Here's a question I get from almost every client who's approaching retirement: "Where do I pull from first?"
It sounds like a simple question. It isn't.
The order in which you withdraw from your retirement accounts — your taxable brokerage accounts, your traditional IRA and 401(k), your Roth IRA, has a profound impact on how much of your wealth you keep versus how much goes to the IRS. Done right, a thoughtful withdrawal sequence can save you tens of thousands of dollars over the course of your retirement. Done wrong, it can trigger a tax problem that compounds for decades and eventually forces you to take income you don't need and pay taxes you didn't have to pay.
That problem has a name: the RMD tax bomb. And it's one of the most common, and most preventable, retirement planning mistakes I see.
First, Understand Your Three Tax Buckets
Before we talk about withdrawal sequencing, you need to understand how your accounts are taxed. There are three categories:
Taxable accounts (brokerage accounts, savings accounts) are funded with after-tax dollars. When you sell investments, you pay capital gains tax, typically at a lower rate than ordinary income, and potentially at 0% if your income is low enough.
Tax-deferred accounts (traditional IRA, 401(k), 403(b)) were funded with pre-tax dollars. Every dollar you withdraw is taxed as ordinary income in the year you take it. This is where most people have the bulk of their retirement savings, and where the RMD problem lives.
Tax-free accounts (Roth IRA, Roth 401(k)) were funded with after-tax dollars. Qualified withdrawals are completely tax-free, including all the growth. This is your most valuable bucket, and the goal is to protect it as long as possible.
The General Rule, And When It Actually Works
The conventional wisdom is to withdraw in this order: taxable first, tax-deferred second, Roth last.
The logic is sound: you let the tax-advantaged accounts compound as long as possible while drawing down the taxable accounts first. And for certain retirees, specifically, those who retire in their early 60s, delay Social Security, and have a relatively modest income during those early years, this approach can work beautifully.
Here's why: if you're living off your taxable accounts and your income is low enough, you may qualify for a 0% long-term capital gains rate. You're essentially liquidating investments tax-free. That's a powerful opportunity that most people don't take full advantage of.
But here's where the general rule breaks down: if you follow it rigidly and never touch your tax-deferred accounts until you're forced to, you end up with a massive balance sitting in your IRA or 401(k), growing, compounding, and accumulating a deferred tax liability that gets bigger every year.
And then, at age 73 (or 75, depending on your birth year), the IRS steps in and says: you've been deferring long enough. Time to pay up. Those are your Required Minimum Distributions.
The RMD Tax Bomb: How It Happens
Here's a scenario I see regularly. A couple retires at 62 with $1.5 million in a traditional 401(k) and $300,000 in Roth accounts. They follow the conventional wisdom, live off their taxable accounts and Social Security, and never touch the 401(k). The 401(k) keeps growing.
By age 73, that $1.5 million has grown to $2.5 million or more. The IRS now requires them to withdraw a percentage of that balance each year, roughly $90,000 to $100,000 in the first year, growing each year after that.
That $90,000 is added to their Social Security income, their investment income, and any other income they have. Suddenly they're in a much higher tax bracket than they expected. Their Medicare premiums spike because of IRMAA surcharges (which are triggered by higher income). Their Social Security becomes more heavily taxed. And the Roth accounts they carefully protected are now less necessary because they're already generating more income than they need.
This is the RMD tax bomb. And the painful part is that it was entirely preventable.
The Solution: Proactive Bracket Management
The antidote to the RMD tax bomb is to proactively draw down your tax-deferred accounts during the years when your income is lower, typically the gap between retirement and when Social Security and RMDs kick in.
This is called bracket management, and it's one of the most valuable things a retirement planner can do for a client.
The strategy works like this: in your early retirement years, when your income is relatively low, you deliberately take withdrawals from your traditional IRA or 401(k), not because you need the money, but to "fill up" the lower tax brackets. You pay tax now, at a lower rate, rather than later at a higher rate.
Even better, you can convert those withdrawals to a Roth IRA, a Roth conversion. You pay the tax today, but the money then grows tax-free for the rest of your life and passes to your heirs tax-free. You're essentially prepaying a tax bill at a discount.
Here's a real example: a couple retires at 62 and 63. One spouse has a pension and Social Security; the other delays Social Security to 67. They need $12,000 per month to live on. After the pension and the one Social Security check, they have a $4,000 per month gap. They fill that gap from after-tax accounts, but they also use their current low-income years to execute Roth conversions, filling up the 22% bracket before the second Social Security check kicks in at 67.
By the time RMDs arrive, their tax-deferred balance is significantly smaller. The forced distributions are manageable. The tax bomb has been defused.
Withdrawal Strategy Is Also Risk Management
Here's something that often gets overlooked in the withdrawal sequencing conversation: the order you withdraw isn't just a tax decision. It's also a risk management decision.
Your near-term spending needs, the money you'll use in the next one to five years, should be held in safe, liquid assets within the accounts you're drawing from first. You don't want to be forced to sell growth assets at a loss to fund your lifestyle during a market downturn.
Your long-term accounts, especially the Roth, which you're drawing from last, should hold your highest-risk, highest-return investments. Because you won't touch that money for a decade or more, you can let it ride through market volatility and capture the full benefit of long-term compounding.
This is time segmentation applied to withdrawal sequencing. And it's the reason that a good withdrawal strategy isn't just about minimizing taxes, it's about building a retirement income system that's resilient to the things you can't predict.
The Bottom Line
Generic rules of thumb fail to consider your specific situation. Your tax picture, your Social Security timing, your pension, your healthcare costs, your legacy goals, all of these interact with each other in ways that a one-size-fits-all approach simply can't account for.
The right withdrawal sequence for you depends on your specific numbers, your specific timeline, and your specific goals. But the underlying principle is consistent: be intentional about when and how you pay taxes, because the decisions you make in the first decade of retirement will echo for the rest of your life.
If you want to understand what the right withdrawal sequence looks like for your situation, and whether you're sitting on an RMD tax bomb that needs to be defused. I'd love to help. Book a complimentary retirement brainstorm session and let's run the numbers together.
Jason Rindskopf is the founder of Two Waters Wealth Management and creator of the SMART Retirement Blueprint®. He works with high-achieving professionals and couples in the Charlotte, NC area who are within 10 years of retirement or recently retired. If you'd like to talk through your retirement withdrawal strategy and tax planning, book a complimentary consultation here.