Tax-Smart Retirement Withdrawals: What Order Should You Tap Accounts In?

When you enter retirement, you shift from saving money to spending it—and how you withdraw that money can make a significant difference in your tax bill. A tax-smart withdrawal strategy helps stretch your retirement savings further and minimizes what you owe the IRS.

The key? Knowing which accounts to tap first—and why.

The Typical Retirement Account Mix

Most retirees have a combination of the following account types:

1. Taxable accounts – brokerage accounts, savings, CDs

2. Tax-deferred accounts – traditional IRAs, 401(k)s

3. Tax-free accounts – Roth IRAs, Roth 401(k)s

Each is taxed differently, which is why the order of withdrawal matters.

The Conventional Wisdom: Taxable → Tax-Deferred → Tax-Free

A commonly recommended withdrawal sequence looks like this:

1. Start with taxable accountsThese accounts don’t benefit from tax deferral, and you’ve already paid income taxes on the principal. Withdrawals typically generate capital gains taxes, which are usually lower than ordinary income taxes. Using taxable funds first allows tax-advantaged accounts to keep growing.

   
   

2. Then move to tax-deferred accountsOnce your taxable savings run low, tap into traditional IRAs and 401(k)s. These distributions are taxed as ordinary income, and beginning at age 73 (for those turning 72 after Jan. 1, 2023), you’re required to take Required Minimum Distributions (RMDs) anyway.
   

3. Save Roth withdrawals for lastRoth IRAs grow tax-free and aren’t subject to RMDs during your lifetime. By saving these for later, you maximize tax-free growth and preserve flexibility in later retirement years—or pass on tax-free assets to heirs.
   

When to Break the “Standard” Rule

While the above order works for many retirees, one-size-fits-all rarely applies in retirement planning. Here are situations where a different approach may be smarter:

• Filling low tax brackets earlyIf you retire before RMDs begin and your income is relatively low, you may want to withdraw from tax-deferred accounts earlier. This lets you "fill up" lower tax brackets and reduce the size of future RMDs, which could otherwise push you into a higher bracket later.
  

• Roth conversionsIn those same early years, consider converting part of your traditional IRA into a Roth IRA. You’ll pay taxes on the converted amount now (at a potentially lower rate) and enjoy tax-free growth moving forward.
  

• Avoiding higher Medicare premiumsLarge RMDs or investment income could trigger IRMAA (Income-Related Monthly Adjustment Amount) surcharges on your Medicare premiums. Strategic withdrawals or conversions can help you stay below those income thresholds.

  
  

• Capital gains planningIf you’re in the 0% capital gains bracket, withdrawing from taxable accounts—even realizing some gains—could be very tax-efficient. This strategy is especially useful before Social Security and RMDs begin.
  

Coordinating with Social Security and Pensions

Another factor is the timing of Social Security benefits and pensions. If you delay Social Security until age 70 (to earn a higher monthly benefit), you may have several years of low income that are ideal for tax planning.

Strategic withdrawals during that window—especially from traditional IRAs or via Roth conversions—can minimize future tax burdens and help you manage cash flow while waiting on your guaranteed income streams.

Make Tax Strategy Part of Your Retirement Plan

Tax-smart withdrawal planning isn’t just about minimizing taxes—it’s about maximizing income, managing risk, and maintaining flexibility in retirement.

At Avalon Tax & Financial Services, we help retirees create tailored strategies that align their withdrawals with their lifestyle goals, cash flow needs, and tax realities. The right withdrawal order can save you tens of thousands of dollars over the course of your retirement.

Let’s make your money last longer. Contact us today for a retirement income consultation that puts taxes on your side.