Best Order to Withdraw Retirement Accounts: Save Thousands

Congratulations! You’ve spent decades diligently saving for retirement across various accounts — your 401(k), traditional IRA, Roth IRA, and maybe some taxable investment accounts. Now comes the million-dollar question: which accounts should you tap first when it’s time to start withdrawing money in retirement?

The order in which you withdraw from your retirement accounts can make a massive difference in how long your money lasts and how much you’ll pay in taxes. Get it right, and you could potentially save tens of thousands of dollars over your retirement. Get it wrong, and you might find yourself running out of money sooner than expected or paying Uncle Sam more than necessary.

The conventional wisdom used to be simple: withdraw from taxable accounts first, then tax-deferred accounts, and save Roth accounts for last. But modern retirement planning has evolved, and the optimal withdrawal strategy is more nuanced than ever. Your personal situation — including your tax bracket, health status, legacy goals, and market conditions — all play crucial roles in determining the best approach for you.

Understanding Your Account Types and Tax Implications

Before diving into withdrawal strategies, let’s get crystal clear on how different account types are taxed when you withdraw money:

Taxable Investment Accounts: You’ve already paid income tax on the money you contributed, so you only owe capital gains tax on any growth. Long-term capital gains rates for 2026 are 0%, 15%, or 20%, depending on your income level.

Traditional 401(k) and IRA Accounts: Every dollar you withdraw is taxed as ordinary income at your current tax rate. If you’re in the 22% tax bracket, that withdrawal gets hit with 22% federal tax plus any state income tax.

Roth 401(k) and Roth IRA Accounts: Withdrawals are completely tax-free as long as you’re over 59½ and the account has been open for at least five years.

Health Savings Accounts (HSAs): Often overlooked as retirement accounts, HSAs offer triple tax advantages. Withdrawals for qualified medical expenses are tax-free at any age, and after 65, you can withdraw for any purpose (though non-medical withdrawals are taxed as ordinary income).

The Traditional Withdrawal Strategy: Taxable First

The classic approach follows this order:

Taxable investment accounts
Traditional 401(k) and IRA accounts
Roth accounts last

This strategy makes sense because it preserves your tax-advantaged accounts for as long as possible, allowing them to continue growing tax-free or tax-deferred. It also tends to keep your taxable income lower in early retirement, potentially keeping you in lower tax brackets.

For example, let’s say you’re 62 and need $50,000 annually. If you withdraw from taxable accounts first, you might only pay 15% capital gains tax on the growth portion. But if you took that same $50,000 from a traditional 401(k), the entire amount would be taxed as ordinary income.

However, this traditional approach has some significant limitations that might make it suboptimal for your situation.

The Modern Approach: Tax Diversification and Bracket Management

Today’s retirement planning experts often recommend a more sophisticated strategy called “tax diversification” or “tax-efficient withdrawal sequencing.” This approach focuses on managing your tax bracket each year rather than simply following a rigid order.

Here’s how it works: Instead of depleting one account type before moving to the next, you strategically withdraw from different accounts to optimize your tax situation year by year.

Filling Up Lower Tax Brackets

Consider taking some money from traditional retirement accounts even when you don’t need to, especially if you’re in a lower tax bracket than you expect to be in later. For 2026, the 12% tax bracket for married couples filing jointly extends to $89,450 in taxable income.

If your Social Security and other income only put you at $60,000, you have nearly $30,000 of room left in that 12% bracket. It might make sense to do a Roth conversion or take additional traditional IRA withdrawals to “fill up” that bracket, even if you don’t need the money for current expenses.

Strategic Roth Conversions

Roth conversions can be a powerful tool when used strategically. You pay tax now on the converted amount, but all future growth and withdrawals are tax-free. This is particularly valuable if:

You’re currently in a lower tax bracket than you expect in the future
You want to reduce future required minimum distributions (RMDs)
You’re concerned about tax rates increasing over time
You want to leave tax-free money to heirs

Navigating Required Minimum Distributions

Once you turn 75 (as of 2026), you must start taking required minimum distributions from traditional 401(k) and IRA accounts. These RMDs can significantly impact your withdrawal strategy because they might push you into higher tax brackets whether you need the money or not.

RMDs are calculated by dividing your account balance by your life expectancy factor. For example, at age 75, you’d divide your account balance by 24.6. So if you have $500,000 in traditional retirement accounts, your RMD would be about $20,325.

Planning Around RMDs

Smart retirees start planning for RMDs years before they’re required:

Ages 62-75: This is your “golden window” for tax planning. You can control your taxable income by choosing which accounts to withdraw from and potentially doing Roth conversions in lower-tax years.

Age 75+: RMDs become mandatory, but you can still optimize by coordinating them with your other withdrawals and managing which accounts you tap for additional funds.

Consider Your Spouse’s Age: If there’s an age gap between spouses, the younger spouse might be in a lower tax bracket after the older spouse starts collecting Social Security, creating conversion opportunities.

Account-Specific Withdrawal Strategies

Health Savings Accounts: The Secret Retirement Weapon

If you have an HSA, it should often be the last account you touch. After age 65, HSAs become like traditional IRAs for non-medical expenses, but they retain their tax-free advantage for medical costs — and healthcare expenses tend to increase significantly in retirement.

The average couple retiring in 2026 will spend approximately $315,000 on healthcare throughout retirement, according to Fidelity research. An HSA can cover these costs completely tax-free.

Roth IRA vs. Roth 401(k) Timing

If you have both Roth IRAs and Roth 401(k)s, prioritize the 401(k) withdrawals first. Roth 401(k)s are subject to RMDs, while Roth IRAs are not. By spending down your Roth 401(k) first, you can potentially roll the remainder into a Roth IRA to avoid future RMDs.

Taxable Account Optimization

When withdrawing from taxable accounts, be strategic about which investments you sell. Harvest tax losses by selling underperforming investments first, and consider the wash sale rule if you want to repurchase similar investments.

Also, if you have both individual stocks and mutual funds, you might prioritize selling individual stocks to reduce concentration risk while maintaining diversified mutual fund holdings.

Special Situations and Considerations

Early Retirement (Before Age 59½)

If you’re retiring before 59½, your options become more limited due to early withdrawal penalties on retirement accounts. However, several strategies can help:

Substantially Equal Periodic Payments (SEPP): Also known as 72(t) distributions, this allows penalty-free withdrawals from traditional IRAs if you commit to taking equal payments for at least five years or until age 59½, whichever is longer.

401(k) Rule of 55: If you leave your job at age 55 or later, you can withdraw from that employer’s 401(k) without penalties (though you’ll still owe income tax).

Roth IRA Contributions: You can always withdraw your original Roth IRA contributions penalty-free, though you can’t touch the growth without penalties before 59½.

Market Volatility and Sequence of Returns Risk

When markets are down significantly, it might make sense to deviate from your normal withdrawal order to avoid selling investments at a loss. This is where having multiple account types really pays off — you can adapt your strategy based on market conditions.

Consider keeping 1-2 years of expenses in cash or short-term bonds, so you’re not forced to sell stocks during market downturns.

State Tax Considerations

Don’t forget about state taxes in your withdrawal planning. Some states don’t tax retirement income, while others tax it heavily. If you’re considering relocating in retirement, the tax treatment of different account types might influence both your withdrawal strategy and your choice of residence.

Building Your Personal Withdrawal Strategy

Creating an optimal withdrawal strategy requires considering your unique circumstances:

Income Needs: How much do you need annually, and is this amount consistent or variable?

Tax Situation: What’s your current tax bracket, and what do you expect it to be in the future?

Legacy Goals: Do you want to leave money to heirs, and if so, would you prefer it to be tax-free?

Health Status: Are you likely to have high medical expenses that could benefit from HSA withdrawals?

Longevity: Family history and health status affect how long you need your money to last.

Risk Tolerance: Are you comfortable with the complexity of managing multiple account types, or do you prefer simplicity?

Many retirees benefit from working with a fee-only financial planner who can model different scenarios using software like Income Lab or NewRetirement to optimize their personal withdrawal strategy.

Final Thoughts

The optimal retirement withdrawal strategy isn’t one-size-fits-all, and it’s definitely not set-it-and-forget-it. The best approach for you depends on your unique financial situation, tax considerations, and retirement goals. While the traditional approach of depleting taxable accounts first still makes sense for some retirees, many people can benefit from a more nuanced strategy that manages tax brackets year by year.

The key is to remain flexible and review your strategy annually. Tax laws change, your financial situation evolves, and market conditions shift. What works best in your first year of retirement might not be optimal five or ten years later.

Remember, the goal isn’t just to minimize taxes — it’s to maximize the probability that your money lasts throughout retirement while providing the lifestyle you want. Sometimes paying a bit more in taxes now can save you significantly more later, and sometimes the peace of mind that comes with simplicity is worth more than the theoretical tax savings of a complex strategy.

Consider working with a qualified financial professional who can help you model different scenarios and create a withdrawal strategy that aligns with your specific goals and circumstances. The decisions you make about withdrawal order can literally be worth tens of thousands of dollars over your retirement, making professional guidance a potentially valuable investment.