After spending decades saving for retirement, eventually the direction of the money changes. Instead of contributing to your accounts, you need to start withdrawing from them to pay for everyday expenses. That creates a new question: Which accounts should you withdraw from first?
Traditional retirement advice often suggests spending taxable assets first, followed by tax-deferred retirement accounts, and saving Roth assets for last. That can be a reasonable starting point, but it isn't necessarily the best strategy for every retiree.
Retirement distribution planning is about more than choosing which account to empty first. It's about deciding where each year's income should come from while considering taxes today, taxes later, Social Security, Medicare, required minimum distributions, investments, and your long-term financial plan.
Start by Understanding Your Three Tax Buckets
Having money available across these different tax buckets can give retirees more flexibility when deciding where their income should come from each year. The goal isn't necessarily to minimize withdrawals from one particular account type. It's to coordinate them so each type of account is used intentionally throughout retirement.
Strategy 1: Withdraw From Taxable Accounts First
One traditional approach is to spend taxable savings and investments first, followed by tax-deferred accounts such as traditional IRAs and 401(k)s, while preserving Roth assets for later.
There is logic behind this strategy. Using taxable assets first can give tax-deferred retirement accounts additional time to grow, while Roth assets may continue growing tax-free.
But there can also be a downside.
If you spend primarily from taxable assets during the early years of retirement, you may create several years with relatively little taxable income while allowing traditional retirement accounts to continue growing. Later, required minimum distributions and larger IRA withdrawals could push taxable income higher.
In other words, deferring taxes isn't always the same thing as reducing taxes.
Strategy 2: Take Proportional Withdrawals
Another approach is to fund retirement spending from multiple account types instead of completely exhausting one before moving to the next.
For example, a retiree might fund part of their spending from a taxable brokerage account and part from a traditional IRA, while using Roth assets selectively when appropriate.
The goal is to create a more consistent tax picture over time rather than having very low taxable income early in retirement followed by substantially higher taxable income later.
That doesn't mean proportional withdrawals are automatically better. It means retirees aren't limited to an all-or-nothing sequence.
Strategy 3: Manage Withdrawals Around Your Tax Bracket
For many retirees, the most useful approach may be more dynamic: determine how much taxable income you intentionally want to recognize each year and then decide which accounts should provide it.
Consider someone who retires before required minimum distributions begin. They may also choose to delay Social Security. That period can create years when taxable income is significantly lower than it was while working or may be later in retirement.
Instead of automatically funding all spending from cash and taxable investments during those years, the retiree might intentionally withdraw money from a traditional IRA or complete a Roth conversion.
The question becomes: How much taxable income makes sense to recognize this year? That's very different from simply asking: Which account should I spend first?
The answer can change from one year to the next as tax laws, income, investments, spending, and the rest of the financial plan change.
Required Minimum Distributions Can Change the Strategy
Tax-deferred retirement accounts generally can't remain untouched forever. Required minimum distributions, or RMDs, eventually require many retirees to begin taking distributions from traditional retirement accounts.
If you've spent primarily from taxable accounts for years while allowing a large traditional IRA or 401(k) to continue growing, future RMDs could create more taxable income than you actually need for spending.
That income may affect your tax bracket and other parts of your retirement plan.
This is why the years between retirement and the beginning of RMDs can be particularly valuable for tax planning. Depending on your circumstances, intentionally taking distributions or completing Roth conversions during lower-income years may reduce the amount remaining in tax-deferred accounts later.
The objective isn't simply to pay the least tax possible this year. It's to consider the potential tax impact across retirement.
Social Security Changes the Equation
Social Security adds another layer to retirement distribution planning.
Depending on your combined income, a portion of your Social Security benefits may be subject to federal income tax. That means additional withdrawals from tax-deferred retirement accounts can potentially affect how much of your Social Security is taxable.
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This is one reason Social Security claiming and retirement withdrawals shouldn't be planned independently. The timing of one can affect the strategy for the other.
Medicare Can Change It Again
Once you're enrolled in Medicare, retirement income decisions can potentially affect your premiums.
Higher-income Medicare beneficiaries may pay an Income-Related Monthly Adjustment Amount, or IRMAA, in addition to their standard Medicare Part B and Part D premiums. IRMAA is based on modified adjusted gross income from a prior tax year, so a large retirement distribution or Roth conversion can have consequences beyond the immediate income tax bill.
That doesn't automatically mean you should avoid a distribution that triggers higher Medicare premiums. In some situations, intentionally recognizing additional income may still make sense as part of a longer-term strategy.
It simply means taxes aren't the only number to consider.
Don't Forget About the Surviving Spouse
For married couples, a retirement distribution strategy should also consider what happens after the first spouse dies.
A strategy that continually postpones distributions from traditional retirement accounts may eventually leave the surviving spouse with a substantial tax-deferred balance. The survivor may have less household income but eventually file using the narrower tax brackets available to single taxpayers.
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This doesn't mean couples should aggressively spend down traditional retirement accounts simply to avoid a future tax problem. It means the potential surviving-spouse tax picture should be part of the analysis when deciding whether to recognize income today or defer it until later.
Your Investment Strategy Matters Too
Taxes shouldn't determine every withdrawal decision.
Suppose your plan calls for taking money from a taxable brokerage account, but the investments you would need to sell have declined significantly. Or perhaps another part of the portfolio has appreciated and needs to be reduced as part of rebalancing.
The investments available in each account, current market conditions, cash reserves, capital gains and losses, and your target portfolio allocation can all influence where a distribution should come from.
This is especially important during market declines. Selling investments after a significant loss while simultaneously taking retirement withdrawals can increase sequence-of-returns risk.
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A good distribution strategy coordinates what you withdraw with what you own rather than treating retirement income and investment management as separate decisions.
Your Retirement Spending Won't Always Be the Same
Retirement distributions don't need to follow the same formula every year because retirement spending doesn't stay exactly the same.
One year you may need additional money for travel. Another year you might purchase a vehicle, remodel your home, help a child, or make a large charitable gift. Healthcare expenses can change later in retirement as well.
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Those changes create opportunities to adjust which accounts you use. A low-spending year may provide room for strategic taxable income or a Roth conversion, while a high-spending year might call for a different combination of taxable, tax-deferred, and Roth assets.
How Should You Decide Where Retirement Income Comes From Each Year?
Instead of following one withdrawal order for the rest of retirement, start each year by looking at the complete picture:
- How much do you expect to spend?
- How much income will Social Security, pensions, or other sources provide?
- What taxable income will you already have?
- What tax bracket are you currently in?
- Are there lower tax brackets you intentionally want to use?
- Are RMDs required now, or could they become significant later?
- Could additional income affect Medicare premiums?
- What would the strategy mean for a surviving spouse?
- Which investments make sense to sell?
- How much Roth flexibility should you preserve for later?
Once those questions are answered, you can determine the appropriate combination of taxable, tax-deferred, and Roth assets to use. That combination may look different next year—and that's okay.
Retirement Distribution Planning Is an Ongoing Process
There isn't one withdrawal sequence that works for every retiree. For some households, spending taxable assets first may make sense. Others may benefit from proportional withdrawals. Still others may intentionally recognize traditional IRA income during lower-tax years, complete Roth conversions, or preserve certain assets for later in retirement.
The important distinction is between simply taking money out of your accounts and actually having a retirement distribution strategy.
Rather than asking which account you should empty first, determine how much income you need and then decide where that income should come from based on your taxes, investments, Social Security, Medicare, future RMDs, and long-term goals.
The best retirement distribution strategy may not be the one that produces the lowest tax bill this year. It's the one that coordinates today's income needs with the rest of your retirement plan.
Frequently Asked Questions
Q: What is the best order to withdraw money in retirement?
A: There isn't one withdrawal order that works for every retiree. While a traditional strategy is to spend taxable assets first, followed by tax-deferred accounts and Roth accounts, the appropriate mix depends on your income needs, tax situation, Social Security, RMDs, Medicare, investments, and long-term financial plan.
Q: Should I withdraw from my IRA or taxable account first?
A: It depends. Using taxable assets first may allow an IRA to continue growing tax-deferred, but intentionally taking IRA withdrawals during lower-income years may help manage taxes over the course of retirement. The decision should consider both your current and future tax situation.
Q: Should I save my Roth IRA for last in retirement?
A: Not necessarily. Roth assets can be valuable later in retirement because qualified withdrawals are generally tax-free, but there may also be years when using Roth money helps manage taxable income. Preserving Roth assets should be weighed against the rest of your retirement income and tax strategy.
Q: How do RMDs affect retirement withdrawals?
A: Required minimum distributions can create taxable income from traditional retirement accounts later in retirement. If those accounts become substantial, future RMDs may influence your tax bracket, Medicare premiums, and overall distribution strategy.
Q: Can retirement withdrawals affect Medicare premiums?
A: Yes. Large taxable retirement distributions and Roth conversions can increase modified adjusted gross income, which may affect Medicare income-related surcharges, known as IRMAA. Because Medicare generally uses income from a prior tax year to determine these surcharges, distribution decisions can have effects beyond the year the withdrawal occurs.
Q: How does Social Security affect retirement withdrawal planning?
A: Social Security provides income that reduces the amount you need to withdraw from investments, and other taxable income can affect how much of your Social Security benefit is taxable. Coordinating Social Security with retirement-account withdrawals can therefore be an important part of an overall retirement income strategy.
Q: Should my retirement withdrawal strategy change every year?
A: It can. Spending, investment markets, tax brackets, Social Security, RMDs, Medicare, and other circumstances can change throughout retirement. Reviewing your distribution strategy annually can help determine the appropriate mix of taxable, tax-deferred, and Roth withdrawals for that year.
About Andstead Advisors
Andstead Advisors is an independent financial planning and wealth management firm headquartered in Denver's Denver Tech Center, serving individuals, families, retirees, and business owners throughout Colorado and across the country. Our team provides comprehensive financial planning, investment management, retirement planning, business owner solutions, retirement plan consulting, business succession planning, cash balance plan strategies, profit sharing plans, and Solo 401(k) guidance. As fiduciary advisors, we help clients make informed financial decisions through personalized advice, long-term planning, and ongoing partnership designed to support their financial goals at every stage of life.