Withdrawal Sequencing: Which Accounts to Tap First
You've spent decades saving in different account types. Now it's time to spend it. The order in which you withdraw from taxable, tax-deferred, and tax-free accounts can significantly impact how long your money lasts.
The Three Buckets
Most retirees have money in three types of accounts:
- Taxable accounts: Brokerage accounts, savings. Contributions were after-tax; only gains are taxed.
- Tax-deferred accounts: Traditional IRA, 401(k). Contributions were pre-tax; everything is taxed on withdrawal.
- Tax-free accounts: Roth IRA, Roth 401(k). Contributions were after-tax; nothing is taxed on withdrawal.
The Conventional Wisdom
The traditional rule of thumb says withdraw in this order:
- Taxable accounts first - Let tax-advantaged accounts keep growing
- Tax-deferred accounts second - Required withdrawals start at 73 anyway
- Roth accounts last - Maximize tax-free growth
This approach is simple and often works. But it's not always optimal.
Why Conventional Wisdom Can Fail
The RMD problem: If you don't touch your IRA until 73, it may have grown so large that RMDs push you into higher tax brackets than you'd be in if you withdrew earlier.
Other situations where the standard order fails:
- Low-income early retirement years: You might be in the 0% or 10% bracket—a great time to take IRA distributions or do Roth conversions
- ACA subsidies: Keeping income low can qualify you for health insurance subsidies before Medicare
- Social Security taxation: Up to 85% of Social Security becomes taxable above certain income thresholds
- IRMAA brackets: High income can trigger Medicare surcharges two years later
The Dynamic Approach
Instead of a fixed sequence, optimize withdrawals year by year based on:
Fill Lower Tax Brackets
If you're in the 12% bracket with room to spare, consider withdrawing from tax-deferred accounts up to the top of that bracket. You'll pay 12% now instead of potentially 22% or more later.
Manage Income Cliffs
Watch for thresholds where small income increases create disproportionate costs:
- $25,000/$32,000 (single/married) - Social Security taxation begins
- $34,000/$44,000 - 85% of Social Security becomes taxable
- ~$103,000/$206,000 - IRMAA Medicare surcharges begin
Harvest Capital Gains
In years when you're in the 0% capital gains bracket (under ~$47,000 single, ~$94,000 married in taxable income), realize gains in taxable accounts tax-free.
Example: Dynamic Withdrawal
John, 62, has $500,000 in a traditional IRA, $200,000 in a Roth, and $300,000 in taxable accounts. He needs $60,000/year.
Conventional approach: Draw from taxable first. IRA grows to $800,000+ by 73. RMDs of $30,000+ push him into 22% bracket.
Dynamic approach: Take $40,000 from IRA (staying in 12% bracket), $20,000 from taxable. By 73, IRA is smaller, RMDs more manageable, and he paid only 12% on early withdrawals.
The Role of Roth
Roth accounts are often best saved for:
- High-income years: When taxable income is high, Roth withdrawals don't add to the tax burden
- Healthcare shocks: Large Roth withdrawals don't affect IRMAA
- Legacy planning: Tax-free money for heirs
- Managing brackets: Fine-tune income to hit exactly the top of a bracket
How Talk Through Wealth Helps
Model your optimal withdrawal strategy:
- Project tax brackets year by year through retirement
- See the impact of different withdrawal sequences
- Identify opportunities to fill lower brackets
- Factor in Social Security, RMDs, and IRMAA
- Compare "conventional" vs. "dynamic" approaches
Optimize Your Withdrawal Strategy
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