Retirement Withdrawal Order: Which Account First?

You spent 40 years learning how to put money into retirement accounts.

Nobody taught you how to take it out.

And that is strange, because the taking out part has a bigger effect on your lifetime tax bill than almost anything you did on the way in. The order you tap your accounts can swing six figures across a retirement. Same portfolio. Same spending. Different sequence.

The advice everyone repeats is simple and clean: taxable first, then traditional, then Roth.

It is not wrong exactly. It is just the beginner version, and for a large number of retirees it quietly produces the worst possible outcome.

Let us go find the six figures.

Every dollar you own in retirement lives in one of three tax environments. They behave completely differently and most people have never seen them side by side.

Look at the last row. Each bucket has a job. The standard advice treats them like a queue instead of a toolkit, and that is the entire mistake.

Here is the classic case, and it is extremely common.

A couple retires at 62 with $1.4 million. They follow the rule. They spend the taxable account first, which takes about eight years because capital gains are cheap and it feels efficient.

They are thrilled. Their tax bill during those years is close to nothing.

Then they turn 73, RMDs begin, and this happens:

They spent a decade in the 10% and 12% brackets and paid almost nothing. Then they spent the following two decades in the 22% and 24% brackets, with IRMAA surcharges and 85% of their Social Security taxable.

They did not save on taxes. They deferred them into their most expensive years, and let the balance compound in the meantime.

Here is the strategy people who do this professionally use, and it does not have a catchy name. It is just arithmetic.

Every year, deliberately generate exactly enough ordinary income to fill up your current tax bracket, and not one dollar more.

Instead of asking "which account do I take from," you ask "what number do I want on line 15 of my tax return," and then you work backwards.

The mechanics:

Step four is the part that feels wrong to people. You are voluntarily taking money out of a tax deferred account and paying tax on it when nobody made you.

That is exactly the point. You are buying those dollars at 12% instead of letting them sit and be forced out at 24% later.

Same couple. Same $1.4 million. Same spending. Different sequence.

The couple on the right paid more tax in their sixties and dramatically less for the following twenty-five years. Over a full retirement, the difference on a portfolio this size routinely lands between $100,000 and $250,000 in lifetime taxes.

And the version on the right leaves heirs a much cleaner inheritance, which we will get to.

If income tax were the only thing on the line, the difference would be big but not brutal. It is brutal because ordinary income in retirement triggers four other things at the same time.

1. The Social Security tax torpedo. As your other income rises, more of your Social Security becomes taxable, up to 85%. In a specific income range, every extra $1,000 of IRA withdrawal makes another $850 of Social Security taxable, so your effective marginal rate can hit the low forties while you are nominally in a 22% bracket. This is the most under-discussed number in American retirement.

2. IRMAA. Medicare prices your premiums off your tax return from two years ago, in cliffs. One dollar over a threshold costs a couple thousands for a year.

3. The capital gains stacking effect. Long term capital gains have a 0% bracket. Ordinary income sits underneath gains and pushes them up out of it. So a large IRA withdrawal does not just get taxed itself, it can convert previously free capital gains into taxed ones.

4. The widow's penalty. When one spouse dies, the survivor files single. Brackets roughly halve, the standard deduction halves, and IRMAA thresholds halve. A big traditional IRA is a much heavier object in single brackets.

That is the worst case stacking, not the typical case. But it explains why "I am in the 22% bracket" is often a fiction, and why the timing of withdrawals matters far more than people believe.

There is a specific stretch of years that makes or breaks a retirement tax plan, and most people sleep through it.

That golden window is the only period of your entire life where you control your income precisely. You have no wages, no Social Security yet, no RMDs yet. Your taxable income is whatever you decide it is.

Retire at 62 and start RMDs at 73 and you have eleven of these years. Retire at 55 and you have eighteen.

Wasting them by living off a taxable account and reporting almost no income is the single most expensive passive decision in retirement.

The SECURE Act changed the game and most retirees still have not updated their plan.

Most non-spouse beneficiaries must now empty an inherited retirement account within 10 years. No more stretching it across a lifetime.

Think about what that means. You leave your daughter a $900,000 traditional IRA. She is 52, in her peak earning years, and must withdraw all of it within a decade. Every dollar stacks on top of her salary at her top marginal rate.

Nearly $290,000 of difference, decided entirely by which bucket the money happened to be sitting in when you died.

So the withdrawal order is not only about your taxes. It is about which container your heirs inherit. And a traditional IRA is the worst container in the house.🧰 The real withdrawal order, written properly

Forget the queue. Here is the actual sequence, and it is annual, not lifetime.

Every year, in this order:

That last line is the one that separates a good plan from a great one. Roth is not the last account you spend. It is the account you spend when spending anything else would be expensive.

This one is worth real money and it shows up exactly when life is hardest.

Medical expenses above 7.5% of AGI are deductible if you itemize. In a year with a large medical or long-term care expense, that deduction can be enormous.

Which creates a rare opportunity: a year where you can pull a very large amount out of a traditional IRA and have the deduction absorb most of the tax.

Families routinely make the withdrawal and never claim the deduction, because they are dealing with a health crisis and nobody is thinking about Schedule A. It is the most commonly missed deduction in elder finance.

Long term capital gains have a 0% bracket. Not low. Zero.

A retired couple with modest ordinary income can realize a meaningful amount of long term gains and pay nothing federally on them.

Which means there is a strategy called gain harvesting, the opposite of loss harvesting. You deliberately sell an appreciated position, pay 0% on the gain, and immediately buy it back. Your cost basis resets higher. There is no wash sale rule for gains.

But notice the conflict. Gain harvesting needs low ordinary income. Bracket filling creates high ordinary income. You cannot do both at full throttle in the same year.

So you alternate. Some years you fill brackets and convert. Other years you keep ordinary income low and harvest gains at 0%. Which one to prioritize depends on how big your traditional IRA is relative to your taxable account.

That second to last row matters. A retiree with a large pension may be sitting at the top of the 22% bracket before touching anything. For them, extra withdrawals or conversions can be actively harmful. Bracket filling is not universal advice. It is advice for people with room.

Living on the taxable account for a decade. Feels efficient, wastes eleven years of low brackets, and lets the IRA compound into an RMD problem.

Saving the Roth for last on principle. The Roth is your flexibility. Hoarding it while getting taxed at 24% elsewhere is backwards.

Ignoring the Social Security torpedo. Your stated bracket and your real marginal rate can be twenty points apart in a specific income range.

Claiming Social Security at 62 by default. Doing so fills your bracket with income you cannot control, closing your conversion window early. Delaying Social Security is often as much a tax strategy as a longevity strategy.

Doing it in January. You do not know the year's dividends, distributions or expenses yet. Do the math in November, execute in December.

Forgetting withholding. If you withdraw from an IRA without withholding tax, you can get hit with underpayment penalties. Withholding from an IRA distribution is treated as paid evenly across the year, which is a useful quirk for fixing a shortfall in December.

Converting money you will need within five years. Converted amounts have their own five year clock for penalty free access if you are under 59 and a half. Know the rule before you convert.

Forgetting state taxes. Some states do not tax retirement income at all. If you plan to move from a high tax state to a no tax state, the correct answer may be to wait and do your conversions after you move.

Here is what a real sequence looks like for a couple retiring at 62 with $400,000 taxable, $900,000 traditional and $200,000 Roth, spending $80,000 a year.

Notice that nothing in that plan is exotic. There are no annuities, no insurance products, no complicated trusts. It is just doing the arithmetic every November instead of never.

Every withdrawal plan meets a bear market eventually, and the sequence you follow in that year matters more than the sequence you follow in the other nine.

The danger is sequence of returns risk. Selling shares to fund spending while prices are down permanently removes those shares from the recovery. Doing it in the first five years of retirement is the single most reliable way to run out of money early.

But here is the counterintuitive part. A market crash is an excellent time to do a Roth conversion, for one specific reason: you convert more shares for the same tax bill.

The entire recovery happens inside the Roth, tax free, forever. Converting during a downturn is one of the few genuinely free lunches in personal finance, and it requires doing the emotionally hardest thing at the worst moment.

So the bear market rule is two sentences. Fund your spending from cash and bonds. Do your conversions from the depressed equities.

If you have a health savings account, it is the best of all four buckets and it plays by different rules.

Triple tax free is not available anywhere else. So the HSA should generally be the last account you touch for ordinary spending and a primary source for medical costs, including Medicare premiums.

And one detail almost nobody uses: there is no deadline to reimburse yourself. If you paid medical bills out of pocket years ago and kept the receipts, you can withdraw that amount from the HSA tax free at any point in the future. Some people build a shoebox of receipts as a tax free reserve they can tap in a cliff year.

The order you withdraw is not a rule. It is an annual decision, made with a calculator, against a target income number.

The standard advice, taxable then traditional then Roth, is a decent default for someone who will never run a spreadsheet. But it systematically wastes the cheapest tax years of your life and then delivers a bill in your seventies and eighties.

The better framework is three sentences long:

Do that for ten years and you will have moved a large chunk of your traditional IRA out at 10% and 12% instead of watching it get forced out at 22% and 24% with surcharges attached.

Spend one evening with your tax return and your account balances. Find the top of your bracket. Find the next IRMAA line. Then decide what number you want on your return this year, instead of letting your spending habits decide it for you.

See you next issue. 🪙

This is general education, not financial or tax advice. Tax brackets, standard deductions, IRMAA thresholds, capital gains rates, RMD ages and QCD limits change annually and depend entirely on individual circumstances. All figures and scenarios here are illustrative and simplified, and ignore state taxes, which can change the answer completely. Roth conversions have five year rules and are irreversible. Discuss any withdrawal or conversion strategy with a licensed tax professional before executing it.

Sources: IRS rules on required minimum distributions, Roth conversions, qualified charitable distributions, capital gains rates and the medical expense deduction; Social Security Administration guidance on taxation of benefits; Medicare and CMS income related monthly adjustment amount rules; SECURE Act and SECURE 2.0 beneficiary distribution requirements.