Smart Account Withdrawals in Retirement: Keeping More of What You’ve Saved

As you approach or enter retirement, one of the most important questions becomes “How do I withdraw my savings in a way that minimizes taxes?” Even though you’ve worked hard to build a nest egg, how you withdraw your funds can make a significant difference in how much you get to spend in retirement. This blog will walk you through some practical strategies to help you maximize your retirement income and minimize your tax burden.

1. Start with Taxable Accounts

If you have money saved across different types of accounts—taxable (e.g., brokerage accounts), tax-deferred [like traditional IRAs or 401(k)s], and tax-free (such as Roth IRAs)—the order in which you tap into these accounts matters. For many retirees, it’s tax-efficient to start withdrawals from taxable accounts first. Here’s why:

When you withdraw from taxable accounts, you’re typically only taxed on the gains. By starting with these accounts, you allow the funds in your tax-deferred and tax-free accounts to keep growing tax-advantaged, helping you build a more robust income stream over the years.

Pre-retirees can benefit by balancing contributions across account types to help create more flexibility later on.

2. Use Tax-Deferred Accounts Strategically

After drawing from taxable accounts, consider turning to your tax-deferred accounts. Withdrawals from these accounts, like traditional IRAs and 401(k)s, are taxed as ordinary income. By delaying these withdrawals as long as possible (until required minimum distributions, or RMDs, start), you allow these funds to continue growing without being taxed.

However, if you expect your income to be lower in the early years of retirement, it may be advantageous to take some withdrawals from tax-deferred accounts before RMDs kick in. Doing this may reduce the taxable portion of your Social Security benefits and lower your Medicare premiums.

3. Use Tax-Free Accounts for Flexibility and Legacy

Consider strategically using tax-free accounts, such as Roth IRAs. Because withdrawals from Roth IRAs are tax-free in retirement, these accounts can be especially helpful in years when additional income from other accounts would push you into a higher tax bracket or raise your Medicare premiums.

Using Roth IRAs later in retirement also provides flexibility: You can tap into them without triggering extra taxes, helping you manage your total tax burden. And since Roth IRAs don’t have required minimum distributions during your lifetime, they can keep growing tax-free, making them an excellent asset to pass on to your heirs.

For pre-retirees, building up Roth savings now can give you valuable retirement options, allowing you to maintain a flexible, tax-efficient strategy.

4. Plan for Required Minimum Distributions (RMDs)

Once you reach RMD age, the IRS mandates that you begin taking distributions from most tax-deferred accounts. Ignoring or missing an RMD comes with hefty penalties, so it’s essential to plan for these withdrawals.

By projecting future RMDs, you may see that earlier, smaller withdrawals from your retirement accounts (or Roth conversions, which we’ll discuss next) can keep you from being hit with large RMDs and taxes later.

For pre-retirees, knowing that RMDs are coming up can help you prepare. One effective way to manage RMDs is to shift some of your savings into Roth accounts during your working years or early retirement when you might be in a lower tax bracket.

5. Consider Roth Conversions

A Roth IRA offers tax-free withdrawals in retirement, so it can be a valuable account in your withdrawal strategy. Converting funds from a traditional IRA to a Roth IRA means you’ll pay taxes on the converted amount now. Still, this strategy can benefit those who expect to be in a higher tax bracket later on or want to reduce future RMDs.

For those nearing retirement, Roth conversions during low-income years can be an excellent way to diversify your tax strategy and lower the tax impact of withdrawals later. However, be mindful of how conversions affect your current year’s taxes, potentially moving you into a higher tax bracket or increasing your Medicare premiums.

6. Optimize Social Security Benefits

While not a withdrawal strategy in the traditional sense, the timing of your Social Security benefits can impact your tax situation. Delaying Social Security until age 70 increases your monthly benefit to the maximum amount possible, which can serve as a form of “tax-free” income boost.

Consider how Social Security fits into your retirement income plan. Using your retirement accounts to cover expenses and delay Social Security can result in a larger benefit later and could prove more tax-efficient in the long run.

7. Be Aware of the Tax Torpedo

The “tax torpedo” refers to the situation where withdrawals from retirement accounts make a portion of your Social Security benefits taxable. This can happen when income from withdrawals or other sources pushes you over certain thresholds, triggering taxes on up to 85% of your Social Security.

To avoid the tax torpedo, pre-retirees and retirees can benefit from careful income planning, such as balancing withdrawals between taxable and tax-free accounts and controlling the timing of retirement income sources.

8. Don’t Overlook Qualified Charitable Distributions (QCDs)

If you’re charitably inclined and over age 70½, qualified charitable distributions (QCDs) allow you to donate up to $100,000 annually directly from your IRA to a qualified charity. This can satisfy part or all of your RMD, and the distribution doesn’t count as taxable income. QCDs are a great way to manage your RMDs without raising your tax burden.

9. Work with a Fiduciary Financial Advisor

Withdrawal strategies can get complicated quickly. A fiduciary financial advisor, who must act in your best interest, can help you coordinate these strategies to meet your income needs while minimizing your tax burden. They can assist with forecasting your tax situation and optimizing your withdrawals across accounts. This guidance can be valuable, especially as tax laws and personal circumstances change.

Bringing It All Together

For pre-retirees, building tax diversification now can give you more options later. For retirees, being intentional with your withdrawals can mean a big difference in your spendable income. A tax-efficient plan can help your savings last longer and offer you greater financial security and peace of mind throughout retirement.

In this phase of life, you deserve to enjoy your hard-earned money. Thoughtful, tax-smart strategies can make a difference in how much of it is there for you each year.

Schedule a complimentary, 15-minute chat with a fee-only, fiduciary financial advisor today to discuss your personal situation.

This material was written in collaboration with artificial intelligence (ChatGPT) derived from sources believed to be accurate. This information should not be construed as investment, tax, or legal advice.

Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor with offices in Granite Bay and Folsom, CA, and Lehi and Logan, UT. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country’s leading professional association of fee-only financial advisors.