The Order You Withdraw Retirement Funds Actually Matters

Why Withdrawal Order Isn’t an Afterthought

Most people spend decades focused on one question: how much should I save? Far fewer spend any real time on the second question, which matters just as much once retirement arrives: in what order should I spend it down?

The order you draw from taxable accounts, tax-deferred accounts like traditional IRAs and 401(k)s, and tax-free accounts like Roth IRAs can change how much of your money the government keeps over the rest of your life. This isn’t a one-time decision. It’s a strategy that should adapt year by year based on your income, tax bracket, and required withdrawals.

The Three Buckets and How They’re Taxed

Taxable Accounts

These are your regular brokerage accounts and savings. You’ve already paid tax on the money you put in. When you sell investments, you owe capital gains tax only on the growth, and long-term capital gains rates are typically lower than ordinary income rates.

Tax-Deferred Accounts

Traditional IRAs, 401(k)s, and similar accounts let contributions grow without annual tax, but every dollar you withdraw in retirement is taxed as ordinary income. These accounts also come with required minimum distributions (RMDs) starting at a certain age, meaning you don’t get to choose forever when to pull the money out.

Tax-Free Accounts

Roth IRAs and Roth 401(k)s are funded with after-tax dollars, but qualified withdrawals in retirement are completely tax-free. Roth IRAs also have no RMDs during the original owner’s lifetime, which makes them useful both for tax planning and for leaving assets to heirs.

The Conventional Wisdom, and Why It’s Incomplete

The traditional rule of thumb goes like this: spend taxable accounts first, then tax-deferred, and save Roth accounts for last. The logic is sound on the surface. Let tax-advantaged accounts keep growing as long as possible, and use up the accounts with the least tax benefit first.

The problem is that this approach ignores your tax bracket in any given year. If you drain your taxable account first and then rely entirely on tax-deferred withdrawals, you may push yourself into a higher bracket in your 70s and 80s, right when RMDs force even more income out of those accounts whether you need it or not.

A smarter approach blends the buckets every year to keep your taxable income inside a target bracket, rather than exhausting one account type before touching the next.

Filling Up the Lower Brackets on Purpose

One of the most useful ideas in retirement tax planning is intentionally “filling up” a lower tax bracket each year. Here’s the basic idea:

• Estimate your total taxable income for the year from Social Security, pensions, and any required withdrawals.
• Identify how much room is left before you cross into the next tax bracket.
• Withdraw additional money from tax-deferred accounts up to that limit, even if you don’t need the cash yet.
• Move the leftover money into a taxable account or use it to cover expenses you’d otherwise pull from a Roth.

This strategy effectively lets you pay tax on tax-deferred money now, while you’re in a lower bracket, instead of later when RMDs and other income sources push you higher.

Roth Conversions: Paying Tax Now on Your Terms

A Roth conversion means moving money from a traditional IRA or 401(k) into a Roth IRA, paying ordinary income tax on the converted amount in the year you do it. This sounds counterintuitive since you’re voluntarily creating a tax bill, but the timing can work heavily in your favor.

When Conversions Make the Most Sense

• The years between retirement and when Social Security or RMDs begin, often called the “gap years,” when your income is naturally lower.
• Years with unusually low income from a job change, business loss, or other one-time dip.
• Before RMDs begin, to shrink the balance that will eventually force taxable withdrawals.
• When you expect tax rates to rise in the future, either due to policy changes or your own income growing.

What to Watch Out For

Roth conversions add to your taxable income for the year, which can affect other things tied to your income level, including Medicare premium surcharges (IRMAA) and how much of your Social Security benefit is taxable. A large conversion in a single year can also push you into a higher bracket than intended, so it often makes sense to spread conversions across several years rather than doing one big conversion.

You’ll also want to pay the conversion tax from outside funds, such as a taxable account, rather than from the IRA itself. Using IRA money to pay the tax reduces the amount that actually gets the tax-free treatment and defeats much of the purpose.

Required Minimum Distributions Change the Math

Once RMDs begin, you lose some flexibility because you’re required to withdraw a minimum amount from tax-deferred accounts each year, regardless of whether you need the income. This is exactly why filling brackets and doing conversions in the years before RMDs start can be so valuable. The smaller you can make your tax-deferred balance before RMDs kick in, the smaller those forced withdrawals will be, and the more control you keep over your tax situation later in life.

Don’t Forget State Taxes

Federal tax brackets get most of the attention, but state tax treatment of retirement income varies widely. Some states don’t tax retirement account withdrawals at all, others tax them fully as ordinary income, and some offer partial exemptions based on age or income level. If you’re considering relocating in retirement, or even just deciding how aggressively to convert to Roth, check your state’s specific rules on retirement income before finalizing your plan.

Building a Withdrawal Plan That Actually Works

Rather than picking one static rule, treat withdrawal sequencing as an annual decision:

1. Start each year by estimating total income from fixed sources like Social Security and pensions.
2. Calculate how much more you can withdraw before crossing into a higher bracket.
3. Use tax-deferred withdrawals or conversions to fill that space when it makes sense.
4. Pull remaining needed cash from taxable accounts to keep long-term capital gains rates working in your favor.
5. Reserve Roth withdrawals for years when you need extra income without affecting your tax bracket, or for large one-time expenses.

This kind of year-by-year review takes more effort than picking a single rule and sticking with it, but the payoff can be significant over a retirement that may last two or three decades. Small adjustments made consistently, informed by your actual bracket each year, tend to beat a rigid formula applied blindly from day one.

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