Retirement income is not taxed based only on how much you withdraw. It is also shaped by which account you use, when you take the distribution, and how that income affects future tax years. A withdrawal plan that looks simple on paper can create avoidable tax drag or push your Medicare income high enough to increase IRMAA surcharges.

The goal is not to minimize this year’s tax bill in isolation. It is to coordinate income across the years when your tax bracket, account balances, and healthcare costs may change. Start by understanding how each retirement account bucket is taxed, then you can evaluate which source best fits each stage of your plan.

Tax-efficient Retirement Withdrawal Sequencing: The Three Retirement Account Buckets and How They Are Taxed

Most retirement portfolios are not taxed in one uniform way. The account holding your money can determine whether a withdrawal creates taxable income, affects Medicare costs, or produces no current income tax at all. Understanding these distinctions is the first step toward tax-efficient retirement withdrawal sequencing.

Taxable brokerage accounts

Taxable accounts include individual and joint brokerage accounts. You contribute after-tax dollars, so withdrawing the original principal generally does not create income tax. However, selling investments can produce capital gains or losses, and the account may generate taxable dividends or interest along the way. The tax result depends on what you sell, when you sell it, and the investment’s cost basis.

Because taxable withdrawals do not automatically count as ordinary income in the same way as Traditional IRA distributions, they can offer flexibility when managing your taxable income. That does not make every brokerage withdrawal tax-free. It means the account gives you more control over the type and timing of income you recognize.

Tax-deferred Traditional IRA and 401(k) accounts

Traditional IRAs and traditional 401(k)s generally allow contributions or earnings to grow tax-deferred. When you take distributions, the taxable portion is generally reported as ordinary income. Those distributions can increase your Modified Adjusted Gross Income, or MAGI, and may affect taxes and income-based Medicare costs. The IRS provides guidance on the tax treatment of IRA distributions in Publication 590-B.

These accounts also have required minimum distribution rules. For those subject to the current rule, RMDs from traditional accounts must begin at age 73. Once RMDs apply, the required amount becomes part of the withdrawal decision even if you would prefer to leave the money invested. Morningstar similarly identifies traditional IRAs and employer retirement plans as accounts carrying RMDs for retirees over 73: Morningstar’s withdrawal guidance.

Proactive RMD optimization strategies can help manage the tax impact of these required withdrawals.

Tax-free Roth IRA and Roth 401(k) accounts

Qualified Roth IRA and Roth 401(k) withdrawals are generally tax-free. Contributions are made with after-tax dollars, and qualified distributions do not normally add to taxable income. Roth assets can therefore provide valuable flexibility in years when additional ordinary income would push you into a higher tax bracket or increase Medicare-related costs.

The three buckets are not interchangeable. A thoughtful plan considers the tax character of each account, your income needs, and rules such as RMDs before deciding which dollars to use.

The Conventional Withdrawal Order: Taxable First, Tax-Deferred Next, Roth Last

A conventional approach to tax-efficient retirement withdrawal sequencing starts with taxable brokerage accounts, moves to tax-deferred accounts, and preserves Roth assets for last. The order is not a rule that applies equally in every household. It is a starting framework that considers when income becomes taxable, how long tax-free assets can compound, and how withdrawals may affect future Medicare costs.

How the first account used can affect a retirement income plan

Account drawn first	What generally happens	Planning implication
Taxable brokerage	Withdrawals use funds that are already outside retirement accounts. The tax result depends on the account’s income, cost basis, and realized gains.	Using taxable assets first can delay additional ordinary income from traditional retirement accounts while meeting current spending needs.
Tax-deferred IRA or 401(k)	Distributions from traditional IRAs are generally taxable as ordinary income and can increase Modified Adjusted Gross Income (MAGI), potentially affecting Medicare costs.	Withdrawals may be useful in lower-income years, but larger distributions later can add to taxable income. Required Minimum Distributions generally begin at age 73 for applicable traditional IRA owners.
Roth IRA or Roth 401(k)	Qualified withdrawals are tax-free, so the account can continue growing without current income tax on those distributions.	Using Roth assets last preserves the account’s tax-free growth potential and creates a flexible source of funds for later years or unusually high expenses.

There is an important refinement to the simple order. Taking modest distributions from tax-deferred accounts before Social Security begins, while remaining in the 10% or 12% federal tax bracket, can smooth the lifetime tax burden. T. Rowe Price describes this early, measured approach as a way to avoid leaving too much taxable income for later years. It may also reduce the risk that future required distributions create an unnecessarily high tax bill. The right amount depends on the household’s income, filing status, cash needs, and broader plan.

In practice, the sequence should be reviewed annually rather than followed mechanically. Taxable income, market conditions, Social Security timing, and future spending can all change which account is most efficient to use within your broader retirement income plan.

How Withdrawal Sequencing Affects Medicare IRMAA Surcharges

The amount you withdraw from retirement accounts can affect more than your annual tax bill. Traditional IRA distributions are generally taxable as ordinary income, which can increase your Modified Adjusted Gross Income (MAGI). That higher MAGI may affect the Medicare premiums you pay two years later.

The Social Security Administration explains that Medicare uses tax-return information from two years prior to calculate income-related monthly adjustment amounts, or IRMAA. In practical terms, a large distribution today could influence your Part B and Part D premiums in a future Medicare year. The timing matters, particularly when a withdrawal is discretionary rather than required.

Why one large withdrawal can change your Medicare costs

Medicare IRMAA is organized into five income tiers. For Part B, beneficiaries subject to IRMAA pay a share of the underlying cost that ranges from 35% at the first level to 85% at the highest level. Crossing into a higher tier can therefore create an additional recurring expense for premiums, alongside the income tax generated by the withdrawal.

For example, taking a substantial amount from a tax-deferred account in one year may push MAGI above an IRMAA threshold, even if your usual retirement income would not. The same withdrawal divided across multiple tax years may produce a different result. This is not a reason to avoid needed distributions, but it is a reason to evaluate the tax and Medicare effects through a comprehensive tax planning and strategy approach before choosing the amount and timing.

Coordinate withdrawals with the two-year lookback

A tax-efficient retirement withdrawal sequence considers current tax brackets, future required distributions, Social Security income, and the Medicare lookback period together. Rather than waiting until an unusually large expense forces a withdrawal, you may be able to use measured distributions from different account types to manage MAGI over time. Required distributions still have to be taken when due, but discretionary withdrawals may offer more flexibility.

For a broader framework, review implementing tax-efficient withdrawal strategies. The right approach depends on your account balances, income sources, filing status, and expected spending, so IRMAA planning should be coordinated with your overall retirement income plan.

Sources: Social Security Administration guidance on Medicare premiums and IRMAA; IRS Publication 590-B.

When Roth Conversions Fit Into Your Withdrawal Plan

A Roth conversion can be useful when your taxable income is temporarily lower than it is likely to be later. You pay income tax on the amount converted from a Traditional IRA, then move those funds into a Roth IRA, where qualified future withdrawals are generally tax-free. The decision requires careful projection, because converting too much in one year can create an unnecessarily large tax bill.

Greenbush Financial identifies Roth conversions as a key tax planning tool when retirees are in lower tax brackets. The right timing depends on your income, withdrawals, Social Security start date, charitable plans, and future required distributions. Consider the decision in this sequence:

1. Identify a lower-income window. The years after retirement but before Social Security begins can create room for a conversion. The same may be true during a gap between other income sources and required minimum distributions. Review the full tax picture for the year before choosing an amount.
2. Fill the window deliberately. A partial conversion may help use available room in your current tax bracket without pushing more income into a higher bracket. This is not a reason to convert automatically. Compare the tax cost today with the potential benefit of reducing future tax-deferred balances.
3. Coordinate the conversion with withdrawals. A Roth conversion does not replace a withdrawal plan. You may still draw from taxable or tax-deferred accounts for spending, while using the conversion to shift part of your long-term assets into a tax-free account. For a broader look at sequencing withdrawals for tax efficiency, consider how each account fits together.
4. Preserve Roth flexibility for later. In the conventional withdrawal order, Roth accounts are drawn from last so they can continue growing tax-free and remain available for later spending needs. Legacy goals, or years when other withdrawals would create a higher tax burden. A conversion can make that last-resort account more substantial over time.

Roth conversions work best as part of an annual review, not as a one-time decision. Your plan should test different conversion amounts against current taxes, future distributions, and the income you actually need to spend.

When the Standard Order Needs a Custom Approach

The taxable-to-tax-deferred-to-Roth sequence is a useful starting point, not a permanent rule. Your income needs, tax bracket, account balances, and timing can change from year to year. Tax-efficient retirement withdrawal sequencing works best when it responds to those changes instead of treating every retirement year the same.

Required distributions can change the plan

Required Minimum Distributions (RMDs) from traditional IRAs must begin by the required beginning date, which is age 73 for those turning 72 after 2022. IRS guidance explains the applicable timing rules. Once RMDs apply, you may need to withdraw money from a traditional account even if you would rather use taxable assets or leave the funds invested. That required income can affect your tax picture and reduce the flexibility of a strict “Roth last” approach.

Spending and markets are not predictable

A home purchase, major healthcare expense, or another one-time need may justify drawing from a different account than the standard order would suggest. Market conditions matter, too. Selling investments from a taxable account during a downturn may not be the most practical choice. While relying heavily on a traditional account in a strong-income year could create avoidable tax pressure. A blended strategy may allow you to meet a near-term need while managing taxable income over time.

Fidelity describes withdrawing 4% to 5% in the first year of retirement, with subsequent adjustments for inflation, as a starting guideline, not a rule. Fidelity’s guidance should be evaluated alongside your own spending plan, tax situation, and risk capacity.

my integrative planning uses the RetireRight process to develop that context: Discover your priorities and resources, Plan the income and tax strategy, Implement the coordinated decisions, and Monitor as your life and the markets evolve. The goal is not to follow an order perfectly. It is to build a withdrawal strategy that remains useful when retirement does not go exactly as expected.

Frequently Asked Questions

What is the most tax-efficient retirement withdrawal sequence?

A common starting point is to use taxable brokerage assets first. Then take distributions from tax-deferred accounts such as Traditional IRAs or 401(k)s, and preserve Roth assets for later. That order is not automatic. A plan should also consider current and future tax brackets, Social Security timing, required distributions, charitable giving, and expected spending.

Why should I withdraw from taxable brokerage accounts first in retirement?

Using taxable assets first may give tax-deferred and Roth accounts more time to grow under their respective tax rules. However, selling investments can create capital gains, and the best source depends on which holdings are sold. Your income for the year, and the effect on your broader tax plan.

How can withdrawal sequencing help reduce Medicare IRMAA surcharges?

Medicare uses income from a prior tax year to determine whether higher-income beneficiaries pay IRMAA surcharges. Coordinating taxable sales, tax-deferred distributions, Roth conversions, and the timing of other income can help manage modified adjusted gross income. Because the thresholds and your circumstances change, review the plan annually rather than relying on a fixed account order.

Should I take money from tax-deferred accounts before I need it?

Sometimes. Modest distributions during lower-income years, such as before Social Security begins, may fill lower tax brackets and reduce the size of future tax-deferred balances. That can help smooth taxes over time, but taking too much may increase current taxes or affect other income-based costs. The right amount depends on a year-by-year projection.

Is a fixed withdrawal rule enough for tax-efficient retirement planning?

No. A fixed percentage may not reflect changes in spending, inflation, market conditions, tax brackets, or Medicare costs. A dynamic plan can adjust which account supplies cash and how much is withdrawn as those factors change, while preserving flexibility for large expenses and future tax obligations.

Ready to Build a Tax-Efficient Withdrawal Plan?

Withdrawal sequencing can affect both your lifetime tax burden and how your income interacts with Medicare premiums. A personalized review can help connect your account types, income needs, and broader retirement priorities. To schedule a consultation, call (704) 847-8444 or use our contact form.