“One of the key principles for extending the life of your retirement savings is to implement a tax-efficient withdrawal plan,” said Colleen Jaconetti, a retirement expert with Vanguard’s Investment Strategy Group.

If you have different types of accounts, start by categorizing them as either taxable (a joint account or a brokerage account) or tax-advantaged—which includes tax-deferred accounts (traditional IRAs and 401(k)s) and tax-free accounts (Roth IRAs and 401(k)s).

So how can you be tax-efficient? The key is taking money from your retirement accounts in the most strategic order:

  1. Take required minimum distributions (RMDs) from tax-deferred accounts.
  2. Tap your taxable accounts.
  3. Withdraw from tax-advantaged accounts.
Reviewing IRS tax rules for each type of account can help you determine the timing and amount of your withdrawals.

The sequence, and why it matters

Start with RMDs.

If you’re 70½ or older and have a tax-deferred account, such as a traditional IRA or 401(k), you must take a yearly RMD or face a steep penalty—50% tax on the required amount.

Next, deplete cash distributions from taxable accounts.

Investments outside your tax-favored retirement accounts generate taxable cash flows—for example, interest, dividends, or capital gains. Whether you reinvest or spend these distributions, you’ll owe taxes on them.

“It’s better to use these cash flows to meet your spending needs rather than reinvest them and possibly have to sell assets later to meet your future spending needs,” said Jaconetti. “Consider setting up a checking account in which to deposit these distributions, along with RMDs and other retirement income such as a pension or Social Security check.”

We can help you make your savings last

Partner with an advisor

Then, sell your taxable assets.

To avoid driving up your taxable income, it’s better to sell taxable assets before withdrawing money beyond the RMD from tax-deferred accounts. Withdrawing from your traditional 401(k) or IRA most likely will incur income tax on the entire withdrawal.

However, if you sell from your taxable account, you’ll be liable only for capital gains on the appreciation of your investment. Currently, income tax rates are higher than long-term capital gains rates. And if you wait to withdraw from tax-deferred accounts, you can let them grow and put off the tax bite.

“Try to minimize the impact of taxes by selling assets at a loss or minimal gains first,” Jaconetti added.

Finally, draw from your tax-deferred or tax-free accounts.

Your current and expected future tax rate should help determine which account to tap next.

If you expect to be in a higher tax bracket later, you should withdraw from tax-deferred accounts when you think your tax rate will be lowest. Delaying withdrawals from tax-free accounts will help maximize their growth. But if you expect your rate to drop, withdraw from tax-free accounts before tax-deferred ones.

Legacy considerations

Some investors want to leave assetsto heirs. If you do, consider both your own tax bracket and theirs.

In general, it’s better to transfer assets to them that have no tax liability—for example, a Roth. That’s because beneficiaries of traditional IRAs or other tax-deferred accounts will incur taxes. It’s ideal to spend more from these before transferring them.

“Most people want to leave a legacy, but your own spending needs should be your top priority,” Jaconetti said. “Don’t be afraid to spend the assets you have because you may need to use them to live on.”

Withdrawal order for retirees to make savings last

Withdrawal order for retirees to make savings last
Source: Vanguard.


All investing is subject to risk, including the possible loss of the money you invest.