As clients transition from accumulating wealth to living off it, one of the most common questions we hear is:
“Where should I take money from first?”
For many retirees, assets are spread across different account types—after-tax brokerage accounts, traditional IRAs, and Roth IRAs. Each account is taxed differently. The order in which you draw from them can significantly impact your lifetime tax bill, portfolio longevity, Medicare premiums, and even what you leave to heirs.
There is no one-size-fits-all answer. But understanding how each account works—and how withdrawals are taxed—can help create a more tax-efficient strategy.
Let’s walk through the major account types and the strategic considerations for each.
1. After-Tax (Brokerage) Accounts
After-tax accounts are funded with money that has already been taxed. These accounts typically hold investments such as mutual funds, ETFs, and individual stocks.
How withdrawals are taxed:
- You are only taxed on the gain, not the full withdrawal.
- Gains held longer than one year are taxed at long-term capital gains rates (0%, 15%, or 20%, depending on income).
- Portions of withdrawals may represent cost basis (your original investment), which is not taxed.
This creates flexibility.
If a retiree is in a lower tax bracket, they may even qualify for the 0% long-term capital gains rate, meaning they can sell appreciated assets without paying federal capital gains tax.
Why many retirees start here:
- Lower tax rates compared to ordinary income.
- Flexibility in managing taxable income.
- No required minimum distributions (RMDs).
- Capital gains treatment is generally more favorable than IRA distributions.
Another benefit is tax-loss harvesting opportunities. In years where markets are down, selling positions at a loss can offset other gains and reduce taxes further.
For many retirees, the after-tax account becomes a “tax management tool” early in retirement.
2. Traditional IRA (and Pre-Tax 401(k))
Traditional IRAs and pre-tax 401(k)s were funded with pre-tax dollars. The tax deduction helped during working years—but taxes are deferred, not eliminated.
How withdrawals are taxed:
- Every dollar withdrawn is taxed as ordinary income.
- Withdrawals increase adjusted gross income (AGI).
- Higher AGI can affect Medicare premiums, Social Security taxation, and eligibility for certain deductions or credits.
- Required Minimum Distributions (RMDs) begin at age 73 (under current law).
Because distributions are taxed at ordinary income rates—which may be higher than capital gains rates—many retirees hesitate to withdraw from these accounts early.
However, avoiding them completely can create problems later.
If retirees delay withdrawals too long, RMDs may force large distributions in their 70s, potentially pushing them into higher tax brackets.
Strategic considerations:
- Filling up lower tax brackets early in retirement.
- Coordinating withdrawals before Social Security begins.
- Using partial Roth conversions in low-income years.
- Managing future RMD exposure.
Sometimes the best strategy is not avoiding traditional IRA withdrawals—but intentionally managing them over time.
3. Roth IRA
Roth IRAs are funded with after-tax dollars. The key advantage: qualified withdrawals are tax-free.
How withdrawals are taxed:
- Contributions can always be withdrawn tax-free.
- Earnings are tax-free if the account has been open at least five years and the owner is over age 59½.
- No RMDs during the original owner’s lifetime.
Because of their tax-free nature, Roth IRAs are extremely valuable—especially later in retirement when tax rates or RMDs may rise.
Many financial planners view Roth assets as the most flexible and valuable “bucket.”
Why retirees often preserve Roth accounts:
- Tax-free growth continues.
- No required distributions.
- Ideal for late retirement spending.
- Highly efficient for estate planning.
Using Roth assets too early can eliminate a powerful long-term tax planning tool.
That said, there are situations where drawing from Roth assets makes sense:
- Avoiding higher Medicare premium thresholds.
- Preventing a jump into a higher tax bracket.
- Managing taxable income in high-income years.
Again, strategy matters.
So, What’s the “Right” Order?
A traditional rule of thumb has been:
- After-tax accounts
- Traditional IRA
- Roth IRA
But real-world planning is rarely that simple.
Instead of rigid sequencing, the better approach is tax bracket management.
A Smarter Approach: Tax Bracket Filling
Early retirement often creates a temporary “tax valley.”
Income may drop after leaving work.
Social Security may not have started.
RMDs are still years away.
This window can allow retirees to:
- Withdraw from traditional IRAs at lower tax rates.
- Convert IRA assets to Roth strategically.
- Realize capital gains at favorable rates.
Rather than draining one account completely before touching another, retirees can blend withdrawals each year to stay within a desired tax bracket.
For example:
- Take enough IRA income to fill the 12% bracket.
- Harvest capital gains up to the 0% capital gains threshold.
- Leave Roth assets untouched for later.
This coordinated approach often reduces lifetime taxes more effectively than strict sequencing.
Other Factors That Matter
Choosing which account to pull from isn’t just about tax rates today. It also affects:
Social Security Taxation
Higher income can cause up to 85% of Social Security benefits to become taxable.
Medicare Premiums (IRMAA)
Crossing certain income thresholds increases Medicare Part B and Part D premiums.
Estate Planning
Traditional IRAs passed to heirs may create tax burdens for them. Roth IRAs are generally more tax-efficient for beneficiaries.
Market Conditions
In a down market, selling from a depressed account may not be ideal. Asset location and rebalancing also play a role.
Bringing It All Together: A Coordinated Strategy Matters
Deciding where to take retirement income from isn’t just a tax decision. It’s a coordination decision.
Each account type—after-tax, traditional IRA, and Roth IRA—serves a different purpose. Used thoughtfully, they can work together to create flexibility, reduce lifetime taxes, and help protect your long-term financial security.
At DWM, we often describe our philosophy as a three-stool approach to retirement planning:
- Investment Strategy – Building and managing portfolios designed to support long-term income needs.
- Tax Strategy – Coordinating withdrawals, managing tax brackets, and positioning assets in the most efficient way possible.
- Comprehensive Financial Planning – Aligning income decisions with Social Security timing, Medicare planning, estate considerations, and legacy goals.
If one of those legs is ignored, the stool becomes unstable.
Too often, retirement income decisions are made in isolation—pulling from whichever account feels convenient at the moment. But without coordination, that convenience can turn into higher taxes, increased Medicare premiums, or missed planning opportunities down the road.
Our role at DWM is to help clients look beyond “what account do I use this year?” and instead answer the more important question:
“What strategy gives me the most after-tax income over my lifetime?”
That means running projections.
That means managing tax brackets intentionally.
That means adjusting as tax laws change and markets evolve.
Retirement isn’t just about drawing income. It’s about drawing income intelligently.
If you’re approaching retirement—or already there—and wondering whether your withdrawal strategy is optimized, we’d welcome the opportunity to help you work through the puzzle.
Because keeping more of what you’ve built doesn’t happen by accident.
It happens by design.
Editor’s note: If you need help solving your retirement income puzzle, give us a call. At DWM, we specialize in turning complexity into clarity.