Retirement Withdrawal Strategy: How to Pull Money Out Tax-Efficiently

The order in which you pull money from your retirement accounts matters more than most people realize. Here's an example that makes the point.

A married couple, both 66, retired in January with $1.3 million spread across three account types: a taxable brokerage, Traditional IRAs, and Roth IRAs. They need $80,000 a year to live on. If they follow the old conventional wisdom (drain the taxable account first, then the IRA, then the Roth), they'll pay roughly $173,000 in total federal taxes over 25 years. If they instead blend withdrawals across accounts and manage their tax brackets, that number drops to around $124,000.

Same money. Same retirement. Forty-nine thousand dollars difference. That's the power of a withdrawal strategy.

The short version: Don't just empty one account at a time. Blend withdrawals from taxable, tax-deferred, and tax-free accounts to stay in low tax brackets. Fill unused bracket space with Roth conversions. The goal isn't avoiding taxes entirely; it's paying the least total tax over your entire retirement.

The Old Rule (And Why It's Wrong)

For decades, the standard advice was simple: spend taxable accounts first, then tax-deferred (Traditional IRA/401(k)), then Roth last. The logic seemed sound: let the tax-advantaged accounts grow as long as possible.

The problem? This creates a "tax time bomb." Your Traditional IRA grows untouched for years, ballooning in value. Then at age 73, required minimum distributions force you to withdraw large amounts, often pushing you into the 22% or 24% bracket (or higher) right when you also start collecting Social Security.

Fidelity's research shows that a proportional withdrawal strategy (blending accounts) can add years to portfolio longevity compared to the sequential approach [1]. The reason is straightforward: filling low brackets now with smaller Traditional IRA withdrawals is cheaper than being forced into high brackets later with massive RMDs.

The Three Tax Buckets

Every dollar you withdraw comes from one of three "tax buckets." Understanding these is the foundation of any withdrawal strategy.

The magic is in how these interact. A married couple in 2026 can have up to $96,950 in taxable income and stay in the 12% federal bracket [2]. Above that, the rate jumps to 22%. That's a 10-percentage-point cliff.

Your standard deduction ($32,200 for a married couple both 65+, including the additional senior amounts) means the first $32,200 or so of income is tax-free. The next $23,200 is taxed at 10%. The next $73,750 at 12%. You want to use every dollar of that low-rate space, and not a dollar more.

The Bracket-Filling Strategy

This is the most powerful technique available to retirees, and it's surprisingly simple in concept. Here's how it works for a specific couple.

The Setup: Tom and Karen, both 66, retired. No Social Security yet (they're delaying to 70). They need $80,000 for spending. They have $450,000 in Traditional IRAs, $650,000 in a taxable brokerage account, and $200,000 in Roth IRAs.

Step 1: Find the ceiling. Their standard deduction ($32,200) plus the top of the 12% bracket ($96,950) means they can have up to about $129,150 in gross income before any dollar gets taxed at 22%.

Step 2: Pull spending money from the taxable brokerage. Tom and Karen take $80,000 from their Fidelity brokerage account to cover living expenses. Because much of this may consist of long-term capital gains (and their income is low), a large portion could be taxed at 0%. The exact amount depends on their cost basis.

Step 3: Convert Traditional IRA dollars to Roth, filling the low brackets. Now for the real move. They initiate a direct Roth conversion of around $90,000 from their Traditional IRAs to their Roth IRAs. This is an internal transfer between accounts (not a withdrawal to their checking account). The converted amount is taxable as ordinary income.

Tax bill on the $90,000 conversion:

• First $32,200: $0 (standard deduction)
• Next $23,200 (10% bracket): $2,320
• Remaining $34,600 (12% bracket): $4,152
• Total federal tax: $6,472

They pay the tax bill from their brokerage account or from cash on hand.

The result: They spent $80,000 on living, paid an effective federal rate of about 7.2% on the conversion income, and moved $90,000 out of the "future RMD tax bomb" pile and into a Roth where it grows tax-free forever and won't be subject to RMDs later.

If they'd just taken $80,000 from the Traditional IRA for spending instead, they'd have filled only part of the 12% bracket. The remaining space would have been wasted, and the other IRA dollars would sit there growing, only to be forcibly withdrawn at potentially higher rates later.

Real life is messier than this example. State taxes, Medicare premium surcharges (IRMAA), and Social Security income all complicate the calculation. That's exactly why doing rough math now beats doing no math at all.

When Social Security Changes the Equation

Once Social Security kicks in, your bracket space shrinks. If Tom and Karen each collect $24,000 a year in benefits at 70, up to 85% of that ($40,800 combined) becomes taxable income. That eats into the low-bracket space they were using for Roth conversions.

This is why the years between retirement and Social Security (and before RMDs start at 73) are often called the "golden window" for Roth conversions. It's the lowest-income period many retirees will ever have. Using it to shift money from tax-deferred to tax-free can save tens of thousands of dollars over a 25-year retirement.

The opportunity isn't unlimited. Once RMDs begin, you must take those distributions first (they can't be converted). And once Social Security starts, your base income is higher. The window is roughly ages 60 to 72 for most people. Don't waste it.

(I've seen retirees who delayed Social Security and used those years aggressively for Roth conversions end up in a dramatically better tax position at 80 than peers who started spending their IRAs on day one. The math isn't even close.)

The 0% Capital Gains Strategy

Here's a tax benefit many retirees miss entirely. In 2026, a married couple filing jointly pays 0% on long-term capital gains if their total taxable income stays below $98,900 [3].

That means if Tom and Karen have $30,000 in unrealized gains in their Fidelity brokerage account, they could sell those positions, realize the gains, and pay zero federal tax on them, as long as their other taxable income doesn't push them above the threshold.

This is called "tax-gain harvesting." It's the opposite of tax-loss harvesting. You're deliberately realizing gains in a year when they're tax-free, resetting your cost basis higher. If you sell and immediately rebuy (no wash sale rule for gains), you've paid $0 in tax and reduced your future tax bill.

The catch: those capital gains count toward the combined income formula that determines how your Social Security benefits are taxed. Everything connects.

What Not to Do

Don't withdraw everything from one account type. Depleting your taxable account first leaves you with nothing but taxable IRA withdrawals later. Depleting your Roth first wastes your most valuable tax-free asset.

Don't ignore state taxes. If you live in California (13.3% top rate), your optimal strategy looks very different from someone in Texas or Florida (0%). State taxes can shift the math on Roth conversions significantly.

Don't forget about Medicare surcharges. If your modified adjusted gross income exceeds $206,000 (married filing jointly, 2025), your Medicare Part B premiums jump. A large Roth conversion that saves income tax might cost you in Medicare premiums. Run both calculations.

Don't treat this as set-and-forget. Tax laws change. Your spending changes. Your health changes. The right withdrawal strategy in Year 1 of retirement probably isn't the right strategy in Year 15. Revisit annually.

Your Next Move

1. Map your tax buckets. Add up exactly how much you have in taxable, tax-deferred, and tax-free accounts. If more than 60% is in Traditional IRAs/401(k)s, you likely have a future RMD problem worth addressing now.

2. Calculate your bracket space. Take your standard deduction, add the top of the 12% bracket, and subtract any guaranteed income (pension, Social Security). The remaining number is how much you can withdraw or convert from Traditional accounts at a low tax rate.

3. Start Roth conversions during the golden window. If you're retired but haven't started Social Security or RMDs, fill your low brackets with conversions every year. Even $20,000 a year adds up over a decade.

4. Harvest capital gains at 0%. If your taxable income is low enough, sell and rebuy appreciated holdings in your brokerage account to reset cost basis. Use our compound interest calculator to see how tax savings compound.

5. Coordinate with your overall drawdown plan. Withdrawal strategy isn't just about taxes. It intersects with sequence of returns risk, spending patterns, and which phase of retirement you're in.

References

1. Fidelity Viewpoints. (2025). Tax-savvy withdrawals in retirement. Fidelity.com.
2. Internal Revenue Service. (2024). Revenue Procedure 2024-40. IRS.gov. https://www.irs.gov/pub/irs-drop/rp-24-40.pdf
3. Bankrate. (2025). Long-term Capital Gains Tax Rates 2025-2026. Bankrate.com.
4. Morningstar. (2025). The State of Retirement Income: 2025.
5. Congressional Research Service. (2025). Federal Income Tax Rules and the Taxation of Retirement Income. Congress.gov.