The three account types and how they are taxed
Most retirees hold assets across three types of accounts, each with different tax treatment on withdrawal. The proportion held in each type, and the order in which they are drawn from, determines the tax trajectory across the full retirement period.
| Account type | Examples | Tax on withdrawal |
|---|---|---|
| Taxable brokerage | Individual or joint investment account | Capital gains rates on growth; ordinary income on dividends |
| Tax-deferred (pre-tax) | Traditional IRA, 401(k), 403(b) | Ordinary income tax on full withdrawal amount |
| Tax-free (Roth) | Roth IRA, Roth 401(k) | No tax on qualified withdrawals; no RMDs during owner's lifetime |
The conventional sequence — and its limitations
The standard guidance is to draw from taxable accounts first, then tax-deferred accounts, then Roth accounts last. The logic is that tax-advantaged accounts continue to grow while taxable assets are spent first.
This sequence is a reasonable default but it is not optimal in most situations. Drawing entirely from taxable accounts in early retirement leaves pre-tax balances growing — which increases future required minimum distributions. By the time RMDs begin at age 73, the forced distributions may be larger than needed, pushing taxable income into higher brackets and affecting Medicare premium calculations.
The goal of withdrawal sequencing is not to defer taxes as long as possible. It is to pay tax at the lowest rates available across the full retirement period — which often means drawing from multiple account types each year rather than exhausting one before moving to the next.
Managing taxable income each year
A more effective approach treats each year's taxable income as a variable to manage rather than a consequence to accept. The question each year is: what combination of withdrawals from different account types produces the income needed while keeping taxable income within a favorable range?
In practice this often means drawing some income from pre-tax accounts to fill lower tax brackets, supplementing with Roth withdrawals to cover remaining income needs without additional tax, and being deliberate about capital gain recognition in taxable accounts when rates are favorable.
This approach also creates space for Roth conversions in years when taxable income is lower — a decision that interacts directly with the withdrawal sequence.
How RMDs change the picture
Required minimum distributions begin at age 73 and impose a minimum amount of pre-tax income each year, calculated as a percentage of account balances. Once RMDs begin, the withdrawal sequence has less flexibility — a base level of taxable income is unavoidable regardless of how much income is actually needed.
Retirees who enter the RMD period with large pre-tax balances — because they drew entirely from taxable accounts in early retirement — often find that RMDs alone push taxable income into ranges that affect Medicare IRMAA surcharges and Social Security taxation. The withdrawal sequencing decisions made in the first decade of retirement directly affect this outcome.
Connecting sequencing to the broader plan
Withdrawal sequencing does not operate independently of other retirement decisions. Social Security claiming age affects when that income begins and how much it adds to the taxable base. Roth conversions in early retirement reduce future RMD obligations. Medicare premium thresholds set a ceiling on how much income can be drawn from pre-tax accounts in a given year without triggering additional costs.
A coordinated retirement plan addresses these interactions together — modeling the withdrawal sequence alongside the full income picture each year rather than treating it as a separate decision.