When you're working, your paycheck mostly comes from one place. In retirement, income often comes from several: a brokerage account, a traditional IRA or 401(k), maybe a Roth IRA, Social Security, and possibly a pension. Each of these is taxed differently, and the order you draw from them can change how much of your money actually stays in your pocket over the course of retirement.
This is often called withdrawal sequencing, or asset location and distribution planning. It's not about picking investments. It's about deciding which account to pull from first, second, and third as the years go by, with an eye toward taxes.
There's no single right order that works for everyone. But understanding how the three main account types are taxed is the foundation for making a more informed decision with your advisor and tax professional.
Key takeaways
- Taxable, tax-deferred, and tax-free accounts are each taxed differently, and the order you draw from them can affect your total tax bill in retirement.
- Required minimum distributions (RMDs) on tax-deferred accounts start at a certain age and can push you into a higher tax bracket if you haven't planned ahead.
- A common approach is to think about managing your tax bracket year by year, not just minimizing taxes in any single year.
- Keeping some money in each type of account can preserve flexibility for years when your income or tax situation changes.
- Everyone's situation is different. General education is not a substitute for a personalized plan.
The three types of retirement accounts, in plain language
Taxable accounts
These are your everyday brokerage or investment accounts. 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 any growth, but the tax rates on long-term capital gains are often lower than ordinary income tax rates. There's no RMD requirement on these accounts, and you can generally access the money whenever you want.
Tax-deferred accounts
This includes traditional IRAs and traditional 401(k)s. Contributions to these accounts were typically made with pre-tax dollars, or you received a deduction when you contributed. The money grows without being taxed each year, but when you eventually withdraw it in retirement, it's taxed as ordinary income. These accounts are also subject to required minimum distributions once you reach a certain age, meaning the IRS requires you to start taking money out whether you need it or not.
Tax-free accounts
Roth IRAs and Roth 401(k)s fall into this category. You contribute with after-tax dollars, meaning you don't get a deduction upfront, but qualified withdrawals in retirement are generally tax-free, including any growth. The IRS outlines the rules for Roth IRA distributions including what makes a withdrawal "qualified." Roth IRAs also are not subject to RMDs during the original owner's lifetime.
Why the order matters
Because each account type is taxed differently, the sequence in which you draw from them can influence:
Your tax bracket each year
If you pull all your income from tax-deferred accounts early in retirement, you could land in a higher tax bracket than necessary. Blending withdrawals from taxable, tax-deferred, and tax-free accounts may help keep your taxable income more level from year to year, which is sometimes referred to as tax bracket management.
Required minimum distributions later on
If a large percentage of your savings sits in tax-deferred accounts, RMDs later in retirement can be substantial. That can push you into a higher bracket at exactly the point when you may prefer more predictable income. Some retirees consider strategies earlier in retirement (before RMDs begin) to help manage this, though the details are highly personal and depend on your full financial picture.
Flexibility for the unexpected
Having money spread across taxable, tax-deferred, and tax-free accounts gives you more options later. If you have an unusually large expense, a health event, or a year with lower income, having a tax-free bucket like a Roth IRA to draw from can help you avoid pushing yourself into a higher bracket that year.
Leaving assets to heirs
Different account types also carry different tax consequences for beneficiaries. This is a conversation worth having directly with your advisor and an estate planning professional, since the rules are detailed and depend on your specific circumstances.
A general framework people often discuss (not a recommendation)
A commonly discussed starting point is to draw from taxable accounts first, tax-deferred accounts next, and tax-free accounts last, since it may allow tax-deferred and tax-free money more time to grow. But this isn't a rule that fits every household. Your Social Security timing, pension income, health care costs, RMD age, and overall goals all factor in. Some years it may make sense to draw a bit more from a Roth account to manage your bracket, even if that's earlier than a simple "taxable first" approach would suggest.
This is general education, not a specific recommendation for your situation. The right sequence depends on your income sources, account balances, health, family goals, and the tax laws in effect at the time.
Common mistakes to avoid
- Assuming there's one universal "correct" withdrawal order that applies to everyone.
- Waiting until RMDs begin to think about tax-deferred account balances, rather than planning years in advance.
- Overlooking how Social Security timing interacts with your other withdrawal decisions.
- Not accounting for how state taxes, in addition to federal taxes, may affect your accounts.
- Treating a Roth IRA purely as a "last resort" account without considering years when tapping it could help manage your bracket.
When to talk with us
Withdrawal sequencing touches taxes, income planning, and your long-term goals all at once, which is exactly why it benefits from a conversation rather than a generic rule of thumb. If you're a few years from retirement, newly retired, or simply reassessing how your accounts work together, it may be worth sitting down to look at your specific mix of taxable, tax-deferred, and tax-free savings. We also encourage involving a tax professional, since tax rules change and your personal tax situation matters. Every family's situation is different, and personalized planning matters here. We invite you to schedule a call with us to talk through your accounts and goals.
Frequently asked questions
Is there one best order to withdraw retirement funds? No. The right sequence depends on your account balances, income needs, age, health, and tax situation. What works well for one retiree may not work for another.
What is a required minimum distribution (RMD)? An RMD is the minimum amount the IRS requires you to withdraw each year from certain tax-deferred retirement accounts once you reach a specific age. You can find current rules on the IRS website.
Do Roth IRAs have RMDs? Generally, Roth IRAs are not subject to RMDs during the original account owner's lifetime, though rules can differ for inherited accounts. Confirm current details with the IRS or your advisor.
Should I withdraw from my taxable account first? Some people find it helpful as a starting framework, but it isn't guaranteed to be the most tax-efficient approach for every household. It depends on your full financial picture.
How does Social Security fit into this? When you claim Social Security, and how much other income you have that year, can affect how much of your benefit is taxable. This is another reason withdrawal sequencing and Social Security timing are often discussed together.
Can my withdrawal strategy change from year to year? Yes. Many retirees adjust which accounts they draw from based on that year's income, expenses, and tax situation rather than following a fixed formula every year.
Does this affect what I leave to my heirs? It can. Different account types carry different tax treatment for beneficiaries. This is worth discussing directly with your advisor and an estate planning professional.
Do state taxes matter here too? Yes, in many cases. State tax treatment of retirement account withdrawals varies, so it's worth considering alongside federal tax rules.
Is this the same as investment advice? No. Withdrawal sequencing is about the order and timing of distributions from existing accounts, not about which investments to buy or sell. It's a planning topic distinct from investment selection.
Who can help me build a withdrawal plan? A financial advisor familiar with retirement income planning, working alongside a tax professional, can help you think through a strategy tailored to your specific accounts and goals.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Global Retirement Partners, LLC, dba CDS Wealth Management Inc., a registered investment advisor and separate entity from LPL Financial. This article is for general educational purposes only and is not intended as personalized tax, legal, or investment advice. Please consult a financial advisor and tax professional regarding your individual circumstances.
