You can’t retire from taxes — but you can plan for them. Taxes remain one of the most underestimated risks to sustainable retirement income. A thoughtful tax strategy isn’t about beating the IRS; it’s about structuring withdrawals in a way that keeps more of your hard-earned money working for you.
The Importance of Order-of-Distribution Planning
One of the most powerful — and often overlooked — levers in retirement tax planning is order of distribution. This refers to the sequence in which you draw from different account types: taxable, tax-deferred, and tax-free. The order you choose can have a profound effect on your lifetime tax bill, investment growth, and legacy planning.
- Start with taxable accounts.
Use non-qualified assets (brokerage accounts, bank accounts, after-tax investments) first. Because after-tax accounts carry the annual drag of taxation on dividends and gains, they typically grow slower than other types of accounts. By drawing from them first can allow your tax-advantaged accounts to continue to grow and compound. This approach helps preserve the growth potential of IRAs and Roth accounts that enjoy tax-deferral or tax-free treatment. - Next, move to tax-deferred accounts.
Traditional IRAs and 401(k)s are taxed as ordinary income upon withdrawal, assuming all the contributions were made on a pre-tax basis. Keep in mind that when reaching age 73, you will need to take required minimum distributions (RMDs) from these accounts. - Preserve Roth assets for last.
Your Roth IRA is the only account that offers tax-free withdrawals in retirement (assuming you meet the age and holding requirements). Leaving these accounts untouched as long as possible allows tax-free growth to compound — and can serve as a powerful estate-planning tool, since heirs can inherit these assets without future income tax. These accounts are not subject to RMD rules.
Other Considerations
As with everything in life, there are circumstances that may require deviating from this framework. Although this isn’t meant to be an exhaustive list, there are a few key items to keep in mind.
You may want to strategically withdraw from different accounts to manage your annual income and stay within a specific tax bracket. For example, if you are in a low tax bracket during an early retirement year, you might consider withdrawing more from a tax-deferred account or consider a Roth conversion.
In addition, keeping a close eye towards your “asset location” (an investment strategy that matches different types of investments in different types of accounts) can have a significant impact on tax planning.
A Fiduciary Perspective
True financial planning is not about chasing returns; it’s about building sustainable, tax-efficient income that supports your lifestyle and goals. Order-of-distribution planning requires thoughtful modeling, careful tax analysis, and a clear understanding of your income needs over time.
As fiduciaries, our role is to help you coordinate your investment, income, and tax strategies — ensuring every withdrawal decision supports your broader retirement plan. By intentionally sequencing your distributions, you can potentially reduce taxes, extend portfolio longevity, and gain greater control over your retirement cash flow.
The Bottom Line
You’ve worked too hard to let poor tax planning erode your retirement income. With proactive distribution planning — and guidance rooted in fiduciary responsibility — you can approach retirement with confidence, clarity, and control.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third party data which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article.
