Tax-Efficient Retirement Withdrawal Strategies: Which Accounts to Tap and When

You’ve spent your career building wealth, making smart investment decisions, and diligently building your retirement savings. Now that it’s time to enjoy the fruits of your labor, the question becomes:  

What’s the best way to withdraw from your accounts to stretch your money and minimize your tax burden?  Some will call this a “drawdown” strategy for retirement.  

The good news: A strategic retirement withdrawal plan can help you keep more of your money working for you—and reduce the risk of surprises come tax time, extending the life of your nest egg and ability achieve big goals you’ve set for yourself. 

At Plancorp, we help clients structure retirement income strategies that coordinate tax, investment, and estate planning in a way that supports long-term goals. In this article we’ll outline guiding principles for tackling the withdrawal phase of retirement planning through a tax-efficient lens. 

First, Know Your Account Types 

Before diving into withdrawal order, let’s get clear on the types of retirement accounts you might have: 

• Taxable Accounts – These include brokerage or investment accounts funded with after-tax dollars. You’ll pay taxes on interest, dividends, and capital gains. 

• Tax-Deferred Accounts – Think traditional IRAs and 401(k) accounts. Contributions are typically made pre-tax, and distributions are taxed as ordinary income. 

• Tax-Free Accounts – Roth accounts—both IRAs and 401(k)s—and health savings accounts (HSA) grow tax-free and provide tax-free withdrawals, assuming the rules are met. We won’t dive into the specifics of HSAs, but if you have one of these accounts and plan to use it in retirement for cash flow needs, check out this article for how to best utilize withdrawals. 

Understanding how each account is taxed helps us identify opportunities to withdraw funds in a way that minimizes your lifetime tax bill—not just what you owe this year. 

The Conventional Withdrawal Sequence: A Good Starting Point 

A common rule of thumb is to withdraw in this order: 

1. Taxable Accounts First 
2. Tax-Deferred Accounts Next 
3. Tax-Free Accounts Last 

Why this order? It allows tax-advantaged accounts to continue growing longer while using up taxable dollars that may be producing unwanted capital gains or dividends, especially if they’ve been growing for decades. 

While this order works well in theory, your unique financial picture may call for a more nuanced strategy, especially if you're navigating a high net worth, large required minimum distributions (RMDs), or legacy planning goals. A trusted financial advisor is key in these situations to set and evaluate an annual strategy. 

Why a Tax-Savvy Strategy Matters 

Taxes are often one of the biggest expenses in retirement—but they’re also one of the most controllable with careful planning. A smart withdrawal strategy considers your:

• Tax bracket now and in the future
• Timing and amount of RMDs 
• Social Security and Medicare impact 
• Legacy goals and charitable giving plans 

By being intentional about where you pull money from—and when—you can better control your taxable income in retirement, potentially lowering your lifetime tax burden. 

Smart Strategies for Withdrawing in Retirement 

1. Fill Up Lower Tax Brackets First

In early retirement (before RMDs or Social Security kick in), you may have unusually low taxable income compared to your working years. This creates a window to strategically withdraw from traditional IRAs or 401(k)s—up to the top of your current tax bracket—at a relatively low rate. 

This not only funds your living expenses but also reduces the balance in accounts that will be subject to RMDs later. 

2. Consider Roth Conversions

A Roth conversion involves moving funds from a traditional IRA to a Roth IRA and paying taxes now to enjoy tax-free growth going forward. You can also convert money in your 401(k) or 403(b) to a Roth account as well.

This can make sense when: 

• Your upcoming cash needs are covered by other sources 
• You’re in a temporarily low tax bracket 

• You want to reduce future RMDs 

• You plan to leave Roth assets to beneficiaries (who will benefit from tax-free growth) 

It’s a powerful strategy—but also one that needs careful coordination with your broader plan. 

3. Be Strategic About Capital Gains

Withdrawing from taxable accounts? You may be able to realize long-term capital gains at favorable rates —or even 0%—depending on your income during this unique time. This can be a great time to sell appreciated assets or rebalance your portfolio with minimal tax impact. 

For example: if you were bringing in a household income of $450,000 but retire at 60, you’ll have a large window of time where your recognized income could be “controlled” before social security or RMDs kick in, allowing you to withdraw from a taxable account with appreciated assets at a lower capital gains tax rate than while you were working or later in retirement. 

Here’s a breakdown of capital gains tax rates (as of 2025), based on overall taxable income, that can help you determine the right time to cash out:  

4. Watch for RMD Triggers

Once you hit age 73 (for those turning 73 in 2025 or later), you’ll be required to start taking distributions from tax-deferred accounts. These withdrawals are fully taxable and can bump you into a higher tax bracket. 

Planning ahead with partial withdrawals or Roth conversions can help manage this liability and prevent large jumps in taxable income later on. 

5. Don’t Forget About Medicare and IRMAA

Higher taxable income can increase your Medicare premiums through the Income-Related Monthly Adjustment Amount (IRMAA). This makes managing taxable income even more important if you want to avoid those surcharges. 

This may not seem like a big deal now if you aren't currently utilizing Medicare, but when that monthly paycheck from Social Security drops by a couple hundred dollars or more, it can certainly throw off the monthly budget that you've settled into in retirement. 

What Should Your Retirement Withdrawal Rate Be? 

Beyond where to withdraw from, an equally important question is: how much should you withdraw? 

One of the most well-known guidelines is the 4% rule, which suggests that retirees can safely withdraw 4% of their portfolio in the first year of retirement—then adjust that amount each year for inflation. 

In theory, this approach gives your money a high likelihood of lasting 30 years or more.  

Is the 4% Rule Right for You? 

Like many rules of thumb, the 4% rule is a helpful starting point—but not a one-size-fits-all answer. It’s based on historical market performance and assumes a balanced portfolio of stocks and bonds, no large, unexpected expenses, and a 30-year retirement horizon. 

In reality, your ideal withdrawal amount depends on a range of personal and economic factors, including:

Market Conditions at Retirement 

Retiring during market volatility can put extra stress on your portfolio. This is known as sequence of returns risk, and it can have a lasting impact on your long-term success if not managed properly.

Other Fixed Cash Flows 

A retiree with guaranteed income from pensions or rental properties may need to withdraw less than someone relying solely on investment assets.

Life Expectancy and Health 

Planning for longevity is critical, especially if you expect a retirement that could span 30+ years. Longer retirements may require more conservative withdrawal strategies. And don’t underestimate health expenses. Some reports say 10-13% of your lifetime healthcare expense will occur in your final year of life. 

Flexibility in Spending 

The more adaptable you are with discretionary expenses, the more resilient your plan can be. In tough market years, reducing withdrawals even slightly can help preserve your portfolio’s longevity.

Legacy and Gifting Goals 

If leaving assets to family or charity is a priority, you may aim to withdraw less than you technically could, preserving more for your heirs. You may also consider tax-advantaged charitable giving strategies that can also help lower your taxable income. 

Dynamic vs. Static Approaches 

Rather than sticking rigidly to a fixed withdrawal rate, many high-net-worth retirees benefit from dynamic withdrawal strategies—adjusting spending in response to portfolio performance, tax considerations, and evolving life goals. This might include: 

• Basing withdrawals on a percentage of your portfolio each year (rather than a fixed dollar amount) 
• Setting “guardrails” to increase or decrease spending based on market conditions 
• Using a “bucket strategy” to segment assets based on when you’ll need them (short-, mid-, and long-term) 
• Revisiting your financial plan at least yearly to see if spending adjustments needs to be made. This can help you make decisions based on your overall probability of financial success rather than emotion. 

A well-designed withdrawal strategy balances your income needs, market realities, and tax efficiency—while also giving you peace of mind. 

Case in Point: A Tale of Two Strategies 

Let’s take two hypothetical retirees: 

Susan, age 65, withdraws only from her taxable account for the first 10 years of retirement. By age 75, she’s forced to take large RMDs from a fully intact traditional IRA, pushing her into a higher tax bracket and triggering Medicare surcharges. 

Michael, also 65, draws modest amounts from his traditional IRA each year to fill up the 22% tax bracket and converts additional IRA dollars to a Roth. By the time RMDs start, his traditional IRA balance is significantly lower, reducing his taxes, preserving Roth assets for his beneficiaries, and maintaining his current Medicare costs. 

Michael’s strategy resulted in lower lifetime taxes and more flexibility. That’s the power of tax-aware planning. 

Final Thoughts: Plan with Intention 

Retirement planning and financial planning in general isn’t a static thing. Your plan evolves with you, and it’s important to reevaluate things like your drawdown strategy regularly. What may be optimal now could change based on markets, your saving rates, tax law, or other changes. 

Retirement income planning isn’t just about how much you’ve saved—it’s about how you use those savings. The right withdrawal strategy can extend the life of your portfolio, reduce your tax burden, and help you meet your personal goals with confidence.  

At Plancorp, we believe your retirement strategy should be as unique as your life. If you’re wondering how to draw from your accounts tax-efficiently, we’re here to help you make a plan that fits your financial picture today—and adapts as life changes tomorrow. 

If you’re ready for a custom financial strategy designed for you and your goals, our 2-minute plan analysis is a great place to start. It’s the first step toward wealth alignment and delivers instant results in four key areas of your financial plan.