMDs are calculated on.
- Roth conversions during low-income years. Paying tax now at a known rate can beat paying a higher rate later on a larger forced distribution.
- Qualified charitable distributions (QCDs). Once you reach age 70½, you can send up to $105,000 per year (indexed) directly from an IRA to a qualified charity. QCDs count toward your RMD but are excluded from taxable income, which can also help with IRMAA and Social Security taxation.
The Unique Angle Most Guides Skip
RMDs are also a cash-flow event. If your RMD exceeds your spending need, you have surplus taxable income you did not ask for. Redirect it rather than reinvesting in a taxable account: fund a Roth conversion, cover a QCD, or pay the tax on converting other traditional dollars.
Building a Tax-Efficient Retirement Withdrawal Strategy
A tax-efficient retirement withdrawal strategy blends all three account types each year instead of draining one at a time.
Steady income matters because tax brackets are progressive: a single spike can push withdrawals into a higher rate, while spreading them keeps more of each dollar in lower brackets.
Managing Tax Brackets and Income Smoothing
Managing your marginal tax bracket means watching total taxable income, not just one account, Social Security taxation, capital gains, and IRA withdrawals all feed the same number.
A common approach is to set a target taxable income each year and fill it deliberately: below the target, take more from tax-deferred accounts; above it, switch to Roth or taxable money.
Roth Conversions and Asset Location
A Roth conversion moves money from a traditional account to a Roth, and you pay tax on the converted amount that year.
Asset location is the related idea of placing the right investments in the right account type: bonds and income-heavy holdings often fit better in tax-deferred accounts, while growth investments fit better in Roth accounts, where growth is never taxed.
How Sequence of Returns Risk Affects Your Withdrawal Plan
Sequence of returns risk is the danger that an early market downturn permanently damages your portfolio, even if the long-run average return is fine. The order in which returns arrive matters as much as the returns themselves, because you sell assets to fund spending while prices are down.
Why Early Losses Hurt More Than Late Ones
The mechanism is simple arithmetic. A 20% loss in year one hits a portfolio still near its peak while you are withdrawing from it, shrinking the base later gains compound on.
Two retirees with identical average returns can end up with dramatically different outcomes if one front-loads the bad years. Averages hide the path.
How Withdrawal Order Interacts With Sequence Risk
In a down year, the account you pull from determines whether you lock in losses:
- Taxable brokerage in a down year. You sell positions at a loss. That is painful, but you can harvest the loss to offset gains elsewhere, and the account has no forced distribution.
- Tax-deferred in a down year. You sell depressed assets to fund the RMD or voluntary withdrawal, converting a paper loss into a realized one and reducing the balance that would have recovered.
- Roth in a down year. You spend tax-free dollars that had the most future growth potential, often the worst account to tap in a downturn, even though it is the most tax-efficient.
A common pattern is to invert the standard hierarchy in bad markets: lean on cash and taxable accounts, preserve tax-deferred balances for recovery, and treat Roth as the last resort. In strong years, refill the cash buffer and take the traditional withdrawals you skipped.
The Cash Buffer: A Concrete Sizing Rule
A practical buffer is one to two years of spending held in cash, Treasury bills, or a short-term bond fund inside the portfolio.
- One year of spending covers a typical drawdown without forcing a sale.
- Two years covers most historical bear markets long enough for stocks to begin recovering.
- Refill in up years. After a strong market year, sell appreciated assets to top the buffer back up. This is also a natural moment to rebalance.
A buffer is not free: holding cash drags on long-run returns, and that drag is the insurance premium for not being a forced seller.
The Unique Angle: Sequence Risk Is a Tax-Planning Problem Too
Most articles treat sequence-of-returns risk as a pure investment problem and withdrawal sequencing as a pure tax problem. They are the same problem. A down market changes which account is cheapest to tap, which changes your taxable income, bracket, Social Security taxation, and ACA or IRMAA exposure.
Common Mistakes to Avoid When Sequencing Withdrawals
Most withdrawal mistakes come from looking at one year instead of the whole plan. The most common:
- Draining one account completely. This wastes the flexibility of having three tax treatments.
- Ignoring Social Security taxation. Extra IRA withdrawals can make more of your benefits taxable.
- Missing the RMD window. Forced withdrawals can arrive at the worst possible time.
- Forgetting state taxes. State rules on retirement income vary widely, so check how your state treats each account type.
- Overlooking health insurance subsidies. If you buy coverage through the health insurance marketplace, a large withdrawal can reduce your premium tax credit. The HealthCare.gov income and subsidy guidance explains how income affects eligibility.
When to Get Professional Help With Your Withdrawal Plan
A withdrawal plan touches taxes, health insurance, Social Security, and investment risk at once, an overlap where do-it-yourself plans tend to break.
Consider working with a planner if any of these apply to you:
- Your savings are spread across several accounts from old jobs
- You are close to Medicare enrollment and unsure how income affects it
- You want to convert to Roth but are unsure how much
- You worry about running out of money late in retirement
- You want your estate documents organized for your family
This is where New Insight Financial helps. We build a personalized income plan around your risk tolerance and timing, and we help you weigh trade-offs like Roth conversions and RMD timing.
Frequently Asked Questions
In what order should I withdraw money from my retirement accounts?
The standard retirement withdrawal order is taxable brokerage accounts first, then tax-deferred accounts like traditional IRAs and 401(k)s, and tax-free Roth accounts last. This sequence lets tax-deferred money keep growing untaxed for as long as possible while you use taxable assets for current income. However, this order is not one-size-fits-all. Required minimum distributions, Roth conversion opportunities, Social Security timing, and your marginal tax bracket each year can change the math. A tax-efficient retirement withdrawal strategy often blends withdrawals from multiple account types to smooth taxable income across your retirement years.
How do Required Minimum Distributions impact my withdrawal sequence?
Required minimum distributions force you to withdraw a minimum amount from traditional IRAs and most workplace retirement plans each year once you reach the age the IRS sets. These distributions are taxable income, so they can push you into a higher marginal tax bracket, increase the taxable portion of your Social Security benefits, and raise your Medicare premium surcharges. The impact of RMDs on tax planning means you may want to withdraw from tax-deferred accounts earlier than the standard hierarchy suggests, or convert some of that money to a Roth while your tax bracket is lower. Check the IRS website for the current RMD age and rules.
How can I avoid the 10% early withdrawal penalty before age 59½?
The IRS charges a 10% additional tax on early distributions from tax-deferred accounts before age 59½, with exceptions. Common exceptions include qualified higher education expenses, first-time home purchase up to the limit the IRS sets, certain medical expenses, and substantially equal periodic payments. Roth IRA contributions can always be withdrawn tax-free and penalty-free at any age because you already paid tax on them. If you are retiring early and need income before 59½, consider drawing from taxable brokerage accounts first, then Roth contributions, and check IRS Publication 590-B for the full list of exceptions.
How does sequence of returns risk affect my withdrawal strategy?
Sequence of returns risk is the danger that a market downturn in the first few years of retirement permanently damages your portfolio because you are selling investments at low prices to fund withdrawals. A retiree who experiences poor returns early has a much higher chance of portfolio depletion than someone who experiences the same average returns in a different order. To manage this risk, many planners recommend keeping one to two years of spending in cash or short-term bonds, using a dynamic withdrawal rate that adjusts with market performance, and avoiding large tax-driven withdrawals during down markets.
Sequencing withdrawals for taxes is a yearly decision, not a one-time setup. The rules shift as your income, health coverage, and the market change, and a plan that worked at 60 may not fit at 70. New Insight Financial can help you build a strategy that fits your situation, from income planning and Roth conversion timing to Medicare navigation and document organization with the Generational Vault®. Get started with New Insight Financial and take the guesswork out of your retirement income.