Guides · Withdrawal order
Tax-efficient withdrawal order in retirement
Why withdrawal order matters
Retirees with $1M+ saved across multiple accounts often have flexibility on which account to draw from each year. The sequence affects:
- Annual tax bill — drawing from a pre-tax 401(k) creates ordinary income; drawing from a Roth IRA doesn't.
- Bracket management — drawing from pre-tax accounts can push you into higher brackets, reducing the value of itemized deductions and credits.
- IRMAA brackets (Medicare premiums) — high MAGI from pre-tax withdrawals triggers higher Part B and Part D premiums two years later.
- ACA subsidy eligibility — pre-tax withdrawals count as income, potentially disqualifying you from ACA premium tax credits.
- Required Minimum Distributions — once you're 73+, the IRS forces pre-tax withdrawals. The order matters because the size of the forced withdrawal affects your bracket.
A $1M retiree drawing $80,000/year who pulls from the wrong account can leave $20,000-$30,000/year on the table in unnecessary taxes. The math is significant.
The 4-bucket framework (US)
For US retirees with multiple accounts, the framework splits savings into four categories by tax treatment:
Bucket 1: Taxable accounts
Standard brokerage accounts. Investments held outside retirement accounts — index funds, individual stocks, ETFs. No contribution limits, but capital gains and dividends are taxable.
Sale of investments held more than one year triggers long-term capital gains tax (0/15/20%). Dividends are either qualified (taxed at LTCG rates) or ordinary (taxed at bracket rates).
Bucket 2: Tax-deferred accounts
Traditional 401(k), traditional IRA, SEP-IRA, SIMPLE IRA. Contributions were pre-tax (or pre-tax portion was deductible); growth is tax-deferred; withdrawals are ordinary income.
Subject to Required Minimum Distributions starting at age 73 (under SECURE Act 2.0; will rise to 75 in 2033).
Bucket 3: Tax-free accounts
Roth IRA, Roth 401(k), Roth 403(b), Roth TSP, HSA (used for qualified medical expenses; otherwise ordinary income on non-medical withdrawals before age 65). Contributions are post-tax; growth is tax-free; qualified withdrawals are tax-free.
Roth accounts have no RMDs during the owner's lifetime (a major planning advantage).
Bucket 4: Tax-deferred non-qualified annuities
Annuities purchased outside retirement accounts. Growth is tax-deferred; withdrawals are taxed at ordinary income rates (no capital gains treatment). Surrender charges, mortality and expense (M&E) fees, and complexity make these a niche tool.
Standard withdrawal order
The general framework, in order from "draw first" to "draw last":
- Required Minimum Distributions (if 73+) — these are mandatory; no planning choice.
- Taxable accounts — draw these first to avoid dragging the higher-bracket 401(k) into a higher bracket. Long-term capital gains rates (0/15/20%) are typically lower than ordinary income rates (10/12/22/24/32/35/37%).
- Tax-deferred accounts — once taxable accounts are exhausted, draw from 401(k) and traditional IRA. The trade-off: each withdrawal is ordinary income taxed at bracket rates.
- Tax-free accounts — last. Roth IRAs and Roth 401(k)s grow tax-free and have no RMDs. They're ideal for legacy planning and for covering high-expense years (medical, long-term care) where additional income would push you into higher IRMAA brackets.
The order is a starting point, not a rule. Specific factors — ACA subsidies, IRMAA, estate planning goals, charitable intentions, state tax — all modify the order.
Strategic Roth conversions
A Roth conversion moves money from a tax-deferred account (traditional IRA, 401(k)) to a Roth account. You pay ordinary income tax on the converted amount in the year of conversion; the money then grows tax-free.
The case for conversions in retirement:
- Fill lower brackets. If you're in the 12% bracket and would otherwise be in the 22% bracket later, convert enough to fill the 12% bracket each year.
- Avoid future RMDs. Roth IRAs have no RMDs. Converting before RMDs kick in (age 73) reduces the forced-withdrawal pressure later.
- Reduce future IRMAA. Lower RMDs = lower MAGI = lower Medicare Part B premiums.
- Estate planning. Roth IRAs pass to heirs income-tax-free (subject to a 10-year drawdown rule for non-spouse beneficiaries).
- You pay ordinary income tax on the conversion now rather than later. If the conversion is large enough to push you into a higher bracket, the conversion may not be worth it.
- The 5-year rule for Roth conversions: each conversion has its own 5-year clock for penalty-free withdrawal of principal. (The contribution can always be withdrawn penalty-free; the 5-year rule applies to the converted amount.)
- Born 1950 or earlier: age 72.
- Born 1951-1959: age 73.
- Born 1960 or later: age 75.
- Below 138% of Federal Poverty Level: Medicaid (in expansion states) or no subsidy.
- 138-400% FPL: subsidy scales with income.
- Above 400% FPL: subsidy capped at 8.5% of income for the benchmark plan (the "subsidy cliff" was changed by the IRA to extend subsidies above 400% FPL through 2025; OBBBA may have extended or modified this).
- ISA (Stocks & Shares / Cash / LISA) — tax-free growth and withdrawal. No contribution tax relief. Annual limit £20,000 across all ISAs (£4,000 in LISA).
- SIPP / workplace pension — tax relief on contributions (20% minimum via salary sacrifice or relief-at-source; higher-rate taxpayer can claim the rest via Self Assessment). Withdrawals taxed as ordinary income (except the 25% tax-free lump sum at age 55+).
- State pension — taxable as ordinary income but not subject to NI. State Pension age is currently 66 (rising to 67 by 2028, 68 by 2046).
- SIPPs and ISAs draw first, state pension last. The state pension is guaranteed for life; it's the foundation. SIPPs and ISAs are discretionary.
- SIPP first if higher-rate taxpayer. If you're at higher or additional rate, drawing from SIPP pushes you above the Personal Allowance and into the higher rate. Drawing from ISA doesn't.
- ISA first if higher-rate taxpayer — same logic in reverse. ISAs are tax-free; SIPP withdrawals are ordinary income. If you're at higher rate, draw ISA first.
- Pension tax-free lump sum — at age 55+, 25% of the SIPP can be taken tax-free. Many retirees take this lump sum first (or as part of an early retirement transition).
The case against:
Most retirees with traditional IRA balances above $500k benefit from some Roth conversions in their 60s, before RMDs begin. The optimal amount depends on bracket projections, ACA subsidy cliff, and estate goals.
Required Minimum Distributions (RMDs)
The IRS requires retirees to withdraw a minimum amount each year from tax-deferred retirement accounts (traditional IRA, 401(k), 403(b), TSP). The RMD age:
The RMD amount is calculated as:
(Prior year-end account balance) ÷ (IRS life expectancy factor for your age)
Example: $500,000 IRA balance at age 75, life expectancy factor 24.6. RMD = $500,000 / 24.6 = $20,325.
RMDs are taxed as ordinary income. Failing to take the RMD triggers a 25% excise tax on the shortfall (10% if corrected timely, under SECURE 2.0).
The 5-year Roth conversion rule interacts with RMDs: each conversion has its own 5-year clock, but the RMD itself must still be taken from the traditional IRA (not the Roth).
ACA subsidies and MAGI
Pre-65 retirees often buy health insurance through the ACA marketplace. Premium Tax Credits (subsidies) are based on Modified Adjusted Gross Income (MAGI). Higher MAGI = lower subsidy.
The MAGI cliff:
For pre-65 retirees, withdrawal strategy often prioritizes capital gains from taxable accounts (which don't count toward MAGI) over 401(k) withdrawals (which do). The subsidy difference can be $10,000-$20,000/year at higher income levels.
UK version: ISA, SIPP, state pension
The UK has a parallel structure with three main buckets:
UK withdrawal order considerations:
The UK annual allowance taper (above £260,000 adjusted income, tapering to £10,000) limits further pension contributions during retirement for high earners, but doesn't affect withdrawals.