What Is the Best Order to Withdraw Retirement Funds?

Most people spend decades focused on building retirement savings. Then retirement arrives, and the focus shifts almost overnight from saving money to figuring out how to use it wisely.

That transition is where many retirees start asking the same question, what is the best order to withdraw retirement funds?

The answer matters more than many people realize. The order retirees use when pulling income from different accounts can affect taxes, Medicare costs, portfolio longevity, and even how much money remains for spouses or heirs later on.

A common assumption is that retirement withdrawals should simply come from whichever account is easiest to access. In reality, retirement income planning usually works better when withdrawals are coordinated intentionally across taxable, tax-deferred, and tax-free accounts.

In many situations, retirees benefit from withdrawing funds in this general order:

1. Taxable brokerage accounts
2. Traditional IRAs and 401(k)s
3. Roth IRAs last

That sequence often helps preserve tax advantages while creating more flexibility over time. Still, retirement withdrawal strategies are rarely one-size-fits-all. Income needs, market conditions, tax brackets, healthcare expenses, and legacy goals can all change the equation. For example, avoiding taking distributions from an account invested in the market during a down year can preserve assets and extend how long your money lasts. 

At Harding Financial Group, retirement income planning often starts with helping clients understand how different withdrawal decisions affect the bigger financial picture — not just this year’s taxes.

Understanding the Different Types of Retirement Accounts

Before deciding on a retirement withdrawal order, it helps to understand how each type of account is treated from a tax perspective.

Some accounts create taxable income immediately. Others continue growing tax-deferred. Roth accounts may allow tax-free withdrawals later in retirement. The mix matters.

Taxable Investment Accounts

Taxable brokerage accounts are funded with after-tax dollars and typically include:

• Individual investment accounts
• Joint brokerage accounts

These accounts are often the most flexible source of retirement income because there are no age-based withdrawal rules or Required Minimum Distributions.

In many cases, long-term capital gains are taxed at lower rates than ordinary income. Because of that, retirees frequently begin withdrawals here first while allowing retirement accounts to continue compounding as a broader wealth management strategy.

For example, someone retiring in their early 60s may rely heavily on brokerage assets for several years while delaying Social Security and minimizing taxable IRA withdrawals.

Tax-Deferred Retirement Accounts

Traditional retirement accounts are funded with pre-tax contributions, which means taxes are deferred until withdrawals begin.

Common examples include:

• Traditional IRAs
• 401(k) plans
• 403(b) accounts
• SEP IRAs

Withdrawals from these accounts are generally taxed as ordinary income.

That distinction becomes important in retirement because larger withdrawals can sometimes create unintended tax consequences. Higher taxable income may increase Medicare premiums, affect Social Security taxation, or push retirees into a higher marginal tax bracket.

This is also where Required Minimum Distributions eventually enter the conversation. Once retirees reach the IRS-mandated RMD age, withdrawals become mandatory whether the income is needed or not.

Tax-Free Retirement Accounts

Roth accounts work differently.

Because contributions are made with after-tax dollars, qualified withdrawals can generally be taken tax-free later in retirement.

These accounts may include:

• Roth IRAs
• Roth 401(k)s

Many retirees prefer preserving Roth assets for later years because the money can continue growing tax-free. Roth IRAs also avoid Required Minimum Distributions during the original owner’s lifetime, which adds another layer of flexibility.

For some households, Roth accounts eventually become less about retirement spending and more about long-term tax planning or legacy planning.

Other Retirement Income Sources

Retirement income rarely comes from a single source.

Depending on the household, retirees may also receive income from:

• Social Security benefits
• Pension payments
• Annuities
• Life Insurance Policies
• Cash reserves
• CDs or short-term savings

The timing of these income streams often influences withdrawal decisions from investment accounts.

What Is the Best Order to Withdraw Retirement Funds?

Although every retirement plan is different, many financial professionals use a similar framework when building retirement withdrawal strategies.

Account Type > Typical Withdrawal Priority > Tax Treatment

Taxable Brokerage Account > First > Capital gains taxes

Traditional IRA / 401(k) > Second > Ordinary income taxes

Roth IRA > Last > Tax-free qualified withdrawals

The goal is usually to create income while managing taxes as efficiently as possible over the course of retirement — not just in a single calendar year.

Step 1 — Withdraw From Taxable Accounts First

Taxable investment accounts are often used first because they provide flexibility.

This approach may help retirees:

• Preserve tax-deferred growth
• Delay larger IRA withdrawals
• Manage taxable income more carefully
• Keep Roth assets invested longer

In practical terms, this might mean selling appreciated investments gradually instead of taking large withdrawals from retirement accounts right away.

Some retirees also use dividends and interest income to reduce how much principal they need to withdraw during the early years of retirement.

This phase can be especially useful before Social Security benefits or pension income fully begin.

Step 2 — Withdraw From Tax-Deferred Accounts

As taxable accounts decline or retirement income needs increase, retirees often begin drawing more heavily from traditional IRAs and 401(k)s.

Because these withdrawals are taxed as ordinary income, timing becomes important.

Rather than waiting until Required Minimum Distributions force larger withdrawals later in life, some retirees intentionally take moderate IRA withdrawals earlier in retirement. Others explore partial Roth conversions during lower-income years as part of their tax planning strategy.

These strategies are often designed to help:

• Reduce future RMDs
• Smooth taxable income over time
• Lower long-term tax exposure
• Avoid unnecessary Medicare premium increases

For example, a recently retired couple in their early 60s may temporarily fall into a lower tax bracket before Social Security and RMDs begin. Those years can create valuable planning opportunities.

Step 3 — Withdraw Roth Accounts Last

Roth accounts are frequently preserved for the later stages of retirement.

One reason is simple: qualified withdrawals are tax-free.

Keeping Roth assets intact longer may provide:

• Continued tax-free growth
• Flexibility during higher-income years
• Protection from future tax increases
• Potential estate planning benefits

That said, retirement planning rarely follows a perfectly straight line.

Some retirees use Roth assets earlier during market downturns or years with unusually high healthcare expenses. Others use Roth withdrawals strategically to avoid pushing taxable income above Medicare IRMAA thresholds.

The best retirement withdrawal sequence depends less on rigid rules and more on how all the pieces work together.

Situations Where the Standard Withdrawal Order May Change

Even well-designed withdrawal strategies sometimes need adjustments.

Retirement planning changes as markets shift, tax laws evolve, or personal circumstances change.

Early Retirement Before Social Security

People who retire before claiming Social Security often experience a temporary drop in taxable income.

Those years can create opportunities for:

• Partial Roth conversions
• Lower-tax IRA withdrawals
• Long-term tax planning

For some retirees, these “gap years” become one of the most useful planning windows in retirement.

High Net Worth Retirement Planning

Higher-net-worth households may face additional planning considerations, including:

• Estate tax exposure
• Medicare IRMAA surcharges
• Net investment income taxes
• Charitable giving strategies

In these situations, withdrawal planning becomes more detailed because tax decisions in one area can affect several others. We take our clients through a comprehensive financial planning process that identifies these ahead of time is extremely important.

Market Downturns and Sequence of Returns Risk

Market declines can create added pressure during retirement, especially early on.

If retirees are forced to sell investments during a downturn while simultaneously withdrawing income, portfolio losses may become harder to recover from.

This is often referred to as sequence of returns risk.

During difficult market periods, retirees sometimes lean more heavily on:

• Cash reserves
• Bond holdings
• Dividend income
• Roth assets

That flexibility may help reduce the need to sell long-term investments at depressed prices.

Required Minimum Distribution Strategies

Required Minimum Distributions eventually force withdrawals from traditional retirement accounts.

Without proactive planning, RMDs can:

• Increase taxable income
• Raise Medicare premiums
• Affect Social Security taxation

Some retirees use Qualified Charitable Distributions (QCDs) to donate directly from IRAs, potentially lowering taxable income while supporting charitable causes.

Married Couples and Survivor Tax Planning

Retirement withdrawal planning often changes significantly after the death of a spouse.

A surviving spouse may eventually move into a higher tax bracket despite having similar income levels.

Because of that, couples sometimes coordinate withdrawals and Roth conversions earlier in retirement to reduce future tax exposure for the surviving spouse.

How Taxes Affect Retirement Withdrawal Strategies

Taxes are one of the biggest variables in retirement income planning.

A withdrawal strategy that looks efficient today may create larger tax problems later if future Required Minimum Distributions become too large.

Understanding Marginal Tax Brackets in Retirement

Many retirees expect taxes to drop sharply once employment income ends.

In reality, retirement income can still come from several taxable sources at once, including:

• IRA withdrawals
• Pension income
• Capital gains
• Social Security benefits

Managing taxable income carefully may help retirees remain within more favorable tax brackets over time.

Capital Gains vs Ordinary Income

Not all retirement income is taxed the same way.

Long-term capital gains from brokerage accounts may receive lower tax treatment than withdrawals from traditional retirement accounts, which are generally taxed as ordinary income.

That difference is one reason taxable accounts are often used first.

Roth Conversion Opportunities

Roth conversions involve moving money from traditional retirement accounts into Roth accounts while paying taxes upfront.

Although conversions increase taxable income in the year they occur, they may reduce future RMDs and create additional tax-free income later in retirement.

For retirees in temporarily lower tax brackets, Roth conversions can sometimes become an important long-term planning strategy.

Medicare Premium Surcharges (IRMAA)

Many retirees are surprised to learn that retirement withdrawals can affect Medicare costs.

Crossing certain income thresholds may increase Medicare Part B and Part D premiums through IRMAA surcharges.

Careful withdrawal planning may help retirees avoid crossing those thresholds unnecessarily.

Common Retirement Withdrawal Mistakes to Avoid

Even financially disciplined retirees can run into problems if withdrawals are poorly coordinated.

Taking Large Lump Sum Withdrawals

Large withdrawals can create several unintended consequences at once.

They may:

• Push income into higher tax brackets
• Increase Medicare premiums
• Trigger additional Social Security taxation

In many situations, spreading withdrawals across multiple years creates better long-term tax efficiency.

Claiming Social Security Too Early

Claiming Social Security at the earliest available age permanently reduces monthly benefits.

For some retirees, using portfolio withdrawals strategically while delaying Social Security may increase lifetime retirement income.

Ignoring Required Minimum Distributions

Missing Required Minimum Distributions can lead to IRS penalties.

Beyond compliance, proactive RMD planning may also help retirees avoid larger tax burdens later in life.

Withdrawing Too Conservatively or Too Aggressively

Retirement spending requires balance.

Overspending early may increase the risk of running out of assets later. On the other hand, withdrawing too conservatively sometimes prevents retirees from fully enjoying the lifestyle they spent years preparing for.

Most retirement income plans benefit from periodic adjustments rather than a “set it and forget it” approach.

Building a Tax-Efficient Retirement Income Plan

No single withdrawal strategy works for everyone.

Income needs, healthcare costs, investment allocation, tax brackets, and long-term goals all influence the most effective approach.

At Harding Financial Group, retirement planning conversations often focus on helping clients understand how today’s withdrawal decisions may affect future flexibility.

A retirement withdrawal strategy is rarely just about generating income for this year alone. The larger goal is usually creating a sustainable plan that balances taxes, investment growth, healthcare costs, and long-term financial security over time.

Retirement Withdrawal Strategies Should Be Personalized

Tax laws change. Markets shift. Healthcare expenses evolve over time.

Because of that, retirement withdrawal planning typically works best when strategies are reviewed periodically instead of relying on fixed assumptions for decades.

Factors like Social Security timing, Required Minimum Distributions, investment performance, and legacy goals all play a role in shaping long-term retirement income decisions.

Conclusion: Creating a Smarter Retirement Withdrawal Strategy

The best order to withdraw retirement funds depends on more than convenience.

Taxes, Required Minimum Distributions, Social Security timing, healthcare costs, and market performance all influence which strategy makes the most sense.

For many retirees, beginning with taxable accounts, transitioning gradually into tax-deferred accounts, and preserving Roth assets for later years creates a strong foundation for retirement income planning.

Still, the most effective retirement strategies are usually flexible rather than rigid.

Retirement income planning works best when withdrawals are coordinated thoughtfully and reviewed regularly as financial needs, tax laws, and market conditions evolve.

If you are planning for your future or getting close to retirement, having a conversation about the right way to withdraw for the lifestyle you want to live would be a great idea. Harding Financial Group would be more than happy to assist, show you some tools that show potential outcomes, and help you make better decisions. Contact us today and we’ll be in touch to discuss.