Saving for retirement gets most of the attention, but the order in which you draw money back out can matter just as much to your lifetime tax bill. Pull from the wrong account at the wrong time and you can push yourself into a higher bracket, trigger Medicare surcharges, or leave tax-free growth on the table that never gets used. Here is how the withdrawal decision actually works.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
The Three Tax Buckets
Retirement savings generally sit in three buckets, each taxed differently on the way out. Taxable accounts — a regular brokerage account — are funded with after-tax dollars, so only the growth is taxed, typically at capital-gains rates, when you sell. Tax-deferred accounts — Traditional IRAs and 401(k)s — are funded pre-tax, so every dollar withdrawn is taxed as ordinary income. Tax-free accounts — Roth IRAs and Roth 401(k)s — are funded after-tax, and qualified withdrawals of both contributions and growth come out with no tax at all.
The Conventional Withdrawal Order
The traditional rule of thumb is to spend taxable accounts first, tax-deferred accounts second, and Roth accounts last. The logic: spending taxable savings first lets your tax-deferred and tax-free accounts keep compounding, and Roth dollars — which owe no future tax on growth — benefit the most from being left alone the longest. This order also tends to keep your taxable income lower in the early retirement years, before Social Security and required distributions add to the pile.
It is a reasonable default, but treating it as a rigid rule rather than a starting point is where many retirees leave money on the table.
Why a Rigid Order Can Backfire
Draining your taxable account completely before touching tax-deferred money often means several early, low-income retirement years pass with little or no ordinary income — and then required minimum distributions arrive all at once and push you into a much higher bracket for the rest of retirement. A blended approach, pulling some ordinary income from tax-deferred accounts every year up to the top of a target bracket, generally produces a smoother, lower lifetime tax bill than an all-or-nothing sequence.
Required Minimum Distributions: The Clock You Can’t Ignore
Under the SECURE 2.0 Act, the age at which you must begin taking required minimum distributions (RMDs) from Traditional IRAs and 401(k)s is 73 for those who turn 72 after 2022 and 73 before 2033, rising to 75 for those born in 1960 or later. Your first RMD can be delayed until April 1 of the year after you reach the applicable age, but every RMD after that is due by December 31 — and missing one carries a real penalty. Roth IRAs are not subject to RMDs during the original owner’s lifetime, which is one more reason to preserve them for later.
The Low-Bracket Window for Roth Conversions
The years between retiring and the start of Social Security and RMDs are often the lowest-income years of retirement — and that makes them a natural window for converting Traditional IRA dollars to Roth. Converting fills up the lower tax brackets deliberately, paying tax now at a rate you control rather than later at a rate RMDs may force on you. The trade-off is that a large conversion in a single year can itself push you into a higher bracket or trigger Medicare premium surcharges (IRMAA), so conversions are usually sized year by year rather than done all at once.
Watch Medicare’s Two-Year Lookback
Medicare Part B and Part D premiums can carry an income-related surcharge, and that surcharge is based on your tax return from two years earlier. A large withdrawal or Roth conversion this year can raise your Medicare premiums two years from now, which is easy to overlook when a decision is made purely to save on income tax in the year it happens.
Blending the Buckets in Practice
In practice, the strongest withdrawal strategies rarely follow one bucket at a time. A common approach draws some taxable and some tax-deferred income each year to stay inside a target bracket, uses Roth conversions in low-income years to preempt future RMDs, and reserves Roth withdrawals for the years income would otherwise spike — a large purchase, a one-time gain, or the years after RMDs begin. The right blend depends on your account balances, your other income sources, and your expected tax bracket in later retirement.
How VarStan Helps
The right withdrawal sequence is rarely obvious from a single year’s tax return — it depends on projecting your income, brackets, and RMDs years into the future. As a CPA-led firm, we help clients map out a multi-year withdrawal and conversion plan that accounts for brackets, RMD timing, and Medicare thresholds together, rather than optimizing one tax return at a time. If retirement is approaching and you have not mapped out which accounts to draw from first, that plan is worth building before the withdrawals start.
Related reading: How Much of Your Social Security Is Taxable — and How IRA Withdrawals Change It and Turning 50? The Tax Moves 60-Year-Olds Wish They'd Made.