How you withdraw money in retirement matters almost as much as how much you have. Withdrawing from the wrong accounts in the wrong order can cost you thousands in unnecessary taxes every year — and over a 25-30 year retirement, those mistakes compound dramatically.
The Three Account Types and Their Tax Treatment
| Account Type | Examples | Tax Treatment on Withdrawal |
|---|---|---|
| Taxable accounts | Brokerage, bank accounts | Capital gains tax on gains (0/15/20%); dividends taxed as earned |
| Tax-deferred | Traditional IRA, 401(k), 403(b), SEP IRA | Ordinary income tax on full withdrawal |
| Tax-free | Roth IRA, Roth 401(k) | Tax-free (after age 59½ and 5-year rule) |
The Standard Withdrawal Order
Step 1: Take all Required Minimum Distributions (non-negotiable — penalty if skipped)
Step 2: Cover remaining expenses from taxable accounts (favorable capital gains rates)
Step 3: Cover remaining needs from traditional IRA/401(k)
Step 4: Use Roth IRA last (tax-free growth; no RMDs; valuable to preserve)
| Account | After-Tax Cost of $1 | Why in This Order |
|---|---|---|
| Taxable (0% LTCG bracket) | $1.00 | Tax-free for many low-income retirees |
| Taxable (15% LTCG bracket) | $0.85 | Preferential rate; basis partially returned |
| Traditional IRA (22% bracket) | $0.78 | Ordinary income; higher cost |
| Roth IRA | $1.00 | Tax-free; preserve as long as possible |
When to Deviate: Bracket Management
The standard order is a starting point. Sophisticated planning often involves deviating for bracket management:
Fill Low Brackets With Traditional IRA Withdrawals
| Situation | Action |
|---|---|
| You’re in the 12% bracket with significant traditional IRA funds | Draw extra from traditional IRA to fill 12% bracket — cheap taxes now vs. more expensive later |
| You’ll be in a higher bracket at 73 due to RMDs | Withdraw from traditional IRA now at lower rate |
| Portfolio is 90% traditional IRA with minimal Roth | Accelerate traditional IRA spending early to balance account types |
Fill Low Brackets With Roth Conversions
Converting traditional IRA to Roth in low-bracket years accomplishes the same goal as drawing from traditional IRA — with the difference that converted funds stay in the tax-free Roth vs. being spent. See Roth Conversion in Retirement for full detail.
Capital Gains Tax Rates: A Key Advantage of Taxable Accounts
Long-term capital gains rates (for assets held >1 year) are much lower than ordinary income rates:
| 2026 Taxable Income (MFJ) | Ordinary Income Rate | LTCG Rate |
|---|---|---|
| Up to $96,950 | 10-12% | 0% |
| $96,951-$583,750 | 22-35% | 15% |
| Over $583,750 | 37% | 20% |
Key: Many retirees with modest income qualify for the 0% LTCG rate. A couple with $80,000 total income (including $10,000 in long-term capital gains) pays 0% on those gains.
Tax Gain Harvesting
If you’re in the 0% LTCG bracket, deliberately realize long-term capital gains:
- Sell appreciated securities
- Rebuy immediately (no wash sale rule for gains)
- This “resets” your cost basis higher — reducing future taxable gains
Example: A couple with $75,000 taxable income has $50,000 unrealized long-term gains in a taxable account. They’re below the $96,950 0% LTCG ceiling. They can realize $21,950 of gains tax-free this year, resetting basis. Future sale of those shares will have higher basis, resulting in less taxable gain.
Social Security Taxation: The 85% Inclusion
Social Security benefits are taxable based on your “provisional income” (AGI + tax-exempt interest + 50% of SS benefit):
| Filing Status | Provisional Income | SS Taxable % |
|---|---|---|
| Single | Under $25,000 | 0% |
| Single | $25,000-$34,000 | Up to 50% |
| Single | Over $34,000 | Up to 85% |
| Married (MFJ) | Under $32,000 | 0% |
| Married (MFJ) | $32,000-$44,000 | Up to 50% |
| Married (MFJ) | Over $44,000 | Up to 85% |
Only 85% of SS is ever taxable — meaning 15% is always tax-free.
Impact on withdrawal order: Every dollar you withdraw from a traditional IRA increases your provisional income, which increases the taxable percentage of Social Security — essentially a “stealth tax” on withdrawals.
The IRMAA Thresholds: Medicare Surcharges
IRMAA surcharges apply when MAGI exceeds thresholds (2026):
| MAGI (MFJ) | Part B Monthly Premium | Part D Surcharge |
|---|---|---|
| ≤ $212,000 | $185/month | $0 |
| $212,001-$266,000 | $259/month | +$12.90/month |
| $266,001-$334,000 | $369/month | +$33.30/month |
| $334,001-$400,000 | $479/month | +$53.80/month |
| > $400,000 | $590/month | +$74.20/month |
Staying below $212,000 (MFJ) or $106,000 (single) is a key objective for most retirees.
High-value tactic: Plan large Roth conversions or IRA withdrawals to stay just under IRMAA thresholds.
Year-End Tax Review for Retirees
Before December 31 each year:
| Action | Purpose |
|---|---|
| Estimate current year MAGI | Know where you are relative to brackets and IRMAA |
| Check remaining low-bracket room | Fill with traditional IRA withdrawals or Roth conversion |
| Review unrealized gains/losses in taxable account | Harvest losses to offset gains; harvest gains at 0% if in range |
| Confirm RMD has been taken | Avoid 25% penalty |
| Check if QCD makes sense | Reduce MAGI with charitable giving from IRA |
| Consider bunching deductions | Itemize in high-income years; standard deduction in lower years |
Tax-Efficient Withdrawal by Account Balance Scenario
| Portfolio Mix | Recommended Approach |
|---|---|
| Mostly traditional IRA (80%+) | Aggressive Roth conversions in tax window; spend taxable first; preserve Roth |
| Balanced (40% traditional, 30% Roth, 30% taxable) | Standard order; moderate Roth conversions to fill 22% bracket |
| Mostly Roth (60%+) | Enviable position; spend taxable first, traditional for large one-time expenses, Roth last |
| All taxable (no retirement accounts) | No RMD concern; focus on capital gains management and deferral |
| All traditional IRA (no taxable or Roth) | Aggressive Roth conversions; QCDs for charitable giving; QLAC to reduce RMDs |
Common Tax Withdrawal Mistakes
| Mistake | Tax Cost |
|---|---|
| Withdrawing from Roth first | Taxing money that could have grown tax-free longer |
| Ignoring 0% LTCG bracket | Missing free tax gain harvesting opportunity |
| Not doing Roth conversions in the tax window | Potentially thousands more in lifetime taxes |
| Large IRA withdrawal in one year | Bracket spike into 24-32%; IRMAA surcharge triggered |
| Taking SS early just to avoid portfolio withdrawals | Smaller SS benefit for life; misses the portfolio withdrawal opportunity at low rates |
Related: Which Accounts to Withdraw First | Roth Conversion in Retirement | RMD Strategies | Retirement Income Planning