5 Steps to Withdrawing From Your Retirement Accounts to Make Money Last

Step 2: Think about asset ‘location’

We’re accustomed to hearing about asset allocation — an investor’s chosen mix of stocks, bonds, cash and other assets that lines up with their risk tolerance and is appropriate for their age and goals. Asset location is different. It’s selecting the accounts in which you hold your investments with an eye toward minimizing your overall tax bite.

There are two things to think about here. First, the investments themselves. You likely want to consider holding anything that pays income in a tax-deferred account. That’s because interest is taxed at your ordinary income rate. The bigger your bond portfolio, the bigger the potential income payout. That could get pricey in a brokerage account. On the flip side, you likely want to consider holding stocks, exchange-traded funds (ETFs), real estate investment trusts (REITs), municipal bonds and other tax-efficient investments in a brokerage account. You can harvest losses in a brokerage account to help offset any gains from asset sales.

The second consideration is when you plan to take the money out. You want to have each of your assets invested for roughly the time frame you want to keep it inside the account. That’s why a Roth IRA, which doesn’t impose RMDs, tends to be the right holding place for your most aggressive assets (generally stocks) that you want to hold for the longest period of time. Starting in 2024, Roth 401(k)s won’t have RMDs either.

Step 3: Consider the tried and true path

Both Barrow and Smith were very clear that there is no one-size-fits-all as far as retirement withdrawals are concerned, in part because no one else has your particular time-based needs for your hard-earned money. That said, there is an order that experts typically — remember that word — follow to maximize tax efficiencies (i.e. pay as little to Uncle Sam as possible), and it’s this: Draw from taxable accounts first, then tax-deferred accounts, then tax-free (or Roth). Why is this the preferred order? “When you’re living in retirement, [primarily] on Social Security income, you’re in a pretty low tax bracket,” Barrow says. “You draw from the taxable bucket first because drawing from the tax-deferred bucket [means you’re increasing your taxable income] and could increase your tax bracket. More problematically, that can increase your Medicare premiums.” (More on that in a second.)

This allows for the investments in the tax-deferred bucket to continue to grow as long as possible though that’s the account you draw down next. Finally (if you have to), you draw from the tax-free bucket. 

Step 4: Beware of IRMAA (and ACA pricing)

Remember the word "typically" from Step 3? Here are the exceptions. Once your Social Security benefit starts, reduce IRA withdrawals to limit the taxability of your benefit. Research from Edelman Financial Engines shows that half or more of tax savings, from an optimal withdrawal strategy, comes from reducing the taxes on your Social Security benefits. Then we come to IRMAA, which stands for the Medicare Income-Related Monthly Adjustment Amount. 

Essentially, if you earn more than $97,000 as an individual or $194,000 as a couple in 2023, your Medicare premiums increase significantly. The money you save on taxes — and more — could be eaten up by the increased amount you have to pay in Medicare. If you retired early and are bridging yourself to Medicare with a policy from the Affordable Care Act exchange, you may be receiving a subsidy for your coverage. Earn more than about $55,000 (again in 2023) as a single person, double that as a couple, and you are at risk of losing all or part of that benefit.  ​

Step 5: Get some help

All in all, it’s important to realize that life is changing as we speak. 

“These are not hard-and-fast rules,” Smith notes, “particularly right now.” 

Many of the provisions of the Tax Cuts And Jobs Act, which passed in 2017, are set to expire in 2025. A number of things could happen as a result. The standard deduction, for example, which in 2023 is $13,850 for single filers and $27,700 for married couples, could be cut in half. The child tax credit could be cut in half for many people. And tax brackets — for many — could grow. If you file single and earn $108,001 to $182,100, you’re in the 24 percent bracket in 2023. If the law expires, your tax bracket would climb to 28 percent. Married couples earning $274,401 to $364,200 this year are currently in the 24 percent tax bracket. But if the act expires, their tax rate would be 33 percent. All of these variables potentially change the math for retirement withdrawals. Bottom line: If you’re unsure how to proceed with the ground shifting beneath you, it’s time to talk to a financial adviser. Even an hour or two of advice can pay benefits for years to come.

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