Definition
Withdrawal order determines the sequence in which account types are depleted during decumulation. Optimal ordering minimizes lifetime tax liability by exploiting differences in tax treatment across account types.
Tax Arbitrage: Different account types have different tax profiles. Strategic sequencing preserves tax-advantaged growth while minimizing current-year tax liability.
The conventional "taxable first, then traditional, then Roth" order is a starting point, not a rule. The real skill is recognizing when to deviate: bracket-filling Roth conversions, capital gains harvesting at 0%, and coordinating with Social Security timing can all improve on the static sequence.
Standard Withdrawal Order
The conventional tax-efficient sequence withdraws from accounts in this order:
Tax Impact Comparison
Example: Retiree needs $50,000 annual income with $300k taxable, $500k Traditional IRA:
*Assumes MFJ with income below $94k threshold for 0% LTCG rate. Actual tax depends on cost basis.
Dynamic Ordering
Real-world implementation often deviates from static ordering. The goal isn't to follow a formula — it's to fill low tax brackets with the right type of income each year. Consider these situations:
- Bracket filling: Withdraw from Traditional IRA to fill low brackets even if taxable available
- Roth conversion opportunity: May preserve taxable assets for conversion tax payment
- RMD constraints: Must take RMDs regardless of optimal order after age 73
- Capital gains harvesting: Realize gains when in 0% LTCG bracket
- ACA subsidies: Keep income below threshold for premium tax credits
RMD Override: At age 73+, RMDs from Traditional accounts are mandatory regardless of withdrawal strategy. Simulation models this constraint automatically.