Your withdrawal sequence: Understanding account types in retirement

Retirees often hold a mix of account types, each with different tax treatments. The sequence in which you draw from these accounts can have a meaningful impact on your long-term wealth, tax exposure, and legacy planning.

Below is a general approach to account-type sequencing, starting with taxable accounts, followed by tax-deferred accounts, and rounding out with Roth accounts. This framework is intended for retirees who are beginning to draw down assets and want to do so in a tax-efficient manner. This is not a full retirement income strategy, but a starting point for thinking about how to structure withdrawals when multiple account types are involved to support retirement lifestyle.

1. Start with Taxable Accounts

In many cases, withdrawing from taxable accounts (like brokerage accounts) can be a wise first move. Here’s why:

• Preferential Tax Treatment: Long-term capital gains and qualified dividends are typically taxed at lower rates than ordinary income. By carefully managing which securities you sell — such as harvesting losses or choosing lots with lower gains — you can further reduce your tax liability.
• Preserve Tax-Advantaged Growth: Leaving tax-deferred and Roth accounts untouched can potentially allow for those investments to continue compounding on a tax-deferred or tax-free basis, which may improve your long-term wealth.
• Flexibility: Taxable accounts offer more flexibility in managing cash flow and taxes. You can sell specific assets, control the timing of gains, and possibly take advantage of tax-loss harvesting.

Note: If your taxable account holdings have appreciated significantly, it’s important to plan for capital gains taxes. A coordinated strategy with your financial advisor and tax professional can help minimize these consequences.

2. Tap into Tax-Deferred Accounts Next

Once your taxable accounts have been drawn down, it’s typically appropriate to begin withdrawing from tax-deferred accounts, such as traditional IRAs, 401(k)s, or other retirement plans. These accounts are subject to ordinary income tax upon withdrawal.

Benefits of this approach include:

• RMD Management: Required minimum distributions (RMDs) begin at age 73 (or 75 for those born in 1960 or later, per the SECURE 2.0 Act). If your tax-deferred accounts are too large by that time, RMDs could push you into higher tax brackets and affect Medicare premiums or Social Security taxation. Drawing from these accounts earlier, in controlled amounts, can help reduce the future RMD burden.
• Bracket Management: With careful planning, you may be able to “fill up” lower tax brackets by taking moderate withdrawals in years when your income is relatively low. This proactive approach can reduce your overall lifetime tax bill.
• Charitable Planning Opportunities: If charitable giving is part of your legacy, consider using Qualified Charitable Distributions (QCDs) from your IRA after age 70.5. These direct transfers to charity can count toward your RMD and are excluded from taxable income.

3. Save Roth Accounts for Last

Roth IRAs and Roth 401(k)s are powerful tools in retirement — and preserving them for as long as possible is often the best move.

• Tax-Free Growth Potential and Withdrawals: Roth accounts offer tax-free distributions, including on all investment gains, provided certain requirements are met. This can make them ideal for the later stages of retirement when managing tax brackets becomes more complex.
• No RMDs: Unlike traditional retirement accounts, Roth IRAs are not subject to RMDs during your lifetime. That means you can leave the funds untouched for as long as you’d like, giving them more time to potentially grow.
• Legacy Planning: Because of the tax-free nature of Roth distributions, these accounts can be better assets to leave to heirs than traditional IRAs. While non-spousal beneficiaries must now deplete inherited Roth IRAs within 10 years (due to the SECURE Act 2.0), they can usually do so without generating taxable income.
• Strategic Conversions: In the early years of retirement — or any year with particularly low income — you might consider converting some traditional IRA funds to a Roth. This can reduce future RMDs and build your Roth base. Just be aware that conversions are taxable in the year they’re made, so it’s best done in coordination with your tax advisor.

Final Thoughts

There’s no one-size-fits-all answer to retirement withdrawals. Your investment mix, tax bracket, lifestyle goals, and legacy plans all factor into the equation. But for many affluent retirees, the general framework of drawing first from taxable accounts, then tax-deferred, and finally from Roth accounts offers a sound starting point for account-type sequencing.

This approach can help minimize taxes, support long-term investment growth potential, and enhance wealth transfer strategies. As always, work closely with your financial advisor, estate planning attorney, and tax professionals to tailor a withdrawal plan that fits your unique circumstances —and helps ensure that your wealth works for you and your family for years to come.