Hey Reader,

Most Americans spend decades building their retirement savings — contributing consistently, investing carefully, and watching the balance grow year after year.

Then retirement arrives. And almost nobody ever taught them how to take the money out.

The withdrawal order — which accounts you draw from first, second, and third — is one of the most consequential financial decisions a retiree makes. Get it right and you minimize taxes, maximize the longevity of your portfolio, and preserve your flexibility throughout retirement. Get it wrong and you pay thousands of dollars more in unnecessary taxes every single year — on money you already paid tax on once, or money you could have sheltered entirely.

Here is the correct withdrawal sequence and exactly why it matters.

Why Withdrawal Order Matters More Than Most People Realize

Before covering the sequence it helps to understand why the order matters at all.

Your retirement accounts are not treated equally by the IRS. Each type carries a different tax profile — and drawing from the wrong one at the wrong time can trigger a cascade of consequences that extend far beyond a single year's tax return.

Withdrawals from traditional IRAs and 401k accounts are taxed as ordinary income — stacking on top of Social Security, pension income, and any other taxable income you receive. A large withdrawal in a single year can push you into a higher bracket, trigger the taxation of up to 85 percent of your Social Security benefits, and cause Medicare IRMAA surcharges that increase your premiums for the following year.

Withdrawals from Roth accounts are completely tax-free and do not count toward any of those thresholds.

Withdrawals from taxable brokerage accounts are taxed at long-term capital gains rates — typically 0, 15, or 20 percent depending on your total income — which are significantly lower than ordinary income rates.

The goal of a deliberate withdrawal sequence is to use these differences strategically — keeping your taxable income as low as possible in each year of retirement while preserving your most tax-efficient accounts to compound for as long as possible.

The Conventional Withdrawal Order

The most widely taught withdrawal sequence in personal finance is as follows.

First draw from taxable brokerage accounts. Second draw from tax-deferred accounts such as traditional IRAs and 401ks. Third draw from tax-free accounts such as Roth IRAs and Roth 401ks.

The logic behind this sequence is straightforward. Taxable accounts are taxed on gains annually whether you withdraw or not — so drawing from them first does not accelerate any tax you were not already paying. Tax-deferred accounts grow without annual taxation but generate ordinary income on withdrawal — so they are accessed second once taxable accounts are depleted. Roth accounts are the most tax-efficient and benefit the most from continued compounding — so they are preserved for last.

This conventional sequence works reasonably well as a general framework. But for most retirees it is not the optimal approach.

The Smarter Sequence — Bracket Management

The conventional sequence treats each account type as a pool to be drained sequentially. The smarter approach treats your tax bracket as a resource to be managed deliberately every year.

Here is what that looks like in practice.

At the beginning of each calendar year calculate your projected taxable income from all sources — Social Security, pension, required minimum distributions, part-time work, and any other income you expect to receive.

Then identify your current tax bracket and how much space remains before you reach the next bracket threshold.

That remaining space is your annual bracket management budget — the amount you can withdraw from tax-deferred accounts or convert from traditional to Roth without crossing into a higher rate.

Use that space deliberately every year. Withdraw from traditional accounts up to the top of your current bracket. Convert additional traditional IRA funds to Roth up to the same threshold. Fill the bracket with income-generating withdrawals rather than letting required minimum distributions fill it involuntarily at a time and amount not of your choosing.

Draw any additional income needs beyond that threshold from Roth accounts or taxable brokerage accounts — both of which generate no additional ordinary income.

This approach keeps your taxable income in the lowest bracket possible in every year of retirement while simultaneously shrinking your tax-deferred account balance before required minimum distributions begin — which further reduces your future mandatory taxable income.

The Required Minimum Distribution Problem

Required minimum distributions are the most common reason retirees end up in a higher tax bracket than they expected.

Starting at age 73 the IRS requires you to withdraw a minimum amount from your traditional IRA and 401k accounts every year — calculated based on your account balance and your life expectancy from the IRS Uniform Lifetime Table. You pay ordinary income tax on every dollar of that withdrawal whether you need the money or not.

For retirees who spent decades maxing their 401k contributions the RMD amount can be substantial. A $1,500,000 traditional IRA balance at age 73 generates an RMD of approximately $56,000 in the first year — added to Social Security, pension income, and any other sources — potentially pushing the retiree into the 22 or 24 percent bracket against their will.

The solution is not to stop contributing to tax-deferred accounts during your working years. The solution is to reduce your tax-deferred balance deliberately before age 73 through Roth conversions — executed during the lower-income years between retirement and the start of RMDs.

This window — often called the Roth conversion sweet spot — typically runs from the year you retire to the year your Social Security and RMDs begin. During these years your taxable income is often lower than it was during your working years and lower than it will be once RMDs start. It is the most efficient time to convert and the window most retirees either miss or use too conservatively.

A Real Example of the Difference

Consider two retirees. Both are 70 years old, married filing jointly, with $1,200,000 in traditional IRA accounts and $400,000 in Roth accounts. Both receive $36,000 per year in Social Security benefits.

Retiree A follows the conventional sequence and draws only from their traditional IRA for living expenses — withdrawing $60,000 per year. They do no Roth conversions.

At age 73 their RMDs begin at approximately $48,000 per year — on top of their $60,000 withdrawal and their Social Security. Their total provisional income exceeds $100,000. Up to 85 percent of their Social Security becomes taxable. Their effective tax rate rises steadily through their 70s as their RMD amounts increase annually.

Retiree B spends ages 70 to 72 drawing living expenses from their taxable brokerage account and executing deliberate Roth conversions — converting $50,000 per year from traditional to Roth while staying within the 22 percent bracket. By age 73 their traditional IRA balance has decreased to approximately $950,000 — reducing their initial RMD to approximately $38,000.

Their lower RMD combined with strategic Roth withdrawals for additional expenses keeps their taxable income below the Social Security taxation threshold in most years. Their effective tax rate remains lower throughout retirement. Their Roth account continues compounding tax-free with no forced withdrawals.

Same starting balances. Same Social Security benefit. Completely different tax outcomes — produced entirely by sequencing.

The Action Step for This Week

If you are already retired: calculate your current projected taxable income for this year from all sources. Compare it to your current tax bracket ceiling. If you have bracket space remaining before December 31st — consider a partial Roth conversion to fill that space before the year ends.

If you are still working: identify the years between your planned retirement date and the start of your Social Security and RMDs. That window is your Roth conversion sweet spot. Begin planning now for how much you can convert each year during that period to reduce your future RMD burden.

The withdrawal sequence is not a decision you make once at retirement. It is a strategy you execute deliberately every single year — adjusted as your income, your bracket, and your account balances evolve.

The retirees who manage it well pay significantly less in taxes over the course of their retirement than the ones who simply draw from whichever account feels most convenient.

Talk soon,

Grant
The Compound View