The traditional order for spending down retirement assets aims to keep as much money growing tax-deferred for as long as possible while keeping your current income in lower tax brackets.
Step 1: The Standard Withdrawal Sequence
- Required Minimum Distributions (RMDs) ──► Mandatory; clear these first
- Taxable Brokerage Accounts ──► Capital gains treatment & basis recovery
- Tax-Deferred Accounts (Trad IRA/401k) ──► Taxed as ordinary income
- Tax-Free Accounts (Roth IRA/401k/HSA) ──► Leaves compounding tax-free the longest
- Taxable Accounts First: Liquidating taxable brokerage accounts lets you pay long-term capital gains rates (often or ) rather than ordinary income tax rates. It also allows tax-deferred accounts to keep compounding untouched.
- Tax-Deferred Accounts Second: Withdrawals from Traditional IRAs and 401(k)s are taxed as ordinary income.
- Tax-Free Accounts Last: Roth IRAs, Roth 401(k)s, and Health Savings Accounts (used for qualified medical expenses) grow and distribute tax-free, making them ideal to preserve as long-term growth assets or estate legacies.
Step 2: Key Exceptions & Strategic Adjustments
While the standard sequence is the baseline, sticking to it strictly can result in tax spikes later in life.
- Required Minimum Distributions (RMDs): Starting at age 73 (75 starting in 2033), mandatory withdrawals from Traditional IRAs and 401(k)s must be taken first, regardless of your preferred sequence.
- Tax Bracket Filling (Proactive Roth Conversions): If you retire before RMD age and drop into a very low tax bracket (e.g., or ), drawing down some tax-deferred funds early or converting them to a Roth up to the top of that bracket avoids higher tax brackets when RMDs kick in.
- Health Savings Accounts (HSAs): If you have qualified medical expenses, draw from your HSA penalty-free and tax-free at any point in retirement.
Comparison of Retirement Account Types
| Account Type | Primary Tax Treatment | Withdrawal Priority | Key Advantage |
| Taxable Brokerage | Long-Term Capital Gains (, , ) | 1st | Taxed at lower capital gains rates; no RMDs |
| Traditional IRA / 401(k) | Ordinary Income Rates | 2nd | Tax-deferred growth; mandatory RMDs at 73/75 |
| Roth IRA / 401(k) | Tax-Free | 3rd | No federal RMDs (for original owner); tax-free legacy |
Wealth building isn’t about finding a secret investment; it is about consistency and structure. Contact Financial Directions (520) 408-7777 and let us help you plan for a successful retirement.