Tax-Efficient Retirement Income Order

You have money in three kinds of accounts. Which one do you spend first? That single choice can move your lifetime tax bill more than your fund picks ever will. The order you draw income in is one of the highest-leverage decisions in retirement, and almost nobody plans it.

The three buckets

Retirement money usually sits in three tax wrappers, and each is taxed differently when you pull from it:

• Taxable accounts. Brokerage and bank money. You’re taxed only on gains and dividends, often at lower long-term capital-gains rates.
• Tax-deferred accounts. Traditional IRAs and 401(k)s. Every dollar out is ordinary income, and these carry RMDs starting at 73 or 75.
• Tax-free accounts. Roth IRAs. Qualified withdrawals are tax-free, and there are no RMDs during your life.

The conventional order, and why it’s a decent default

The textbook sequence is taxable first, tax-deferred second, Roth last. The logic holds up: spend the lightly taxed money early, let the tax-deferred and tax-free accounts keep compounding, and save the Roth for last because it grows tax-free and passes to heirs tax-free. As a default, it’s reasonable.

But a default isn’t a plan. Follow it on autopilot and you can sail through your 60s with artificially low income, only to get hammered when RMDs and Social Security switch on together and force a wall of ordinary income in your 70s. The naive order can quietly set up the exact bracket spike you were trying to avoid.

Where to bend it: fill the brackets in the low years

Here’s the move the textbook order misses. The low-income years before RMDs begin are too valuable to waste. Rather than touch only the taxable account and report almost no income, you can deliberately pull from the tax-deferred account, or run a Roth conversion, to “fill up” a low bracket while it’s cheap. For 2026, a married couple stays in the 12% bracket up to $100,800 of taxable income and the 22% bracket up to $211,400. Topping off the 22% bracket on purpose in your 60s can spare you the 24% or higher on forced RMDs later.

There’s a parallel move in your taxable account. For 2026, a married couple with taxable income up to $98,900 pays 0% on long-term capital gains. In a low-income year you can realize gains at no federal tax and reset your cost basis. The same logic, a different lever.

The hidden price: the lines above the brackets

Drawing income isn’t only about the bracket you land in. Two quieter lines move with your income and cost real money. The first is IRMAA, the surcharge on your Medicare premiums, set by your income from two years earlier. The second is the share of your Social Security that becomes taxable, which climbs as your other income rises. So the “right” account to draw from depends on where you sit against those thresholds, not just the income-tax table. The order that minimizes this year’s tax can maximize your Medicare premium two years out. Plan the whole board.

For higher-net-worth households

With large balances and multiple income sources, the order becomes a multi-year optimization, not a rule of thumb. The aim is to smooth income across decades so you never spend years in a low bracket only to get forced into the top one. That usually means proactively drawing down or converting tax-deferred money in the quiet years, harvesting gains at 0% when you can, and protecting the Roth for last because it’s the most valuable asset to hold and to leave behind. See First-Year Withdrawal Plan for how to turn this into your year-one paycheck.

What you own matters. Where you own it, and the order you spend it, often matters more. Sequence it deliberately and you keep more of what you spent a lifetime building.