Part 1: Getting the Order Right
This kicks off a three-part series on retirement income planning in retirement. The goal of the series is to help families think more clearly about how they draw from their portfolio—across account types, tax considerations, and evolving life needs—to support a more flexible and sustainable retirement.
Retirement planning doesn’t stop the day you stop working. In many ways, that’s when the real planning begins.
One of the most overlooked levers in retirement income strategy is which accounts to draw from, and when. It’s not just a matter of preference or cash flow. The order in which you tap different types of accounts can significantly affect your total tax bill, your investment flexibility, and your legacy.
So why do so many people default to spending from cash first, then brokerage accounts, then IRAs? Because it's intuitive, but it’s not always strategic.
Let’s walk through why retirement income sequencing matters, and how a coordinated approach can help preserve both lifestyle and long-term control.
Not All Dollars Are Taxed the Same
Most retirement portfolios span three types of accounts:
- Taxable accounts, like brokerage or joint investment accounts
- Tax-deferred accounts, like traditional IRAs, 401(k)s, or annuities
- Tax-free accounts, like Roth IRAs or Roth 401(k)s
Each has different tax characteristics. Withdrawals from tax-deferred accounts are taxed as ordinary income. Taxable accounts generate capital gains or losses when assets are sold. Roth accounts, if qualified, allow tax-free growth and withdrawals.
The challenge isn’t just understanding these differences. It’s knowing how to use them in combination over time.
The Conventional Wisdom (And Its Limits)
A common approach is to spend taxable assets first, then IRAs, and save Roths for last. The logic is to minimize taxes early and let tax-advantaged accounts grow longer.
While this sequence is widely recommended, individuals with substantial tax-deferred balances or highly appreciated assets may benefit from a more tailored approach that considers their unique tax situation and long-term goals.
But this can backfire, particularly for those with relatively low income in early retirement who delay withdrawals from large IRAs. Delaying IRA withdrawals until RMDs begin (typically at age 73) can lead to significantly higher taxable income in later years, potentially resulting in higher tax brackets, increased Medicare premiums, and a greater portion of Social Security benefits becoming taxable.
We often see scenarios where people go from modest taxable income in their 60s to sudden, unavoidable spikes in their 70s. Higher income in those years can mean higher tax brackets, increased Medicare premiums, and even taxes on Social Security benefits.
A More Intentional Sequence
A more thoughtful strategy often includes filling lower tax brackets intentionally during early retirement by drawing from IRAs or doing partial Roth conversions. This helps spread out the tax burden over time, rather than concentrating it later.
Meanwhile, selectively harvesting capital gains in taxable accounts—especially when income is low—can be done at favorable rates or even zero tax. And preserving Roth accounts for later years supports flexibility and potential tax-free legacies.
Of course, the right strategy depends on your overall balance sheet, spending needs, and goals. There’s no one-size-fits-all sequence, but there is usually a better one than “default to cash.”
Why This Matters
For many families, the biggest financial risk isn’t a market downturn. It’s inefficiency. Paying more in taxes than necessary, being forced into higher income brackets, or losing flexibility because of poor coordination.
Strategic retirement income planning is one way to stay in control. It turns retirement from a drawdown phase into a decision-making phase, with the opportunity to manage taxes, preserve assets, and align withdrawals with real life.
Everyone’s retirement path looks a little different. If you're navigating these types of decisions and want to understand how they apply to your situation, we're here to help you think it through.
In Part 2, we’ll look at how retirement income planning can stay flexible when life throws a curveball—whether due to unexpected expenses, health changes, or market volatility.
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