Most retirement planning focuses on saving. Far less attention goes to the other side of the equation: how you will turn those savings into income. A thoughtful retirement withdrawal strategy decides which accounts to draw from, in what order, and in what amounts each year. Those choices can affect how much tax you pay over your lifetime, how long your portfolio may last, your Medicare premiums, and what you eventually leave to heirs. If you want help mapping out your own sequence, a complimentary, no-obligation wealth and tax review can be a practical first step.
This guide explains the basic account types, the conventional withdrawal order, and why many retirees across Wisconsin, from La Crosse to Janesville, may benefit from a more flexible approach.
The Three Tax Buckets
Most retirees hold money in some combination of three types of accounts, each taxed differently.
Taxable accounts
Brokerage accounts, savings, and other non-retirement accounts are funded with after-tax dollars. You generally owe tax each year on interest and dividends, and capital gains tax when you sell an investment for more than you paid. Withdrawals of your original investment are not taxed again.
Tax-deferred accounts
Traditional IRAs, 401(k) plans, and similar employer plans typically receive pre-tax contributions. Growth is deferred, but withdrawals are taxed as ordinary income. Required minimum distributions begin at a certain age, which means the IRS eventually requires you to take money out whether you need it or not. Check current IRS rules for the applicable age and calculation.
Roth accounts
Roth IRAs and Roth employer accounts are funded with after-tax dollars. Qualified withdrawals are generally tax-free, and Roth IRAs are not subject to required minimum distributions for the original owner. That flexibility makes Roth money valuable later in retirement and for heirs.
Some retirees also hold a health savings account used as a retirement account, which can offer tax-free withdrawals for qualified medical expenses.
The Conventional Retirement Withdrawal Strategy
The traditional rule of thumb is simple: spend taxable accounts first, then tax-deferred accounts, then Roth accounts last. The logic is that it lets tax-advantaged accounts keep growing for as long as possible.
That approach can work, but it has drawbacks. A retiree who lives only on taxable savings in the early years may report very little income, then face a surge of taxable income later when required minimum distributions begin and Social Security is fully underway. That later surge can push income into higher brackets, increase the share of Social Security that is taxed, and trigger higher Medicare premiums through IRMAA. Our article on IRMAA and Medicare premium planning explains how those surcharges work.
A More Flexible Approach: Filling Lower Brackets
Many planners favor a blended approach. Instead of draining one bucket at a time, you draw from several accounts each year in proportions designed to manage taxable income. Common techniques include:
Bracket filling. In years when income is low, such as early retirement before Social Security or required distributions begin, you may withdraw extra from tax-deferred accounts or complete partial Roth conversions to use up lower tax brackets.
Pairing withdrawals. Combining some tax-deferred income with taxable account withdrawals or Roth distributions can help keep income within a target range.
Harvesting gains or losses. In taxable accounts, selling positions strategically can help manage capital gains over time.
Charitable planning. Retirees who give to charity may consider qualified charitable distributions from IRAs once eligible, which can count toward required distributions without adding to taxable income. Annual limits apply.
The right mix changes from year to year as your income, tax law, and market values change. A retirement withdrawal strategy is best treated as an annual decision rather than a set-it-and-forget-it rule.
How Investments and Withdrawals Work Together
Withdrawal sequencing is not only a tax question. It is also a wealth management question. Which assets you hold in each account, and which ones you sell to raise cash, affect both your tax bill and your portfolio risk.
For example, many retirees keep a reserve of cash or short-term bonds to cover a period of spending. That reserve may allow you to avoid selling stocks during a market decline, which can reduce sequence of returns risk. Asset location, meaning the placement of tax-efficient and tax-inefficient holdings in the right account types, can also complement your withdrawal order.
The Compound calculator can help you explore how different growth and contribution assumptions may change account balances over time. Its results are hypothetical and do not reflect actual investments or predict future results.
Coordinating With Social Security and Other Income
Your withdrawal plan should fit around other income sources. Delaying Social Security, for instance, may mean drawing more from your portfolio in early retirement, which could create a window for Roth conversions. Our overview of Social Security claiming strategies covers the tradeoffs. Pensions, rental income, part-time work, and annuity payments all change how much room you have in each bracket.
Wisconsin residents should also consider state income tax treatment of different income types. Our article on retirement tax planning for Wisconsin retirees discusses state-specific considerations that matter for households in Appleton, Brookfield, and across the state.
Thinking About Heirs
The order in which you spend accounts also affects what you leave behind. Heirs who inherit traditional IRAs generally owe income tax on withdrawals, often over a compressed timeline, while inherited Roth accounts may be withdrawn tax-free if requirements are met. Taxable accounts may receive a step-up in basis at death under current law. Because these rules interact with your estate plan and beneficiary designations, coordinate any legacy decisions with your estate attorney.
Next Steps for Your Withdrawal Plan
A retirement withdrawal strategy that coordinates taxes, investments, Social Security, and legacy goals may help your savings last longer and reduce lifetime taxes, though there is no guarantee. Reviewing your plan each year keeps it aligned with changing rules and markets. To talk through your accounts and income sources, request a complimentary wealth and tax review. There is no obligation.
Frequently Asked Questions
What is a retirement withdrawal strategy?
It is a plan for which accounts to draw from, in what order and amounts, to fund retirement spending. The goal is usually to manage taxes, support portfolio longevity, and meet legacy goals.
Should I always spend taxable accounts first?
Not always. Spending taxable accounts first is a common rule of thumb, but blending withdrawals from several account types may help manage taxable income over your lifetime.
When do required minimum distributions start?
They begin at an age set by federal law, which has changed in recent legislation. Check current IRS rules or ask a tax professional for the age that applies to you.
Can Roth conversions be part of a withdrawal plan?
Yes. Partial Roth conversions in lower income years may help reduce future required distributions and create tax-free income later. Conversions are taxable in the year completed, so modeling is important.
How often should I revisit my withdrawal order?
At least once a year, and whenever your income, tax law, health, or goals change significantly.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
This content is intended primarily for search engine visibility and general informational purposes. Information may be generalized or subject to change. Please contact our team for the most current and accurate information.
About Compound Wealth
Compound Wealth brings together professionals across tax planning, wealth management, accounting, and business transition services to provide a coordinated planning experience. This collaborative approach supports evaluating financial decisions from multiple perspectives while supporting each client's broader planning objectives.
