Most people spend their working years focused on whether they are saving enough for retirement. Once retirement arrives, the focus shifts to a different question: how do you turn those savings into income while keeping taxes under control? The answer depends on the types of accounts you have, when you claim Social Security, whether you receive a pension, and how all those income sources interact on your tax return. With thoughtful planning, the timing and sequence of your withdrawals can make a meaningful difference over time.
Why sequence matters.
Not all retirement incomes are taxed the same way. Traditional IRA withdrawals are generally taxable as ordinary income. Qualified Roth IRA withdrawals are typically tax-free. Pension and annuity payments may include a tax-free portion depending on how contributions were made and how the benefit is structured. These differences matter because the combination of income sources can affect not only your tax bracket, but also Medicare premiums and the taxation of Social Security benefits.
When multiple income sources arrive in the same year, they stack on top of one another. A pension combined with a large IRA withdrawal, for example, can push more income into a higher tax bracket than anticipated.
Social Security timing.
Social Security benefits can be claimed as early as age 62 or delayed until age 70. Claiming early results in a permanent reduction in monthly benefits. For individuals born in 1960 or later, full retirement age is 67. Delaying beyond full retirement age increases benefits by approximately 8% per year until age 70.
From a planning perspective, delaying Social Security can create opportunities in the early years of retirement. During that period, retirees may choose to draw from traditional IRAs or complete partial Roth conversions before Required Minimum Distributions (RMDs) begin. Reducing IRA balances before RMDs start can potentially lower future taxable income and may provide greater flexibility later in retirement when additional income sources come into play.
The pension wrinkle.
If you have a pension, it often begins paying at a predetermined date, giving you less control over its timing than other income sources. Because pensions are generally taxable, it creates a baseline level of annual income. Any IRA withdrawals, Roth conversions, investment income, or Social Security benefits are layered on top.
This makes it especially important to be intentional about when you claim Social Security and how much you withdraw from retirement accounts each year. If your pension already covers a significant portion of your living expenses, you may have greater flexibility to delay Social Security, complete Roth conversions, or strategically draw from taxable accounts.
The “gap years” planning window.
For many retirees, the years between retirement and the start of RMDs at age 73 or 75 can represent a valuable planning opportunity. These “gap years” often coincide with lower taxable income, making Roth conversions particularly attractive. By converting portions of a traditional IRA to a Roth IRA during lower-income years, retirees may be able to take advantage of lower tax brackets while reducing future RMDs.
Thresholds that trigger higher taxes.
A few key income levels are worth keeping in mind as you plan:
- Social Security taxation: Once provisional income exceeds $34,000 for single filers or $44,000 for married couples filing jointly, up to 85% of Social Security benefits may be subject to federal income tax.
- Medicare IRMAA surcharges: Higher withdrawal amounts can push income into higher Medicare premium tiers. Because IRMAA is based on income from two years prior, a large withdrawal today could increase Medicare premiums in future years.
- Tax bracket thresholds: Managing the size and timing of withdrawals may help keep taxable income within a desired tax bracket and reduce the amount of income taxed at higher rates.
Withdrawal sequencing is not a set-it-and-forget-it decision. The most effective strategy depends on your income sources, tax situation, spending needs, and long-term goals. A thoughtful withdrawal plan can help create tax efficiencies, manage future RMDs, and potentially increase the amount of retirement income you keep over time. If you would like guidance on building a retirement withdrawal strategy, don’t hesitate to reach out.
Frequently asked questions.
Should I withdraw from my IRA before claiming Social Security?
In some cases, yes. Taking IRA withdrawals before Social Security begins may allow you to reduce future RMDs and take advantage of lower tax brackets during your early retirement years. However, the right approach depends on your income needs, tax situation, and long-term goals.
Does pension income affect how much of my Social Security is taxable?
Yes. Pension income is included in the provisional income calculation used to determine whether Social Security benefits are taxable. Higher pension income can cause a larger portion of your Social Security benefits to be subject to federal income tax.
What are “gap years” in retirement planning?
Gap years are the period between retirement and the start of Required Minimum Distributions (RMDs). Because many retirees have lower taxable income during this time, gap years can be an opportunity for strategies such as Roth conversions or strategic IRA withdrawals.
Is there an ideal order for withdrawing money in retirement?
There is no one-size-fits-all approach. The ideal withdrawal strategy depends on factors such as pensions, Social Security timing, taxable accounts, retirement account balances, and tax considerations. A personalized withdrawal plan can help improve tax efficiency and support long-term retirement goals.
Disclaimer: The information above is for general educational purposes only and should not be considered financial, tax, or legal advice. Always consult with a qualified professional regarding your specific situation. You should consult with your CPA and/or attorney before implementing any estate planning, gifting, or tax-related strategy.