The order you withdraw from your retirement accounts can shape your tax bill, your Medicare premiums, and how long your money lasts. Here is how to think through it.
By Courtney Hoffman, CFP®, AAMS™ EverPar Advisors
Most of my clients come in thinking retirement income is a math problem. Add up the accounts, divide by years, figure out how much you can spend. That part is actually the easy part.
What takes longer to work through is this: where do you pull from first?
Withdrawal sequencing (which accounts you draw from and in what order) is one of the most consequential decisions in retirement planning. I’ve seen the tax side of this many times with clients. And I can tell you that two retirees with the same account balances can end up in very different places over a 20-year retirement depending on how they structure their withdrawals.
Small differences in timing quietly shape your tax brackets for years. They affect your Medicare premiums. They determine how much of your Social Security is taxable. They influence how long your portfolio actually holds up.
In this video, Ken and I walk through the full picture. We start with the basics and build toward a framework you can actually apply.
The Three Types of Retirement Accounts
Before you can make smart withdrawal decisions, you need to understand the tax character of each account. There are three categories, and each one behaves differently when it’s time to take money out.
Tax-deferred accounts like Traditional IRAs and 401(k) plans are funded with pre-tax dollars. You get a deduction today, the money grows without being taxed along the way, and you pay ordinary income taxes when you withdraw in retirement. The original assumption built into these accounts is that you’ll be in a lower tax bracket in retirement than you were during your working years.
That assumption holds for some people. For others, it doesn’t.
Tax-exempt accounts like Roth IRAs and Roth 401(k)s work the other way. You contribute after-tax dollars, the money grows tax-free, and qualified withdrawals come out without owing federal income tax. There are no Required Minimum Distributions, which gives you more control over when you take money out. These accounts tend to make the most sense when you expect your tax rate to be higher in retirement, or when you’re early in your career and have decades of tax-free growth ahead of you.
Taxable brokerage accounts are funded with after-tax money as well, but the tax treatment along the way is different. Dividends and interest are taxed in the year you receive them. Selling an investment triggers a capital gain or loss. Investments held longer than a year qualify for long-term capital gains rates, which range from zero to 20% depending on your income. These accounts are the most flexible since there are no contribution limits, no distribution requirements, and no penalties for early withdrawal.
Most people have assets spread across all three. Understanding how each one is taxed is the foundation for everything else.
A comparison worth running through
Let me make this concrete with a side-by-side example.
Take someone earning $100,000 a year who contributes 10% to their retirement account. Here’s how the math plays out differently depending on which account type they use.
With a Traditional 401(k), that $10,000 contribution comes out pre-tax, so they’re effectively paying taxes on $90,000. At a 22% marginal rate, they get a real tax break today. Then, in retirement, if their income drops to $40,000 and they take a $5,000 withdrawal, their taxable income bumps to $45,000 and they’re paying roughly half the tax rate they were during their working years.
With a Roth 401(k), they contribute the same $10,000 but pay taxes on it now. At 22%, that’s $2,200 in taxes, leaving a net contribution of $7,800. At a 6% average growth rate over 30 years, that $7,800 becomes approximately $44,800. When they withdraw it in retirement, they owe nothing in federal income tax.
Same income. Same contribution rate. Very different outcomes depending on when you pay the taxes.
I want to flag something I don’t think gets enough attention: tax diversification deserves as much thought as investment diversification. Having assets spread across all three account types gives you flexibility to manage your tax bracket in retirement. It lets you respond to legislative changes, unexpected income events, and shifts in your spending.
Why Withdrawal Order Matters so Much
Once you’re retired and no longer receiving a paycheck, the question shifts from how to save to how to draw down what you’ve built. And the order matters far more than most people expect.
The sequence you choose affects your current and future tax brackets. It affects your Medicare premium calculations (IRMAA is a real consideration for a lot of our clients). It shapes how your Required Minimum Distributions play out later in retirement. And it has a direct impact on how your portfolio holds up through a market downturn.
Taking money out of growth-oriented accounts during a down market locks in losses and can permanently reduce your portfolio’s lifespan, particularly in the first five to ten years of retirement. This is what planners call sequence-of-return risk, and it’s one of the reasons that thoughtful withdrawal planning matters before the first withdrawal ever happens.
The traditional approach, and where it breaks down
The most commonly recommended strategy draws from accounts in this order: taxable accounts first, tax-deferred accounts second, and tax-exempt accounts last.
The logic is straightforward. You pull from accounts taxed at lower capital gains rates before touching accounts that will generate ordinary income on withdrawal. Roth accounts are preserved as long as possible to maximize tax-free growth and keep the most efficient assets available for heirs.
This is a reasonable starting point. It’s not the right answer for everyone.
The better way to think about it: sequencing isn’t really about avoiding taxes. It’s about controlling when and how they happen. In many cases, a blended approach that draws from multiple account types in the same year can smooth out the tax impact and outperform a strict sequential strategy over a 20-year retirement.
This is a reasonable starting point, but it is not the right answer for everyone. Sequencing is less about avoiding taxes and more about controlling when and how they occur. In many cases, a blended approach that draws from multiple account types in the same year can smooth out the tax impact and ultimately outperform a strict sequential strategy.
Your situation is specific
The right approach depends on your specific numbers, your specific timeline, and what else is going on in your financial life.
Before settling on a strategy, there are several things worth working through carefully: your current and expected future tax brackets, when your RMDs are set to begin, large one-time expenses or deductions you’re expecting, your legacy and charitable goals, current market conditions, any upcoming tax law changes, and shifts in your lifestyle or spending.
That list isn’t exhaustive. It’s just a starting point.
How we work through this at Everpar – 5 steps
Here’s the process we use with clients.
Step 1: Map spending against guaranteed income
That means identifying what’s already covered by Social Security, pensions, or other fixed sources before we look at investment accounts. You need to know what the base looks like before you know how much flexibility you have.
Step 2: Look at RMDs and Roth conversion windows
If you have time before RMDs are required at age 73 or 75, that gap is often valuable. It’s a window to reduce pre-tax balances through strategic conversions, at tax rates that may be lower than what you’ll face once RMDs begin.
Step 3: Identify the spending gap
What’s left after guaranteed income is accounted for? That gap, combined with your current tax bracket and everything else on the list above, determines which accounts make the most sense to draw from.
Step 4: Run actual tax estimates
This is where my accounting background comes in handy. We model the impact on Medicare premiums, identify years where long-term capital gains may be taxed at 0%, and account for known one-time income events or legislative changes on the horizon.
Step 5: Define net spendable income
Once that number is clearly established, planning shifts from reactive to intentional. Instead of making decisions in response to market moves or unexpected expenses, you’re working from a defined plan that can be adjusted thoughtfully each year.
There’s no fixed formula here. Retirement income planning is a year-by-year process, and it’s highly personal. What works for one client doesn’t automatically work for the next.
If you have questions about how to structure your own withdrawal strategy, we’re happy to talk through it.
Schedule time with EverPar’s planning team →
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