Withdrawal Sequencing in Retirement: A Tax Smart Framework to Make Your Money Last

dperrotto
Feb 12
9 min read

A lot of retirees do “retirement income” the same way they do home repairs. Something breaks, so they grab the nearest tool and hope it holds.

Need cash? Pull from the IRA. Tax bill feels high? Pull from the brokerage instead. Market drops? Freeze and do nothing, then panic later.

The problem is not effort. The problem is order.

Not all money is taxed the same way. Not all withdrawals create the same ripple effects. And the sequence you use can change how long your savings lasts, how predictable your taxes feel, and how many unpleasant surprises show up after you thought retirement would be simple.

Charles Schwab says it clearly:

“Not all investments are subject to the same tax treatment.”

This article gives you a client-facing, plain English framework for withdrawal sequencing in retirement. You’ll learn:

The three “tax buckets” and why sequencing matters
A practical order of operations that works for most households
How RMDs, Social Security, and Medicare change the plan
The traps that create surprise tax spikes
A simple process you can repeat every year

If you want the bigger picture of how we connect this to planning, taxes, and ongoing stewardship, start with How We Work. If retirement tax planning is your main concern, see Strategic Tax Optimization.

What “withdrawal sequencing” actually means

Withdrawal sequencing is simply:

The order in which you pull money from different accounts in retirement.

You might have money in:

a checking or savings account
a taxable brokerage account
a traditional IRA or 401(k)
a Roth IRA or Roth 401(k)
a pension
Social Security
an annuity

Sequencing answers questions like:

Do we sell from the brokerage first or the IRA first
When do we use Roth money
What do we do about required minimum distributions
How do we avoid jumping into higher tax brackets
How do we keep Medicare premiums from rising unnecessarily

This is not about finding the one “perfect” sequence. It’s about building a system that is:

tax aware
repeatable
adaptable when life and markets change

The Clarity Sweep: the three tax buckets

Most retirement accounts fall into one of three buckets:

1) Taxable (brokerage)

You pay taxes as you go.

Interest, dividends, and capital gains may be taxed.
When you sell an investment for a gain, you may owe capital gains tax.

2) Tax deferred (traditional IRA, 401(k), 403(b))

You generally get a tax benefit upfront.

Money grows without taxes each year.
Withdrawals are generally taxed as ordinary income.

3) Tax-free (Roth)

You pay taxes upfront.

Qualified withdrawals can be tax-free.
Roth accounts can add flexibility later because withdrawals may not increase taxable income the same way.

The sequencing goal is not “avoid taxes.” Taxes exist. The goal is to avoid unforced errors, like:

creating a big tax spike one year
triggering Medicare premium surcharges by accident
paying high ordinary income tax when you had lower-taxed options available
leaving yourself with only one bucket later (usually the worst one)

The So What Sweep: why sequencing changes outcomes

If you withdraw without a plan, two common things happen:

1) You pay more taxes than you need to, in the wrong years

You might not pay more taxes every year. You pay them in big clumps. Those clumps cause:

bracket jumps
surcharges
phaseouts
stress

2) You reduce your flexibility later

You might drain the taxable account early because it “feels easiest,” then later you’re stuck living off IRA withdrawals that create higher taxable income when you have less room to maneuver.

Sequencing is about keeping your options open.

The practical withdrawal sequencing framework

There are lots of opinions about “the best order.” Here’s the reality:

The best order depends on taxes, account types, income sources, and your goals.

But for most households, a strong starting framework looks like this:

Cover basic spending with reliable sources first
Satisfy RMD rules if they apply
Use taxable assets intentionally (manage gains, use losses)
Use tax-deferred withdrawals to “fill” planned tax brackets
Use Roth strategically (often last, but not always)

That’s the framework. Now let’s make it concrete.

Step 1: Start with a guaranteed or reliable income

Before you decide which account to sell, list your stable income sources:

Social Security
pension
annuity payments (if you have them)
rental income
consistent interest or dividend income (if you rely on it)

Then compare that to your spending needs.

This gives you the “gap” your portfolio must fund each year.

Example:

Spending need: $90,000
Social Security: $45,000
Pension: $15,000
Gap: $30,000

Now you can decide how to fill the $30,000 on purpose.

Step 2: If RMDs apply, handle them correctly

If you are subject to required minimum distributions (RMDs), they are not optional. The penalty structure for missing an RMD is ugly, and the fix is annoying.

RMDs typically apply to tax-deferred retirement accounts once you reach the required age (the exact age depends on your birth year and current law). The important part here is not the age. The important part is the sequencing rule:

If you have an RMD, it needs to be part of your withdrawal plan early, not a December surprise.

Practical approach:

Calculate the RMD early in the year
Decide whether to withhold taxes at the RMD level
If you do not need the RMD for spending, plan where it goes (taxable account, cash reserve, reinvestment plan)

This alone can prevent a lot of “why is my tax bill so high” moments

Step 3: Use taxable accounts with intent

Taxable accounts are often the most flexible bucket. They also create the most opportunities to manage taxes.

Here’s how to think about it in plain English:

Taxable sales have two parts

The cash you receive (what hits your bank)
The taxable gain (what shows up on your return)

If you sell $50,000 in a taxable account, you do not automatically owe taxes on $50,000. You owe taxes on the gain.

That means taxable accounts can be very tax-efficient if:

Your gains are modest
You have losses available
You sell lots with a higher cost basis
You are in a lower capital gains bracket

Practical tactics that often help:

Harvest losses when appropriate (sell losers to offset gains)
Sell long-term holdings (often taxed at lower rates than short-term)
Avoid creating a huge gain in one year unless there’s a reason

If you want to see how this fits into broader coordination, this is squarely in our Private Banking lens.

Step 4: Use tax-deferred withdrawals to fill brackets, not spike them

Tax-deferred withdrawals (traditional IRA/401k) are usually taxed as ordinary income.

That means they can be “expensive” from a tax standpoint, but they’re also predictable. You can plan them.

A clean approach:

The bracket fill method

Decide on a target tax bracket
Withdraw enough from tax-deferred accounts to fill that bracket
Stop before you jump into the next bracket unless you choose to

This is the same logic you saw in the Roth conversions post. It’s strategic tax optimization applied to retirement income.

It also helps control:

future RMD pressure
future tax spikes
surprise bracket jumps

See Strategic Tax Optimization.

Step 5: Use Roth money strategically

Roth accounts are often best used later because:

They can potentially grow tax-free longer
Qualified withdrawals may not increase taxable income the same way
Roth assets can be useful as a “pressure release valve” in high tax years

But “Roth last” is not always right.

Good reasons to use Roth earlier include:

You’re trying to stay under a Medicare IRMAA threshold
You’re trying to reduce the taxation of Social Security benefits
You have a one-time expense in a year where ordinary income is already high
You want to avoid pushing yourself into a higher bracket

Think of Roth as: the account you use when you need cash but don’t want to create taxable income.

The Prove It Sweep: two example households

Example A: The retiree with modest taxable savings and large IRAs

They have most of their wealth in tax-deferred accounts.
Future RMDs could be large.
The risk is future bracket spikes.

A strong strategy often includes:

planned IRA withdrawals before RMD age (bracket fill)
partial Roth conversions in window years (if appropriate)
using taxable account withdrawals as needed, but not draining it too early

Goal: smooth taxes across years and reduce future forced income.

Example B: The retiree with a large taxable account and moderate IRAs

They have lots of flexibility in taxable.
They can manage gains and timing.

A strong strategy often includes:

using taxable assets early to fund spending, while managing gains
still pulling some IRA money to fill lower brackets (don’t wait too long)
saving Roth for “high tax years” or later flexibility

Goal: keep options across all three buckets.

Same framework. Different emphasis.

The biggest retirement sequencing traps

These are the mistakes that create “retirement tax whiplash.”

Trap 1: Ignoring the Social Security tax interaction

Social Security taxation depends on your overall income picture. Portfolio withdrawals can increase how much of your Social Security becomes taxable.

That doesn’t mean “don’t withdraw.” It means you should plan withdrawal amounts and account types carefully, especially after Social Security starts.

Trap 2: Accidentally triggering Medicare IRMAA

Medicare premiums can increase when income crosses certain thresholds. Big IRA withdrawals or big Roth conversions can trigger this.

The fix is usually sizing and planning, not avoiding withdrawals forever.

Trap 3: Waiting too long to touch IRAs

Some people drain taxable accounts for years because it “feels better,” then they hit the RMD phase with huge tax-deferred balances and limited options.

This is where bracket fill withdrawals (and sometimes Roth conversions) can help in the earlier years.

Trap 4: Withholding and estimated taxes are handled poorly

Retirees often forget that withholding and estimated payments still matter. A tax bill in April is not “bad luck.” It’s usually planning.

Trap 5: Treating retirement as one long flat tax year

Retirement is a series of different tax phases:

early retirement
Medicare start
Social Security starts
RMD phase
survivor phase (often higher taxes for the remaining spouse)

Sequencing should evolve across these phases.

The Specificity Sweep: the questions that build your exact withdrawal strategy

If you answer these, sequencing becomes much clearer:

What are your annual spending needs
What stable income sources do you have (and when do they start)
What is your taxable, tax-deferred, and Roth mix
Are RMDs already required, or when do they begin
Do you have large embedded gains in taxable accounts
Are you near Medicare IRMAA thresholds
Are you already taking Social Security
Do you have a large one-time expense coming
Are you trying to leave assets to heirs, and which bucket will be inherited

This is why we treat retirement income planning as part of Wealth Stewardship.

A simple annual process you can repeat

This is the “no drama” process that works for most households.

Step 1: Map the year

expected spending
expected stable income
gap to be funded

Step 2: Confirm RMD requirements

calculate
decide withholding
decide where the RMD cash goes

Step 3: Choose a target tax bracket range

decide what bracket you want to stay within
plan IRA withdrawals (or conversions) to fill that bracket intentionally

Step 4: Use taxable sales to fund the remaining gap

manage gains
Use loss harvesting if available
avoid big accidental capital gains

Step 5: Use Roth as the pressure relief valve

plug holes without creating income spikes
protect thresholds when needed

Step 6: Review midyear and in Q4

Income surprises happen
markets move
one good adjustment often saves you from a mess

That’s the system. You repeat it, and retirement gets calmer.

The Heightened Emotion Sweep: what a good sequence feels like

A good withdrawal sequence does three things that people actually care about:

Fewer surprises. Tax bills stop feeling random.
More control. You can choose where money comes from instead of reacting.
More confidence in spending. You can spend from your plan without feeling like every withdrawal is a mistake.

That’s the real win.

The Zero Risk Sweep: what this does (and does not) promise

This framework aims to:

Reduce avoidable tax spikes
improve flexibility across retirement phases
Help savings last longer by avoiding unforced errors

It does not:

guarantee lower taxes
eliminate market risk
guarantee Medicare premium outcomes
Replace personalized tax planning

Retirement planning is a moving system. The goal is to make it manageable.

Next steps checklist

If you want to tighten your retirement withdrawal strategy, start here:

List your spending needs and stable income sources
Calculate the gap your portfolio must fund
Map your three buckets (taxable, tax-deferred, Roth)
If RMDs apply, handle them early and decide on withholding
Choose a target tax bracket range and plan withdrawals to fill it
Use taxable sales intentionally (manage gains, sell long-term lots where possible)
Use Roth strategically to avoid income spikes when needed
Review midyear and again in Q4

If you want help coordinating sequencing with taxes, account structure, and ongoing planning, start here:

Closing thought

Withdrawal sequencing is not about finding one perfect order and never changing it. It’s about building a system that adapts as your retirement phases change.

If you want a clear withdrawal plan that connects your accounts, taxes, and income needs, schedule a private intro.