What is the Best Withdrawal Sequence For Retirement Accounts?

If you’re retired (or nearing retirement), you may have money spread across a Traditional IRA/401(k), a Roth IRA/401(k), and a taxable brokerage account. A common question from newer retirees is: “Which account should I pull from first?”

The Old Rule of Thumb for Retirement Withdrawal Sequence

1. Spend your taxable brokerage money first;

2. Then draw from your Traditional IRA;

3. Save the Roth IRA for last (to maximize tax-free growth)

On paper, that makes sense — let your Roth account compound for as long as possible. But in practice? It can backfire. That “old-school” strategy often results in very low taxes in the early years, followed by much higher taxes later once you start tapping your Traditional IRA… and then potentially no taxes at the very end when you’re left with just the Roth.

So what is a better solution? There are three recommended strategies that can all work well, depending on your specific situation:

• "Fill Lower Tax Brackets" Strategy

• "Waterfall Withdrawal" Strategy

• "Blended Withdrawal" Strategy

"Fill Lower Tax Brackets" Strategy

This strategy focuses on withdrawing just enough from tax-deferred accounts (like IRAs) -- on top of other ordinary income sources like pensions, Social Security, and interest -- to reach the top of a specific tax bracket (e.g., the 12% or 22% bracket) before switching to withdrawals from Roth accounts or taxable accounts for any additional income needs. This is especially useful in an early retirement when you might have unused capacity in the 0%, 10%, or 12% tax brackets.

"Withdrawal Waterfall" Strategy

Start by using any pension income, Social Security, and investment income (interest, dividends, capital gains distributions) you are receiving from your taxable accounts — you’ll be taxed on those anyway. Then, to the extent necessary, withdraw from your accounts in the following sequence:

1. Mandatory:  Required Minimum Distributions (RMDs).

2. Taxable:  Brokerage accounts (utilizing 0% Long-Term Capital Gains brackets).

3. Tax-Deferred:  Traditional IRAs and 401(k)s (filled to the top of your current tax bracket).

4. Tax-Free:  Roth IRAs and 401(k)s (saved for last to maximize tax-free compounding).

Note:  If you’re subject to Required Minimum Distributions (RMDs) and if you give to charity, consider Qualified Charitable Distributions (QCDs) before taking your RMDs (Learn how to use Qualified Charitable Distributions (QCDs) to satisfy your RMD in these blog posts: "QCDs: The Tax-Smart Way to Give" and “Roth Conversions — Not the Best Solution for Many Households”).

"Blended Withdrawal" Strategy

Research increasingly supports a blended withdrawal strategy — taking proportionate amounts each year from your taxable, Traditional IRA/401(k), and Roth IRA/401(k) accounts.  Note: if you take RMDs, those would come from the Traditional IRA/401(k) portion of the blended mix.  

This approach smooths out your tax bill across retirement, helping you:

✅ Pay lower total lifetime taxes

✅ Avoid sudden tax spikes

✅ Minimize the risk of IRMAA surcharges or the 3.8% Medicare Net Investment Income Tax (NIIT)

Pro Tip for Big Expenses

Planning a major purchase — like a new car, a home renovation, or a dream vacation? Consider drawing from your taxable brokerage account (especially if you qualify for 0% capital gains) or your Roth IRA/401(k) (which is tax-free).  If possible, avoid large, one-time withdrawals from your Traditional IRA/401(k), as those can quickly push you into higher ordinary tax brackets and trigger IRMAA surcharges as well as the 3.8% NIIT.

Summary of the Withdrawal Strategy Options

Strategy	Best For ...	Primary Benefit
Fill Lower Tax Brackets	Early retirees (gap years before SS)	Maximizing 0%, 10%, and 12% tax brackets
Withdrawal Waterfall	Simplicity-Seekers	Predictable order of withdrawals
Blended Withdrawal	Long-term tax smoothing	Avoiding IRMAA, NIIT, the widow's tax trap, & tax spikes

Glossary of Key Tax Terms

• IRMAA (Income-Related Monthly Adjustment Amount):  Surcharges added to Medicare Part B and D premiums for higher-income earners. These IRMAA surcharges can be substantial for higher income households.

• NIIT (Net Investment Income Tax):  A 3.8% tax on investment income for households exceeding specific income thresholds.

• Widow's Tax Trap: The scenario where a widow or widower is subject to higher tax rates when switching from "Married Filing Jointly" to "Single Filer" status because the income thresholds for each tax bracket and the standard deduction are all cut in half, forcing the widow or widower into higher tax brackets despite having slightly lower total household income.

• Qualified Charitable Distribution (QCD): A tax-efficient distribution made directly from a traditional IRA to an IRS-registered 501(c)(3) charity by individuals age 70 1/2 or older. QCDs are excluded from income, reducing taxes and IRMAA surcharges while also satisfying some or all of Required Minimum Distributions (RMDs).

Retirement success isn’t just about saving money — it’s also about taking it out wisely. Getting the withdrawal sequence right can save you hundreds of thousands of dollars over a 30-year retirement.

If you would like friendly, expert assistance in planning your retirement withdrawal strategy, please contact me or visit www.flourishingpathfinancial.com/book-online to schedule a free Discovery Session.

Author:  John Macy, MBA, RICP®

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