Journal · Retirement Planning

The retirement withdrawal hierarchy: a step-by-step guide to tax-efficient income.

Author: Scott Moscowitz / Wistaria Advisors

July 2026 · Free Consultation

The retirement withdrawal hierarchy: a step-by-step guide to tax-efficient income.

Two retirees with identical portfolios and identical spending needs can pay $100,000 more in federal taxes over 20 years, purely because one drew from accounts in the wrong order. That's the number we map first with every client, because the withdrawal sequence shapes your lifetime tax bill more than almost any other decision in retirement.

Why the order you withdraw from your accounts matters more than how much you withdraw

Sequence determines your lifetime tax bill. Consider a straightforward scenario: you need $100,000 annually and hold money across three buckets — a taxable brokerage account, a traditional IRA, and a Roth IRA. Pull the full $100,000 from the traditional IRA and every dollar is taxed as ordinary income. Draw from the taxable account first, where long-term gains may be taxed at 0% or 15%, and you keep considerably more.

Retirement Budget Calculator's 2026 analysis found that a retiree drawing exclusively from a traditional IRA at a 22% effective rate pays roughly $220,000 in federal taxes over 20 years, while a retiree using a strategic sequence pays closer to $120,000. Same portfolio. Same spending. That $100,000 gap is what the withdrawal hierarchy is designed to close.

The withdrawal sequence that minimizes your lifetime tax bill

The standard starting point is taxable accounts first, traditional pre-tax accounts second, Roth accounts last. The real skill is knowing when to deviate.

Step 1: Draw from taxable accounts first

A taxable brokerage or savings account is funded with after-tax dollars, meaning gains are taxed only when you sell. Start here because long-term capital gains rates run at 0%, 15%, or 20% depending on your income — well below the ordinary income rates that apply to IRA withdrawals. Fidelity's 2026 guidance recommends that retirees who qualify for the 0% capital gains rate prioritize taxable accounts to exhaust that bracket before touching pre-tax money.

One wrinkle worth flagging: if a position has appreciated dramatically, holding it until death triggers a step-up in basis for your heirs, wiping out the embedded gain entirely. In that case, temporarily shifting to traditional account withdrawals rather than selling the appreciated position can be the smarter move, even though it inverts the standard sequence.

Step 2: Fill low brackets from traditional accounts before RMDs force your hand

This is the step most people skip, and it tends to be the costliest omission. The IRS requires annual withdrawals from traditional IRAs and 401(k)s beginning at age 73, and the gap between retirement and that birthday is a genuine planning window. Your income is often at its lowest, Social Security may not have started, and your traditional IRA balance is still manageable. Use those years deliberately.

In 2026, the 12% federal bracket runs to $48,475 for single filers and $96,950 for married couples. If your taxable income sits below those thresholds, pull from your traditional IRA up to the bracket ceiling even if you don't need the cash. Paying 12% now beats paying 22–24% later when required distributions stack on top of Social Security income.

Think of a large traditional IRA as a pressure valve: the longer you leave it untouched, the more pressure builds. A $1 million traditional IRA left to grow until 73 could generate required distributions around $45,000 annually, potentially pushing you into the 24% bracket. Converting $50,000 per year for five years at 22% costs $55,000 in taxes but can cut those future distributions nearly in half.

Step 3: Execute Roth conversions during low-income years

Moving money from a traditional IRA to a Roth IRA means paying ordinary income tax now in exchange for tax-free growth and withdrawals later. The best windows are early retirement years before Social Security begins, down-market years when account balances are temporarily depressed (you convert fewer dollars for the same future value), and any year your income drops unexpectedly.

Watch the Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharge thresholds carefully. In 2026, they trigger at $106,000 for single filers and $212,000 for married couples. A conversion that pushes you over a threshold can add hundreds of dollars per month to your Medicare premiums, so model the full picture before you convert.

Step 4: Roth withdrawals last

Roth accounts are your most tax-efficient asset. Withdrawals don't count as income for IRMAA calculations or Social Security taxation, and there are no required distributions during your lifetime. In high-income years, when required distributions and Social Security stack together, Roth withdrawals let you cover spending without adding a dollar of taxable income. Leave them untouched as long as you can.

One additional tool belongs here: Qualified Charitable Distributions. Once you're 70½, you can donate up to $111,000 directly from your IRA to a qualified charity in 2026. The amount counts toward your required distribution but never hits your taxable income. If you give to charity anyway, run this check on your own situation before taking the standard distribution instead.

Account Type	Tax Treatment on Withdrawal	RMD Required?	Best Used
Taxable brokerage	Long-term gains at 0–20%	No	First, in low-income years
Traditional IRA / 401(k)	Ordinary income rates	Yes, at 73	Second; fill brackets proactively
Roth IRA	Tax-free (qualified)	No	Last; reserve for high-income years

Sample 5-year withdrawal plan

Illustrative example only — hypothetical couple retiring at 63 with $1.2M traditional IRA, $400K taxable brokerage, $200K Roth IRA.

Year	Age	Taxable Draw	Traditional IRA Draw	Roth Conversion	Est. Federal Tax	Notes
1	63	$60,000	$20,000	$30,000	~$9,500	Low-income year; convert to fill 22% bracket; Social Security not yet started
2	64	$55,000	$25,000	$30,000	~$10,200	Continue conversions; taxable account covers most spending
3	65	$50,000	$30,000	$30,000	~$11,000	Medicare begins; monitor IRMAA threshold at $212,000 MFJ
4	66	$45,000	$35,000	$25,000	~$10,800	Taper conversion if income approaches IRMAA limit
5	67	$40,000	$40,000	$20,000	~$10,500	Taxable account winding down; traditional IRA balance reduced by ~$135K via conversions

By age 73, five years of $20,000–$30,000 annual conversions have reduced the traditional IRA balance by roughly $135,000, which lowers projected RMDs and reduces the risk of being pushed into the 24% bracket when Social Security income arrives. The Roth account remains untouched throughout, preserving tax-free reserves for high-income years ahead.

How estate tax exemptions and advanced strategies fit in

For higher-net-worth families, the withdrawal sequence also shapes what you leave behind. The 2026 federal estate tax exemption is $15 million per individual and $30 million for married couples using portability. Amounts above that threshold face a 40% federal estate tax rate. Even with a high exemption, appreciated assets inside a traditional IRA carry embedded income tax that heirs must pay on top of any estate tax exposure.

Preserving the right assets for heirs

Taxable brokerage assets receive a step-up in basis at death, wiping out embedded capital gains for your heirs. Traditional IRAs carry no such benefit. Holding appreciated taxable positions until death and drawing from the IRA instead can actually serve your estate better, even when it feels counterintuitive to the standard sequence. Coordinate this with your CPA before acting.

ILITs and GRATs: the estate tax layer

A Grantor Retained Annuity Trust (GRAT) lets you transfer appreciating assets to heirs with minimal gift tax exposure by retaining an annuity stream for a fixed term. An Irrevocable Life Insurance Trust (ILIT) holds a life insurance policy outside your taxable estate, so the death benefit passes to heirs free of both income and estate tax. For clients whose estates approach the exemption threshold, an ILIT funded with a permanent life insurance policy can be one of the most efficient wealth transfer tools available.

Annual gifting is the simplest lever. In 2026, you can give $19,000 per recipient per year without touching your lifetime exemption. A married couple with three children and five grandchildren can move $304,000 out of their estate annually without filing a gift tax return.

FAQs

Should I still take my RMD even if I don't need the income?

Yes, and the IRS won't give you a pass for skipping it. Once you reach age 73, required minimum distributions are mandatory regardless of whether you need the cash. If you don't need it for spending, reinvest it in a taxable brokerage account rather than letting it sit idle, and consider whether a Qualified Charitable Distribution could satisfy part of the requirement without adding to your taxable income.

What happens to the withdrawal hierarchy if I'm still working at 65 or 66?

A salary keeps your marginal rate higher than it'll be once you stop working, which makes Roth conversions an expensive move while you're still employed. The better play is to keep contributing to tax-deferred accounts now and plan your conversion window for the first low-income years after you leave work, when the gap between retirement and age 73 opens up.

How does Social Security timing interact with withdrawal sequencing?

Delaying Social Security to 70 maximizes your monthly benefit. It also creates a low-income window from retirement to 70 that's ideal for Roth conversions and traditional IRA drawdowns. A couple who retires at 63 and delays Social Security has roughly seven years to convert at lower rates before both Social Security income and required distributions arrive together and start stacking.

When should I use a Roth withdrawal instead of sticking to the hierarchy?

Use a Roth withdrawal in any year where a traditional IRA or taxable withdrawal would push you over an IRMAA threshold, into a higher bracket, or cause more of your Social Security to become taxable. The hierarchy is a default, and Roth flexibility is precisely why you preserve it.

What is a Tax-Free Retirement Account (TFRA) and how does it relate to this hierarchy?

TFRA is an informal term for accounts that allow tax-free growth and withdrawals, most commonly Roth IRAs and certain cash-value life insurance policies. In the hierarchy, these sit at the top of the preservation list because withdrawals carry no income tax and don't affect IRMAA or Social Security calculations.

Does the $15 million estate tax exemption mean I don't need to worry about estate planning?

No. The federal exemption covers most families, but 12 states still impose their own estate taxes with much lower thresholds, and traditional IRA balances inherited by heirs are taxed as ordinary income regardless of the estate tax exemption. Coordinating your withdrawal plan with your estate plan, including tools like ILITs and annual gifting, still matters for most families.

How do annuities fit into a tax-efficient withdrawal strategy?

A fixed annuity payment from an A-rated carrier can anchor your income floor, giving you a predictable base that fills a specific bracket without forcing IRA withdrawals. That predictability lets you control IRA and Roth withdrawals more precisely around it. Annuity products vary widely across carriers, so compare carefully before committing.

Key takeaways

Drawing from the wrong account first can cost six figures in avoidable taxes across a 20–30 year retirement, which puts sequence in the same importance tier as your savings rate.
The years between retirement and age 73 are your highest-leverage window for Roth conversions and traditional IRA drawdowns at lower rates, before required distributions and Social Security income combine.
Taxable accounts receive a step-up in basis at death, which makes them worth holding in some cases even when the standard hierarchy says spend them first.
ILITs and annual gifting at $19,000 per recipient in 2026 are practical estate tax tools that work alongside your withdrawal sequence, not as a separate exercise.
Build a year-by-year withdrawal plan with your CPA and financial advisor before the first required distribution arrives, because retrofitting the strategy afterward costs more than building it right the first time.