Which Retirement Account Should I Withdraw From First?

Deciding how to draw down your savings in retirement is a significant financial choice, as the sequence in which you access different accounts can influence your annual tax bill and how long your portfolio will last. Each withdrawal from your various accounts has a distinct tax consequence. Failing to plan the order of these withdrawals can lead to unnecessarily high tax payments, so a deliberate strategy is a tool for managing your tax liability throughout your retirement years.

Understanding Your Account Types and Tax Treatment

Understanding the tax treatment of your different assets is a foundational step. Investment accounts are generally separated into three categories based on how they are taxed.

The first category is taxable accounts, which includes standard brokerage accounts. These are funded with after-tax dollars, so your initial contribution is not taxed when withdrawn. However, any earnings, such as interest, dividends, or capital gains, are taxed in the year they are realized. Long-term capital gains often benefit from lower tax rates than ordinary income.

Next are tax-deferred accounts, such as traditional IRAs, 401(k)s, and 403(b)s. Contributions are typically made on a pre-tax basis, which lowers your taxable income during your working years, and the investments grow without being taxed annually. The trade-off is that every dollar withdrawn in retirement is taxed as ordinary income.

Finally, there are tax-free accounts, most notably Roth IRAs and Roth 401(k)s. Contributions are made with after-tax dollars, so you receive no immediate tax deduction. The benefit is that both investment growth and all qualified withdrawals in retirement are completely free of federal income tax. To be qualified, withdrawals must be made after you reach age 59½ and the account has been open for at least five years.

The Conventional Withdrawal Sequence

A widely recognized approach to sequencing withdrawals is designed to minimize taxes by preserving the accounts with the most favorable tax treatment for as long as possible. This conventional strategy provides a logical starting point and follows a specific three-step order.

The first step is to draw from your taxable brokerage accounts. Because you only pay tax on the appreciation or gains, often at lower long-term capital gains rates, this is an efficient first source of funds. Tapping these accounts first allows your tax-deferred and tax-free accounts to continue growing untouched by taxes.

Once taxable accounts are drawn down, the next step is to take withdrawals from tax-deferred accounts, such as traditional IRAs and 401(k)s. While every dollar taken is taxed as ordinary income, the goal of waiting is to postpone this tax liability. This allows the full, untaxed balance to benefit from compound growth for a longer period.

The final step is to withdraw from your tax-free Roth accounts. These are preserved for last because their qualified withdrawals are entirely tax-free, providing income that will not increase your tax bill. This can be advantageous later in retirement if your expenses are higher or if income tax rates have risen. Roth IRAs also are not subject to Required Minimum Distributions (RMDs) for the original owner, offering greater flexibility.

Factors That Can Change the Withdrawal Order

While the conventional order provides a solid baseline, several factors can make it advantageous to deviate from this sequence. A more dynamic approach considers your specific financial situation each year, aiming to minimize your lifetime tax bill rather than just for a single year.

Required Minimum Distributions (RMDs)

The IRS mandates that you begin taking RMDs from your tax-deferred retirement accounts once you reach a certain age. The starting age for RMDs is currently 73, set to increase to 75 by 2033. These distributions are calculated based on your account balance and an IRS life expectancy factor. Failing to take the full required amount can result in a steep penalty of up to 25% of the shortfall. Because these distributions are mandatory, a large RMD, especially when combined with other income sources like Social Security or pensions, can push you into a higher tax bracket. This increases the overall tax paid on those funds and makes it necessary to plan withdrawals from these accounts to manage the future tax liability.

Managing Your Tax Bracket

A sophisticated strategy involves actively managing your taxable income to take advantage of lower tax brackets. For instance, in the years after you retire but before you start Social Security or RMDs, your taxable income might be very low. This period presents an opportunity to intentionally withdraw from your tax-deferred accounts. By “filling up” the lower tax brackets, such as the 10% and 12% brackets, with income from your traditional IRA, you pay a relatively low tax rate on those funds now. This can be more advantageous than waiting until RMDs might force larger withdrawals that are taxed at higher rates, such as 22% or 24%.

Strategic Roth Conversions

A Roth conversion is another tool that disrupts the conventional order. This strategy involves taking a distribution from a tax-deferred account, paying ordinary income tax on it, and moving the funds into a Roth account. Once in the Roth account, the funds grow tax-free, and qualified withdrawals are also tax-free. Performing conversions in low-income years allows you to move money from a perpetually taxable environment to a tax-free one at a lower tax cost. This strategy also reduces the balance of your tax-deferred accounts, thereby lowering future RMDs and building a larger pool of tax-free funds for later in retirement.

Impact on Social Security and Medicare

Your withdrawal strategy can impact the taxation of your Social Security benefits and the cost of your Medicare premiums. The IRS uses “provisional income” to determine if Social Security benefits are taxable, and withdrawals from tax-deferred accounts increase this figure, potentially making up to 85% of your benefits taxable. Similarly, Medicare Part B and Part D premiums are subject to an Income-Related Monthly Adjustment Amount (IRMAA). If your Modified Adjusted Gross Income (MAGI) from two years prior exceeds certain thresholds, your premiums will increase. For 2025, these surcharges begin for individuals with a 2023 MAGI over $103,000. Withdrawals from Roth IRAs do not count in the IRMAA calculation.

Developing Your Personal Withdrawal Strategy

Creating an effective withdrawal strategy is an ongoing process that adapts to your changing circumstances and personal financial picture. The process begins with a clear assessment of your resources and needs.

First, conduct a thorough inventory of all your investment and savings accounts. Categorize each one as taxable, tax-deferred, or tax-free to understand the tax implications of withdrawing from it. Next, estimate your annual income needs in retirement to determine the total amount you need to withdraw each year.

Use the conventional withdrawal sequence as your baseline strategy, then layer on the more nuanced factors. Consider your RMD obligations, your projected tax brackets, and the potential impact on your Social Security and Medicare costs. A withdrawal strategy should be reviewed annually, ideally with a financial advisor or tax professional, to adapt to new laws, market performance, and your personal situation.