When you stop working, the income checks stop too. But the expenses? They keep coming like clockwork. Which means at some point, you need to turn your savings into a paycheck. One that actually lasts. One that doesn’t quietly bleed out to taxes over time.
The tricky part is, the order you pull from your accounts (whether taxable, traditional, or Roth) can make a big (sometimes huge) difference on how much mileages your funds can go for your retirement.
Understand Your Income Foundation
Before you tap your investments, look at what income is already coming in. The guaranteed stuff. These are your foundation before you ever touch a stock or bond.
Here’s what usually counts as fixed income:
- Social Security
- Pensions
- Annuities
- Rental or business income
Important thing is knowing when these begin. Retiring at 62 but delaying Social Security until 70? That’s eight years you’re covering out of pocket.
So let’s say you’re spending $10,000 a month. And Social Security later covers $4,000. That leaves a $6,000 monthly gap ($72,000 a year) that needs to come from your own savings. That’s where withdrawal strategy comes in.
Understand Your Buckets
Most people’s retirement assets live in three types of accounts. Each one comes with its own tax rules. And how you pull from them matters.
| Account Type | Tax Treatment | Withdrawal Rules |
|---|---|---|
| Taxable | Funded with after-tax money. Gains taxed when sold. | Pay long-term capital gains tax (if held over 1 year). Often lower than income tax. |
| Tax-Deferred | Tax-deductible going in. Grows tax-deferred. | Withdrawals taxed as regular income. Examples: Traditional IRA, 401(k). |
| Tax-Free (Roth) | Funded with after-tax money. Grows tax-free. | Withdrawals are completely tax-free. Examples: Roth IRA, Roth 401(k). |
Sequence Matters
General rule of thumb: start with taxable, move to tax-deferred, save Roth for last. Won’t be perfect for everyone, but it works surprisingly well in most cases.
- Start with Taxable Accounts
Early in retirement (especially before Social Security or pensions begin) you might be in a low tax bracket. That’s the time to sell appreciated assets. Long-term gains could be taxed at 0 percent if income’s low enough. Some couples can realize over $100,000 in gains and still owe nothing to the IRS. - Then Move to Tax-Deferred Accounts
Once taxable is drawn down (or once your income starts rising) you shift to traditional IRAs or 401(k)s. These are taxed as ordinary income, so it’s important to be thoughtful. Withdraw too much too fast, and you could push yourself into a higher bracket. - Save Roth for Last
Roth is the golden bucket. Withdrawals are tax-free, and the longer you let it grow, the more powerful it becomes. It’s tempting to touch it early, but the real benefit shows up much later (either for your later retirement years or your heirs). No required minimum distributions. No tax surprises.
A $1 Million Difference, Just From Withdrawal Strategy
Let’s take an example. A retired couple, both age 60, just left work and want to live off their savings for the next 30 plus years. They’ve got:
- $2.5 million in total retirement savings
- $600,000 in taxable brokerage
- $1.3 million in tax-deferred (401(k), IRA)
- $600,000 in Roth IRAs
- Social Security starts at 70
- Annual spending around $120,000
Now, let’s compare two ways of withdrawing money.
Scenario A: Even Mix Withdrawal
They pull evenly from all three accounts, every year. One-third taxable, one-third traditional, one-third Roth.
What happens?
- They pay some tax on capital gains from the taxable
- They pay full income tax on the traditional withdrawals
- They use Roth early, so that tax-free growth is cut short
- Later on, their traditional accounts are still big, and RMDs hit hard
- Medicare premiums go up due to higher income
- Taxes on Social Security start earlier than necessary
After 30 years: Portfolio ends up around $5.2 million
Scenario B: Smart Sequence plus Roth Conversions
They withdraw from taxable accounts first. Since their income is low in these early years, they also do Roth conversions (moving money from IRA to Roth and paying a little tax now to avoid a lot later).
After Social Security kicks in, they begin drawing from the remaining traditional account. By then it’s smaller, and withdrawals stay within a moderate tax bracket. Roth accounts remain untouched and keep growing tax-free.
After 30 years: Portfolio ends up around $6.2 million
That’s a $1 million difference. Same couple. Same investments. Just a better withdrawal plan.
And no, this isn’t because of some miracle investment or beating the market. This is just tax efficiency. Roth left to grow. Conversions done when rates are low. And RMDs kept under control.
Other Things That Can Sneak Up On You
There’s more going on than just withdrawals. A few other traps (and opportunities):
Roth conversions: If you have low-income years early on, it might be a great time to shift some traditional IRA money into a Roth. Pay a little tax now, but avoid a bigger tax bomb later. It also helps reduce future RMDs.
Required Minimum Distributions (RMDs): Starting at age 73, you’re forced to take money out of tax-deferred accounts. These required withdrawals can bump up your tax bracket, increase your Medicare premiums, and even cause some Social Security to get taxed.
Medicare premiums: Higher income can push you into IRMAA surcharges, which raise your monthly Medicare costs. Another reason to manage income carefully, not just taxes.
Estate planning: Not all accounts are equal after you’re gone. Roth IRAs pass tax-free. Taxable accounts get a step-up in basis (usually erasing capital gains for your heirs). But traditional IRAs? Your heirs pay income tax on those distributions. Worth keeping in mind.
Summary
It’s not just about how much you’ve saved. It’s about how you take it out. Tax awareness over time (especially with some flexibility in the early years) can stretch your savings a lot further.
And usually, it just means starting with taxable, then traditional, then Roth. Simple on paper. Not always easy in practice. But absolutely worth the planning.