Most retirees think about their retirement portfolio as a single pool of money. They think about how much they have, what it earns, and how much they can spend. What they rarely think about is the tax character of each account, how that character determines the cost of each withdrawal, and how the sequence of withdrawals across accounts over thirty years shapes the total tax burden on their retirement income.
Retirement accounts come in three tax flavors. Taxable brokerage accounts hold after-tax money where gains are taxed at capital gains rates when realized. Pre-tax accounts, traditional IRAs and 401(k) plans, hold money that was deducted at contribution and will be taxed as ordinary income when withdrawn. Roth accounts hold after-tax money that grows and can be withdrawn completely tax-free.
The order in which a retiree draws from these three buckets, the withdrawal sequence, has a compounding effect on lifetime taxes. Drawing from the wrong account in the wrong year can push income into higher brackets, trigger Medicare premium surcharges, increase the taxable portion of Social Security, or deplete tax-advantaged assets that would have continued to grow.
This paper explains the mechanics of withdrawal sequencing, the conventional wisdom and where it falls short, the research-backed approach to optimizing the sequence over a multi-decade retirement, and how the retirement calculator at plan.johnkoyle.com models this dynamic so you can see the tax implications of different strategies across your specific situation.
The retirement generation entering drawdown today is the first to have substantial assets across all three tax buckets simultaneously. Previous generations either had pensions, which provided simple taxable income, or had accumulated savings primarily in one type of account. The 401(k) generation accumulated in pre-tax accounts. Those who followed Roth IRA advice along the way, or who converted in recent years, now have a mix.
That mix is an asset. But only if it's managed thoughtfully. A retiree with $800,000 in a traditional IRA, $300,000 in a Roth IRA, and $200,000 in a taxable brokerage account has three very different levers to pull when they need income. How they pull those levers each year determines whether they stay in the 22% bracket or spill into the 24% or 32% bracket, whether they trigger IRMAA surcharges, and whether they leave their heirs a tax-efficient legacy or a tax bomb.
Taxable brokerage accounts hold after-tax contributions. When you sell an investment held longer than one year, you pay long-term capital gains tax, currently 0%, 15%, or 20% depending on income. You also pay tax annually on dividends and interest generated within the account. Losses can be harvested to offset gains. When you die holding assets in a taxable account, heirs receive a step-up in basis to the date-of-death value, which eliminates the embedded capital gains tax.
Pre-tax accounts, including traditional IRAs, rollover IRAs, SEP IRAs, and traditional 401(k) and 403(b) plans, hold contributions that were deducted from income when made. Every dollar withdrawn is treated as ordinary income and taxed at your current marginal rate. These accounts are also subject to required minimum distributions beginning at age 73.
Roth accounts, including Roth IRAs and Roth 401(k) accounts, hold after-tax contributions. Qualified distributions, generally after age 59.5 and after the account has been open at least five years, are completely tax-free. Roth IRAs have no required minimum distributions during the owner's lifetime. They are the most tax-efficient account from which to draw income, particularly in high-income years.
The conventional withdrawal sequence taught in most financial planning curricula is taxable first, then pre-tax, then Roth. The logic is straightforward: draw down the taxable account first because it has the least tax protection, then draw down pre-tax while preserving the Roth for last because it grows tax-free and has no RMD requirements.
This conventional approach is a reasonable starting point but a poor ending point. It ignores the bracket management opportunity. A retiree who draws exclusively from taxable accounts in early retirement, if their taxable income is low, may be leaving low-bracket pre-tax withdrawal capacity unused. They may even be leaving the 0% long-term capital gains bracket unused. Meanwhile, they're letting a large pre-tax balance grow and generate larger forced distributions later.
The optimized withdrawal sequence is not a fixed order but a dynamic strategy that fills brackets efficiently each year. In any given year, the goal is to draw income from the source that generates the lowest marginal tax cost while managing the trajectory of each account type over the full retirement horizon.
In practical terms, this often means drawing some income from taxable accounts for living expenses, voluntarily drawing or converting some pre-tax income to fill the current tax bracket up to the ceiling without crossing into the next tier, and reserving Roth for years when income from other sources is already high. Some years, the strategy deliberately crosses an IRMAA tier because the long-term tax benefit of a larger Roth conversion exceeds the short-term premium cost.
Withdrawal sequencing works best when asset location has been managed throughout the accumulation phase. Asset location is the practice of placing different types of investments in the account type that treats their returns most favorably. Tax-inefficient assets, those that generate frequent ordinary income like taxable bonds, REITs, or high-turnover funds, belong in pre-tax or Roth accounts where the income isn't taxed annually. Tax-efficient assets, long-term equity holdings that generate qualified dividends and long-term capital gains, belong in taxable accounts where the preferential rates apply.
A retiree who managed asset location during accumulation arrives at retirement with a more tax-efficient portfolio from which to sequence withdrawals. One who didn't faces higher annual tax drag regardless of the withdrawal sequence.
Vanguard's Advisor's Alpha framework quantifies the value of behavioral coaching, financial planning, and tax management for investors working with advisors. Their research on tax-efficient decumulation, including withdrawal sequencing, estimates that optimized withdrawal strategies can add 0.70% or more per year in after-tax returns relative to naive strategies. Compounded over a thirty-year retirement on a $1,500,000 portfolio, that difference is substantial.
Vanguard's analysis specifically highlights the value of Roth conversion during low-income years as one of the highest-value tax planning opportunities available to retirees, outperforming many other tax strategies in expected dollar impact.
Morningstar's retirement research team has modeled the after-tax impact of different withdrawal sequences across a range of portfolio sizes and income levels. Their work consistently shows that the tax cost of suboptimal sequencing, most commonly drawing from Roth accounts too early or failing to use low-income years for pre-tax drawdown, can reduce after-tax wealth by 5 to 15% over a thirty-year retirement.
Their research also shows that the benefit of optimized sequencing is highest for retirees with substantial assets across all three account types. Retirees with only one account type don't have sequencing decisions to make. Those with a rich mix of taxable, pre-tax, and Roth have the most to gain.
Michael Kitces's research on dynamic withdrawal strategies extends beyond the question of which account to draw from to the question of how much to draw. His work on the guardrails approach, developed in conjunction with research by Jonathan Guyton, shows that retirees who adjust their withdrawal rate based on portfolio performance, reducing in down years and increasing in good years, achieve better long-term outcomes than those who adhere rigidly to a fixed dollar amount regardless of market conditions.
This dynamic approach interacts with sequencing because the account drawn from in a down market matters. Drawing from Roth in a bad market year avoids selling depressed pre-tax or taxable assets. Drawing from a cash buffer in a bad market year avoids selling anything. The sequencing strategy and the withdrawal rate strategy work best when coordinated.
The most common and most costly withdrawal mistake is taking equal proportional withdrawals from all accounts simultaneously, commonly called a pro-rata approach. This approach ignores the tax character of each account and consistently delivers worse after-tax outcomes than any thoughtful sequencing strategy. It's the default because it's simple, not because it works.
A retiree who begins retirement with low taxable income and immediately draws from Roth to cover expenses is using their most tax-efficient asset in years when they don't need the tax efficiency. Early retirement, before Social Security and before RMDs, is often the best opportunity to draw down pre-tax accounts at low rates or convert them to Roth. The Roth should generally be preserved for later years when income from other sources pushes brackets higher.
For married couples filing jointly, the 0% long-term capital gains bracket applies to taxable income up to approximately $94,000 in 2024. A retiree with income below this threshold can realize long-term capital gains in their taxable account entirely tax-free. This is a powerful harvesting opportunity that disappears when income rises. Deliberately realizing gains in low-income years, while staying within the 0% bracket, resets the cost basis of taxable holdings without triggering tax.
Social Security income is partially taxable, with the taxable percentage increasing as combined income rises. Drawing from pre-tax accounts in a year when Social Security is also taxable can trigger a higher effective marginal rate than the stated bracket suggests because each additional dollar of withdrawal makes more Social Security taxable. The effective marginal rate can be significantly higher in the Social Security phase-in range. Sequencing decisions need to account for this interaction, not just the stated bracket.
The optimal withdrawal sequence changes every year as account balances shift, tax laws change, IRMAA thresholds adjust, and income from other sources evolves. A sequencing plan built at age 65 and executed unchanged to age 90 will be wrong for most of the years it covers. Withdrawal sequencing requires annual review and recalibration, not a set-and-forget approach.
A disciplined withdrawal sequencing strategy starts with an annual income planning exercise. At the beginning of each year, or working with your advisor each fall for the following year, the process identifies your projected income from fixed sources, Social Security, pension, required minimum distributions, and any other guaranteed streams. That fixed income is your floor.
The gap between your floor and your spending need is the flexible withdrawal. The sequencing decision is how to fill that gap in the most tax-efficient way. In a low-income year, filling the gap from pre-tax distributions or Roth conversions may be optimal. In a high-income year, filling the gap from Roth or the taxable account avoids further bracket spillover.
The clearest practical role for the Roth account in a sequencing strategy is as a pressure valve for high-income years. When RMDs, Social Security, pension, and other sources of income are already pushing income near a bracket ceiling or IRMAA threshold, Roth distributions allow you to meet living expenses without adding to taxable income. This functionality is worth preserving, which means not depleting the Roth account prematurely in low-income years when pre-tax sources can serve the same purpose at lower cost.
The retirement calculator at plan.johnkoyle.com illustrates the withdrawal strategy comparison directly. The Withdrawal Strategy tab shows your current account mix and the tax implications of drawing from each source, comparing a pro-rata approach against an optimized sequencing strategy. Enter your account balances and your income sources, and the calculator shows you the lifetime tax difference and the projected after-tax income at each age.
The answer should be specific to your situation, not generic. It should reference your particular mix of taxable, pre-tax, and Roth balances, your income from other sources, and your bracket situation. A generic answer of 'taxable first, then pre-tax, then Roth' suggests the advisor hasn't analyzed your specific circumstances.
This question surfaces the Social Security phase-in interaction. The effective marginal rate on pre-tax withdrawals in the phase-in range is often meaningfully higher than the stated bracket rate.
If your taxable income is below the threshold in early retirement, strategic capital gains harvesting in your taxable account may be available. This opportunity disappears as income rises and shouldn't be overlooked.
The sequencing strategy in the RMD years is different from the pre-RMD years because a portion of pre-tax income is now forced rather than optional. Your advisor should be able to describe how the strategy evolves at 73 and beyond.
Putting a dollar figure on the value of the optimization grounds the discussion in real stakes. If the advisor can't estimate this, they haven't modeled the comparison.
The retirement planning calculator at plan.johnkoyle.com was built to model exactly the dynamics discussed in this paper. The Withdrawal Strategy tab in the retirement calculator at plan.johnkoyle.com shows your current account composition across pre-tax, Roth, and taxable accounts. It illustrates the projected lifetime tax difference between a pro-rata withdrawal approach and an optimized sequencing strategy that draws from each account type based on your annual income situation. Enter your three account balances, your income sources, and your planned spending, and the calculator shows you the income composition and tax implications at each age through the retirement horizon.
John Koyle, AIF®, is the Co-Founder of Red Cedar Wealth Advisors, headquartered in Pocatello, Idaho. He holds the Accredited Investment Fiduciary (AIF®) designation, awarded by the Center for Fiduciary Studies (Fi360), which signifies completed coursework, a rigorous examination, and ongoing continuing education in fiduciary responsibility and prudent investment practices.
John serves individuals and families in or approaching retirement throughout eastern Idaho, the Pacific Northwest, and across the country via Zoom. Clients work directly with John, not a junior team. Red Cedar Wealth Advisors operates under Osaic Wealth, Inc. (Member FINRA/SIPC) and Osaic Advisory Services, LLC for investment advisory services.
Every client relationship is built on five integrated disciplines. The proportions shift with the client and the moment. The integration is constant. Most of the actual value sits in how these disciplines connect, not in any single one of them.
Retirement planning is a discipline that barely existed a generation ago. For most of modern history, people worked until they physically couldn't and then they died, usually fairly close together. The idea that an individual should spend decades saving, then spend decades drawing down those savings, with a plan that accounts for inflation, taxation, sequence risk, healthcare, longevity, and estate transfer, that's maybe forty years old.
Which means almost nobody your age grew up watching their parents do it properly. There's no cultural muscle memory. The advice industry backfilled that gap with rules of thumb that work sometimes and fail catastrophically the rest of the time. The 4% rule. 'You can take Social Security at 62.' 'Target-date funds will handle it.' These are not bad starting points. They are terrible ending points. Real planning is specific, personal, and built on principles that hold up across the full range of outcomes, not just the average one.
The tax code is a set of instructions Congress wrote to shape behavior. Aligning your financial life with those instructions is not aggressive planning. It is the planning. Roth conversion sequencing, capital gains compression on concentrated positions, charitable remainder trusts, Social Security timing, beneficiary coordination. None of these are obscure. They're all legitimate, all written into the code intentionally, and all under-used. Most CPAs handle compliance. The strategy work is a different discipline entirely.
Seventy percent of family wealth doesn't survive two generations. The reason isn't bad markets. The cause is failure to communicate, outdated documents, and no plan for preparing heirs. Beneficiary designations regularly override well-crafted wills. Trust structures created a decade ago no longer match current law or current family. The portfolio that built the wealth isn't the structure that transfers it. The work here is coordinating with your attorney to align documents, beneficiaries, gifting strategies, and trust funding with what you actually want to happen.
Every week, before any portfolio decision, John runs through four layers of market health: economic conditions, market internals, valuations, and sentiment. Each layer gets scored and those scores combine into a composite that maps directly to a portfolio posture, from aggressive on the positive end to defensive on the negative. The work is in the scoring. Once the scoring is done, the positioning follows. That removes one of the most dangerous things in investing: making it up as you go.
The protection gap quietly kills more plans than markets do. A significant net worth paired with inadequate liability coverage is a lawsuit away from a serious problem. Long-term care is more acute: a multi-year care event for one spouse can consume what was meant for the survivor. Most advisors relegate risk to a footnote because insurance conversations are uncomfortable. The math doesn't care. Coverage adequacy, umbrella sizing, long-term care planning, and life insurance structure sit alongside the portfolio in any complete plan.
These are the principles behind every plan John builds.
To begin a conversation, visit johnkoyle.com, use the retirement planning calculator at plan.johnkoyle.com, or reach John directly at john@redcedarwealth.com or (208) 915-8400. Initial consultations are complimentary and carry no obligation.