You’ve spent decades building your nest egg. Now comes the crucial next step. You have to decide how to draw from it wisely. A well-designed withdrawal strategy can stretch your savings, reduce your tax burden, and help your money last throughout retirement.
Understand your account types.
Most retirees hold assets across three main buckets. Knowing how each bucket is taxed helps guide withdrawal order.
- Tax-deferred accounts (Traditional IRAs, 401(k)s, and similar plans): Withdrawals are taxed as ordinary income.
- Tax-free accounts (Roth IRAs and Roth 401(k)s): Qualified withdrawals are tax-free.
- Taxable accounts (brokerage or savings accounts): You pay taxes only on dividends, interest, and net realized gains.
A balanced withdrawal strategy blends these account types to control your income and your tax brackets each year.
Be purposeful about withdrawal order.
A traditional rule of thumb is to draw from taxable accounts first, then tax-deferred, and finally tax-free. But today’s retirees often benefit from mixing withdrawals to manage taxes and Medicare premiums. For example, draw from taxable accounts early in retirement while your tax rate is low. Use partial IRA withdrawals or Roth conversions before Required Minimum Distributions (RMDs) begin. Save Roth funds for later years when flexibility and tax-free income are most valuable. Coordinating withdrawals annually can help minimize lifetime taxes rather than just annual taxes.
Don’t forget about RMDs.
Once you reach age 73, you must begin taking RMDs from Traditional IRAs and 401(k)s. Failing to take them can result in steep penalties. Plan ahead so your RMDs don’t push you into a higher tax bracket or affect Medicare premiums. Note that Qualified Charitable Distributions (QCDs) from IRAs can satisfy RMDs while avoiding taxable income.
Leverage Roth conversions purposefully.
Converting part of a Traditional IRA to a Roth IRA before RMDs begin can reduce future taxable income. This move can also create a tax-free income source for later in retirement or for heirs. However, conversions trigger immediate income tax, so timing and tax-bracket management is essential.
Coordinate withdrawals with Social Security.
Choosing when you begin to claim Social Security impacts both your lifetime benefits and your tax picture. Delaying benefits until age 70 increases your monthly check and may let you withdraw more from taxable or IRA accounts earlier, spreading taxes more evenly. Balancing withdrawals with the timing of Social Security can help smooth income and avoid sudden jumps in taxation.
Manage capital gains in taxable accounts.
If you hold investments in a taxable brokerage account, consider harvesting capital gains or losses strategically. Realize gains in years when income is low to take advantage of the 0% to 15% long-term capital gains rate. Harvest losses in down markets to offset gains and reduce taxable income.
Keep an eye on Medicare IRMAA thresholds.
Your Modified Adjusted Gross Income (MAGI) determines whether you’ll pay higher Medicare premiums under the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA surcharges can meaningfully increase healthcare costs in retirement. As an illustration, a married couple whose income exceeds an IRMAA threshold may incur several thousand dollars per year in additional Medicare Part B and Part D premiums, with higher tiers resulting in materially larger annual costs.
Over a hypothetical retirement spanning ages 65 through 90, these higher premiums can cumulatively amount to tens of thousands of dollars or more, underscoring the importance of coordinating withdrawals to manage taxable income and Medicare premium exposure.
Review annually as tax laws change.
Tax brackets, RMD ages, and contribution limits can all shift with new legislation. Review your withdrawal strategy each year and after major life changes to make sure your plan remains tax-efficient.
Tax-efficient withdrawal planning is about managing your taxes intentionally over your lifetime. The right approach can help you preserve more of what you’ve earned and create a smoother, more predictable income stream throughout your retirement years.
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.