The Withdrawal Order That Can Cut Your Retirement Tax Bill

Why the Order You Draw From Accounts Matters

Most people spend decades focused on saving for retirement and very little time thinking about how they’ll spend it down. That’s a costly gap. The order in which you withdraw from taxable accounts, tax-deferred accounts like traditional IRAs and 401(k)s, and tax-free accounts like Roth IRAs can change how much you keep versus how much goes to taxes over the course of retirement.

This isn’t a one-time decision. It’s a sequence of choices made year by year, often decade by decade, that compounds in effect. A retiree who draws down accounts thoughtlessly can end up pushed into higher tax brackets, paying more for Medicare premiums, or losing more of their savings to taxes than necessary. A retiree who plans the sequence carefully can often stretch the same nest egg further.

The Three Buckets of Retirement Money

Nearly every retiree’s savings fall into three general categories, and each is taxed differently when you withdraw from it.

Taxable Accounts

These include regular brokerage accounts, savings accounts, and other investments held outside of retirement plans. You’ve already paid income tax on the money you put in. When you sell investments in these accounts, you may owe capital gains tax on the growth, but the original contribution isn’t taxed again.

Tax-Deferred Accounts

Traditional IRAs, 401(k)s, 403(b)s, and similar accounts fall into this bucket. You didn’t pay tax on the money going in, so the entire withdrawal, both contributions and growth, is taxed as ordinary income when you take it out.

Tax-Free Accounts

Roth IRAs and Roth 401(k)s are funded with money that’s already been taxed. As long as you meet the holding period and age requirements, withdrawals, including all the growth, come out completely tax-free.

The Conventional Wisdom, and Why It’s Not Always Right

The traditional advice is to draw from taxable accounts first, then tax-deferred accounts, and save Roth accounts for last. The logic is straightforward: let tax-advantaged accounts keep growing as long as possible, and use up the accounts with the least tax benefit first.

This approach works reasonably well for many people, but it’s not universal. Followed rigidly, it can create a problem: if you don’t touch your tax-deferred accounts for years while they keep growing, you can end up with a very large balance right when required minimum distributions kick in. That can force a big chunk of income into a single tax year, potentially at a higher rate than you would have paid by spreading withdrawals out earlier.

Required Minimum Distributions: What They Involve

Once you reach the age at which the IRS requires you to start withdrawing from tax-deferred retirement accounts, you no longer have full control over the timing. These required minimum distributions, commonly called RMDs, are calculated based on your account balance and a life expectancy factor published by the IRS.

A few things are worth understanding about RMDs:

• They apply to traditional IRAs, 401(k)s, and similar tax-deferred accounts, but not to Roth IRAs during the original owner’s lifetime.
• The amount is recalculated each year based on your account balance as of the end of the prior year.
• Missing an RMD or taking less than required can result in a significant penalty.
• RMDs count as ordinary income, which can affect your tax bracket, the taxability of your Social Security benefits, and your Medicare premium tier.
• The starting age for RMDs has changed in recent years, so it’s worth confirming the current rule rather than relying on what you may have heard in the past.

Because RMDs are mandatory once they start, the years before they begin are often the most valuable window for tax planning. Decisions made in your early sixties, for example, can meaningfully affect what your RMDs look like a decade later.

Where Roth Conversions Fit In

A Roth conversion means moving money from a tax-deferred account into a Roth account, paying ordinary income tax on the converted amount now, in exchange for tax-free growth and withdrawals later. It’s a tool, not a rule, and it works best when used deliberately rather than automatically.

Why People Consider Conversions

The appeal of a Roth conversion usually comes down to filling up a lower tax bracket now to avoid a higher one later. If you retire before RMDs begin and before you start Social Security, you may have several years where your taxable income is unusually low. Converting some tax-deferred money during those years can mean paying tax at a lower rate than you would if that same money were forced out later as part of a large RMD.

What Makes a Conversion Less Attractive

Conversions aren’t free money. The tax on the converted amount is due in the year of conversion, and if you don’t have money outside the retirement account to pay that tax bill, you may end up reducing the very account you’re trying to grow tax-free. Conversions can also push up your income enough in a given year to affect things like Medicare premium surcharges or the taxability of Social Security, so the size and timing matter as much as the decision itself.

A Middle Path

Rather than an all-or-nothing choice, many retirees do partial conversions over several years, converting just enough each year to use up room in a lower bracket without spilling into a higher one. This spreads out the tax cost and reduces the risk of a single bad-timing decision.

Other Factors That Change the Calculation

Withdrawal strategy isn’t just about tax brackets in isolation. A few other pieces of the puzzle matter:

• Social Security timing. When you start benefits affects your taxable income in ways that interact with withdrawals and conversions.
• State taxes. Some states tax retirement account withdrawals differently than others, and some don’t tax them at all.
• Healthcare costs. Income levels affect Medicare premiums through IRMAA surcharges, and large withdrawals or conversions in one year can trigger a higher premium the following year.
• Legacy goals. If you intend to leave money to heirs, the type of account matters. Roth accounts are often more favorable to pass on than tax-deferred ones, since heirs of tax-deferred accounts owe income tax on what they inherit.

Questions Worth Bringing to a Tax Professional

Because every retiree’s mix of accounts, income sources, and goals is different, a generic withdrawal order rarely fits perfectly. When you sit down with a tax professional or financial planner, consider asking:

• Based on my current accounts and expected income, does a Roth conversion make sense in the years before RMDs begin?
• How will my Social Security claiming decision interact with my withdrawal strategy?
• What income level triggers the next Medicare premium tier for me, and how close am I to it?
• Should my withdrawal order change once RMDs start, or once I begin claiming Social Security?
• How does my state’s tax treatment of retirement income affect the plan?

Building a Plan Rather Than Following a Rule

There’s no single withdrawal order that works for everyone, and the “right” answer for a given retiree can change as tax laws, account balances, and personal circumstances shift. The most useful approach is to treat your withdrawal strategy as a plan you revisit every year, not a decision you make once and forget. Small adjustments made consistently, informed by an understanding of how RMDs, account types, and conversions interact, tend to add up to meaningfully better outcomes over a retirement that can last two or three decades.

For the complete, structured playbook on this topic, see Tax-Efficient Retirement Withdrawals: The Order, Timing, and Roth Conversions That Save Six Figures in our library. New here? Start with our free guide.