Table of Contents
Retirement planning doesn’t end when you stop working. In fact, one of the most critical decisions you’ll make in retirement is determining which accounts to withdraw from first. The order in which you tap your retirement savings can mean the difference between your money lasting 25 years versus 30 years, potentially adding hundreds of thousands of dollars to your lifetime wealth.
Most retirees have accumulated savings across three types of accounts by retirement: taxable brokerage accounts, tax-deferred accounts like traditional 401(k)s and IRAs, and tax-free accounts like Roth IRAs. Each account type faces different tax treatment when you withdraw money, making the sequence of withdrawals crucial for minimizing your lifetime tax burden.
This guide from Beem on the tax-efficient withdrawal order provides a simple, actionable framework for optimizing your retirement withdrawal strategy. You’ll learn the standard three-bucket approach, when to deviate from conventional wisdom, and how to coordinate withdrawals with Social Security, Medicare, and required minimum distributions.
What’s the Standard Three-Bucket Withdrawal Order?
Bucket 1: Taxable Accounts First
Why Start Here: Taxable accounts typically offer the most favorable tax treatment for withdrawals. When you sell investments in a taxable account, you pay capital gains tax only on the growth portion of your investment, not the entire withdrawal amount.
Capital Gains Tax Advantages: For 2025, long-term capital gains rates are 0%, 15%, or 20%, depending on your income level. These rates are generally lower than ordinary income tax rates, which can reach 37% for high earners. For many retirees, especially those in early retirement before Social Security begins, the 0% capital gains rate can make taxable account withdrawals completely tax-free.
Portfolio Benefits: By depleting taxable accounts first, you preserve the tax-advantaged growth in your retirement accounts for as long as possible. Your traditional 401(k) continues growing tax-deferred, while your Roth IRA compounds tax-free. This extended growth period can significantly increase your total retirement wealth.
Practical Implementation: Focus on selling appreciated assets that qualify for long-term capital gains treatment. If you have investments that have declined in value, consider tax-loss harvesting to offset gains and potentially create tax deductions for other income.
Bucket 2: Tax-Deferred Accounts Second
The Traditional 401(k) and IRA Phase: Once your taxable accounts are depleted, turn to traditional retirement accounts. These withdrawals are taxed as ordinary income, typically at higher rates than capital gains. However, by this point in retirement, your overall income may be lower than during your working years, potentially placing you in a lower tax bracket.
Required Minimum Distribution Coordination: Starting at age 73, you must take required minimum distributions (RMDs) from traditional retirement accounts. The IRS imposes a harsh 50% penalty on missed RMDs, making these withdrawals non-negotiable. Plan your withdrawal strategy to incorporate RMDs seamlessly, using them as the foundation for your annual income needs.
Tax Bracket Management: Use tax-deferred withdrawals strategically to fill lower tax brackets without pushing yourself into higher rates unnecessarily. For example, if you’re married filing jointly in 2025, you can withdraw up to $23,200 at 0% tax (standard deduction), then fill the 10% bracket up to $44,000, and so on.
Strategic Timing Considerations: In years when you have unusually low income, consider taking larger distributions from tax-deferred accounts to take advantage of lower tax brackets. Conversely, in years with higher income from other sources, minimize these withdrawals to avoid bracket creep.
Bucket 3: Roth Accounts Last
Maximum Growth Preservation: Roth IRAs offer unparalleled tax advantages: tax-free growth and tax-free qualified withdrawals. By saving these accounts for last, you maximize the time your money compounds without any tax drag. Unlike traditional retirement accounts, Roth IRAs have no required minimum distributions during the original owner’s lifetime.
Estate Planning Benefits: If you don’t need all your Roth IRA money during your lifetime, these accounts provide excellent benefits for your heirs. While beneficiaries must generally deplete inherited Roth IRAs within 10 years, all withdrawals remain tax-free, making them valuable legacy assets.
Emergency Reserve Function: Roth IRAs can serve as emergency funds in retirement because contributions (not earnings) can be withdrawn at any time without taxes or penalties. This flexibility provides peace of mind while preserving the account’s tax-free growth potential.
When Should You Break the Standard Rules?
Tax Bracket Arbitrage Strategy
Fill Lower Brackets First: The most important exception to the standard withdrawal order involves strategic tax bracket management. Instead of rigidly following taxable, then tax-deferred, then Roth, consider your overall tax picture and fill lower tax brackets with the most tax-efficient sources.
Example in Practice: Suppose you’re a single retiree who needs $50,000 annually. Rather than taking $50,000 entirely from taxable accounts (potentially missing opportunities), you might take $13,850 from tax-deferred accounts (filling the 0% bracket after the standard deduction), then $32,150 from taxable accounts at favorable capital gains rates.
IRMAA Threshold Management: Medicare premiums increase significantly at certain income levels through Income-Related Monthly Adjustment Amounts (IRMAA). For 2025, IRMAA surcharges begin at $103,000 for single filers and $206,000 for married couples. Plan withdrawals to stay below these thresholds when possible, as crossing them can increase Medicare premiums by hundreds of dollars monthly.
Social Security Taxation Coordination: Up to 85% of Social Security benefits can become taxable based on your “provisional income” calculation. Roth withdrawals don’t count toward provisional income, while traditional IRA withdrawals do. In years when you’re close to Social Security taxation thresholds, emphasize Roth withdrawals to minimize the tax impact on your benefits.
Bear Market Adjustments
Preserve Equity Growth During Downturns: When markets decline significantly, modify your withdrawal strategy to avoid locking in losses on growth investments. Instead of selling depressed stocks, tap bond allocations, cash reserves, or stable value funds within your portfolio.
Roth Conversions During Market Lows: Bear markets create unique opportunities to convert traditional IRA assets to Roth IRAs at temporarily reduced values. You’ll pay current income tax on the conversion amount, but all future growth in the Roth account will be tax-free.
Sequence of Returns Risk Mitigation: The biggest risk to retirement portfolios isn’t average returns over time, but poor returns early in retirement when withdrawals amplify losses. Maintain 1-2 years of expenses in conservative investments to avoid forced sales during market downturns.
How Do RMDs Change Your Strategy?
RMD-First Approach for Compliance
The Non-Negotiable Foundation: Required minimum distributions must be your first priority starting at age 73. The 50% penalty for missed RMDs is one of the harshest penalties in the tax code, making compliance essential. Calculate your RMDs by December 31st each year and ensure they’re completed by the deadline.
Building Around RMDs: Use your required distributions as the foundation of your withdrawal strategy, then supplement with other account types as needed for your total income requirements. This approach ensures compliance while maintaining flexibility for tax optimization.
RMD Aggregation Rules: If you have multiple IRAs, you can calculate the RMD for each account but take the total amount from any combination of accounts. This flexibility allows you to choose which specific investments to sell, potentially optimizing for tax-loss harvesting or rebalancing opportunities.
Qualified Charitable Distributions (QCDs) for Tax Efficiency
Direct IRA-to-Charity Transfers: If you’re charitably inclined and over age 70½, qualified charitable distributions allow you to transfer up to $105,000 annually (2024 limit) directly from your traditional IRA to qualified charities. The transfer satisfies your RMD requirement but doesn’t count as taxable income.
Double Tax Benefit: QCDs provide superior tax benefits compared to taking an RMD and then making a charitable donation. The QCD avoids increasing your adjusted gross income, potentially keeping you in lower tax brackets and below IRMAA thresholds for Medicare premiums.
Strategic Implementation: Plan charitable giving annually to maximize QCD benefits. Even if your charitable giving is smaller than your full RMD, using QCDs for any charitable donations provides tax advantages while satisfying part of your distribution requirement.
Advanced Strategies for Tax Optimization
Tax-Loss Harvesting Coordination
Offsetting Gains with Losses: In taxable accounts, strategically realize investment losses to offset gains from other sales or required distributions. Tax losses can offset capital gains dollar-for-dollar, and up to $3,000 in losses can offset ordinary income annually.
Wash Sale Rule Awareness: Avoid purchasing substantially identical investments within 30 days of realizing a loss, or the IRS will disallow the tax loss. Consider similar but not identical investments to maintain market exposure while capturing tax benefits.
Roth Conversion Ladders for Early Retirees
Multi-Year Conversion Planning: Early retirees often have several years of low income between leaving work and starting Social Security. This creates opportunities for systematic Roth conversions at low tax rates, reducing future RMDs and creating more tax-free income in later retirement.
Conversion Timing Strategy: Execute conversions during years when your income is lowest, such as before Social Security begins or during market downturns when account values are temporarily reduced. Each conversion adds to your taxable income for that year but creates tax-free growth thereafter.
Where Does Beem Optimize Your Withdrawal Plan?
Comprehensive Tax Bracket Monitoring
Beem’s platform continuously tracks your retirement account withdrawals and their tax implications, providing real-time feedback on your current year tax situation. The system monitors your progress toward various tax bracket thresholds and alerts you before you cross into higher tax rates.
IRMAA and Social Security Integration: The platform calculates how different withdrawal scenarios affect Medicare premium surcharges and Social Security benefit taxation. This integrated approach helps you optimize withdrawals across all aspects of retirement tax planning, not just income tax rates.
Multi-Year Tax Planning: Beem projects the tax implications of different withdrawal strategies over multiple years, helping you balance current tax optimization with future tax obligations. This long-term perspective is crucial for strategies like Roth conversions that involve current tax costs for future tax benefits.
Automated Account Coordination
RMD Tracking and Planning: The platform automatically calculates your required minimum distributions and integrates them into your overall withdrawal strategy. You receive alerts well before RMD deadlines, ensuring compliance while optimizing the timing and source of distributions.
Rebalancing Integration: Beem coordinates withdrawal needs with portfolio rebalancing opportunities, helping you maintain target allocations while minimizing tax impact. The system can identify when withdrawal needs align with rebalancing requirements, creating tax-efficient opportunities to adjust your portfolio.
QCD Planning: For charitable retirees, Beem tracks qualified charitable distribution opportunities and reminds you of annual limits and deadlines. The platform helps maximize the tax benefits of charitable giving through strategic QCD timing.
Quick Decision Framework for Daily Use
The Four-Step Priority System
- Satisfy RMDs First: Always ensure required minimum distributions are completed to avoid the 50% penalty. Use these as your baseline withdrawal amount and plan additional withdrawals around them.
- Fill Current Tax Bracket: Take additional tax-deferred withdrawals to utilize available space in your current tax bracket without pushing into the next level. This strategy maximizes the value of lower tax rates.
- Use Taxable Accounts for Remaining Needs: After optimizing tax-deferred withdrawals for bracket management, turn to taxable accounts for additional income needs. Focus on long-term capital gains when possible for favorable tax treatment.
- Preserve Roth for Flexibility: Keep Roth accounts as your last resort or for specific strategic purposes like managing IRMAA thresholds or providing tax-free legacy assets.
Annual Review and Adjustment Process
December Planning Session: Each year in December, review your tax situation and plan the following year’s withdrawal strategy. Consider factors like changes in tax brackets, Social Security benefits, Medicare premiums, and any unusual income or deduction opportunities.
Quarterly Monitoring: Check your withdrawal progress quarterly to ensure you’re on track with your annual plan. Market performance, changes in expenses, or unexpected income may require mid-year adjustments to your withdrawal strategy.
Professional Coordination: Consider working with a tax professional or financial advisor to optimize complex withdrawal strategies, especially when dealing with large balances, multiple account types, or significant tax planning opportunities.
Conclusion: Tax-Efficient Withdrawal Order
The order in which you withdraw from retirement accounts can dramatically impact how long your money lasts and how much you ultimately keep after taxes. While the standard framework of taxable first, tax-deferred second, and Roth last provides a solid foundation, successful retirement income planning requires flexibility and strategic thinking.
The key to optimization lies in understanding your complete tax picture and coordinating withdrawals across all your accounts and income sources. Consider tax brackets, required minimum distributions, Social Security taxation, Medicare premiums, and market conditions when making withdrawal decisions.
Remember that withdrawal planning is an ongoing process, not a set-and-forget strategy. Tax laws change, market conditions fluctuate, and personal circumstances evolve. Regular review and adjustment of your withdrawal strategy ensures you continue optimizing for current conditions while working toward your long-term financial security.
Start implementing tax-efficient withdrawal strategies today by assessing your current account types and balances, understanding your tax bracket situation, and planning your next year’s withdrawals with tax optimization in mind. The time and attention you invest in strategic withdrawal planning can add years to your portfolio’s longevity and significantly increase your lifetime after-tax wealth. Consider using Beem to spend, save, plan and protect your hard-earned money like an pro with effective financial insights and suggestions.
