Three buckets, one outcome
Most retirement savers arrive at retirement with assets spread across three tax buckets: taxable accounts (brokerage), tax-deferred accounts (traditional 401(k) and IRA), and tax-free accounts (Roth). The conventional focus is on how much is in each bucket and how those assets are invested. The sequence in which you withdraw from them, however, can matter as much as the allocation inside them — and it is almost always underweighted in the planning conversation.
The conventional, suboptimal order
The default approach many retirees take is to draw from taxable accounts first, then tax-deferred, then tax-free. The intuition is reasonable: spend the already-taxed money first, defer the tax-deferred money for continued growth, and preserve the tax-free Roth as a last-resort inheritance. In many cases, however, this order leaves significant value on the table.
A more tax-efficient sequence
A more efficient sequence typically begins with taxable accounts (to capture their already-taxed character and any favorable treatment of long-term gains), then layers in tax-deferred withdrawals up to the top of a target bracket — often the 12% or 22% federal bracket — and uses Roth withdrawals to top off spending in years when additional tax-deferred withdrawals would cross into a higher bracket.
A worked example
Consider a retiree with $600,000 in a taxable account, $900,000 in a traditional IRA, and $500,000 in a Roth, needing $70,000 of annual spending after Social Security. Under the conventional order, the taxable account funds the early years, the traditional IRA funds the middle years and is then forced to distribute larger amounts via RMDs, and the Roth is barely touched. Over thirty years, the cumulative tax bill is meaningfully higher than it needs to be.
The factors that complicate it
The efficient sequence is not universal. It is complicated by Social Security taxation thresholds, by Medicare premium surcharges that are themselves driven by taxable income, by state tax treatment, and by the desire to leave specific buckets to heirs. Each of these can shift the optimal sequence for a given household.
The bottom line
The sequence in which you draw from your taxable, tax-deferred and tax-free accounts in retirement is a lever that most retirees underuse. A tax-efficient withdrawal order can add years to a portfolio’s life without requiring higher returns or lower spending — only a more deliberate sequence. It is one of the highest-leverage decisions in retirement planning, and it deserves the same attention as the asset allocation it sits alongside.