How you withdraw from retirement accounts matters as much as how you saved. The right withdrawal strategy can save thousands in taxes and add years to your portfolio's life.
The Three Buckets
Most retirees have accounts in three tax categories:
| Bucket | Account Types | Tax Treatment |
|---|---|---|
| Taxable | Brokerage, savings | Tax on dividends, gains |
| Tax-Deferred | Traditional 401(k), IRA | Taxed at withdrawal |
| Tax-Free | Roth 401(k), Roth IRA | No tax if qualified |
The Traditional Approach
Order: Taxable → Tax-Deferred → Tax-Free
Logic: Let tax-advantaged accounts grow longer.
Problems:
- Ignores tax bracket management
- Can result in huge RMDs
- May miss Roth conversion opportunities
The Optimized Approach
Goal: Minimize Lifetime Taxes
Instead of a rigid order, optimize withdrawals to:
- Fill low tax brackets efficiently
- Manage future RMD burden
- Preserve flexibility
- Maximize after-tax wealth
Tax Bracket Filling Strategy
How It Works
In early retirement, you may be in a lower tax bracket than later (when RMDs start). Use this gap strategically:
| Year | Taxable Income | Tax Bracket | Strategy |
|---|---|---|---|
| 62 | $30,000 | 12% | Fill to top of 12% bracket |
| 67 | $50,000 | 22% | Moderate withdrawals |
| 75+ | $100,000+ | 24%+ | RMDs force income |
The Sweet Spot
Withdraw enough from tax-deferred to:
- Fill the 12% bracket (~$47,150 single, ~$94,300 married for 2024)
- Possibly the 22% bracket
- Convert excess to Roth
Pro Tip
Paying 12% now beats paying 22%+ later when RMDs kick in. Strategic Roth conversions in low-income years can save tens of thousands.
Managing Required Minimum Distributions (RMDs)
RMD Basics
- Start at age 73 (as of 2023)
- Calculated from prior year balance
- Failure penalty: 25% of missed amount
The RMD Problem
Large tax-deferred balances create large RMDs, potentially pushing you into higher brackets.
| Age | Account Balance | Approximate RMD | Tax Impact |
|---|---|---|---|
| 73 | $1,000,000 | $37,740 | Forced income |
| 80 | $1,200,000 | $54,540 | Higher bracket |
| 85 | $1,400,000 | $75,680 | Even higher |
The Solution
Draw down tax-deferred accounts and do Roth conversions before RMDs start.
A Practical Withdrawal Framework
Phase 1: Bridge Years (Retirement to Age 73)
- Live on taxable accounts + some tax-deferred
- Fill low brackets with tax-deferred withdrawals
- Convert excess to Roth (pay tax now at lower rates)
- Preserve Roth for later
Phase 2: RMD Years (73+)
- Take RMDs (required)
- Supplement with Roth (tax-free) as needed
- Taxable accounts for additional needs
- Manage bracket carefully
The Roth Conversion Ladder
Example Strategy
| Age | Action |
|---|---|
| 62-65 | Convert $50,000/year to Roth (pay ~12% tax) |
| 65-73 | Continue conversions, reduce traditional balance |
| 73+ | Lower RMDs, more tax-free Roth income |
Result: Instead of $100,000 RMDs at 24%, smaller RMDs plus tax-free Roth.
Tax-Efficient Asset Location Revisited
What you hold WHERE matters:
| Account Type | Hold These |
|---|---|
| Taxable | Tax-efficient index funds, munis |
| Tax-Deferred | Bonds, REITs (high income) |
| Roth | Highest growth (tax-free forever) |
In retirement, rebalancing through withdrawals (selling from one bucket, spending from another) maintains allocation without triggering taxes.
Social Security Integration
When to claim Social Security affects withdrawal strategy:
Claim early (62): Need less from portfolio now, but lower lifetime SS Claim late (70): 8%/year increase in benefit, need bridge from portfolio
Pro Tip
Delaying Social Security to 70 often makes sense if:
- You're healthy
- You can bridge with portfolio withdrawals
- The 8% guaranteed increase beats expected returns
Safe Withdrawal Rates
| Rate | Annual Withdrawal ($1M) | Risk Level |
|---|---|---|
| 3% | $30,000 | Very safe |
| 4% | $40,000 | Traditional guideline |
| 5% | $50,000 | Aggressive |
Flexible spending (reducing in bad markets) improves success rates significantly.
Working With a Professional
Withdrawal strategy involves:
- Tax projection
- Social Security optimization
- RMD planning
- Estate considerations
Consider working with a fee-only financial planner for personalized analysis.
The Bottom Line
Quick Win
If you're 5-10 years from retirement, calculate your projected tax-deferred balance at 73. If RMDs would push you into higher brackets, start planning Roth conversions now.
The best withdrawal strategy minimizes lifetime taxes while ensuring your money lasts. This often means paying some tax in early retirement to avoid paying more later.