Curated by: Rubric Advisors
Retirement Planning
Retirement Income Distribution Strategy: Account Sequencing
The order in which you draw from taxable, tax-deferred, and Roth accounts in retirement can make a six-figure difference in lifetime taxes, optimal sequencing is far more nuanced than the conventional wisdom suggests.
Retirement Income Distribution Strategy: Account Sequencing
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The Three Account Types
- Taxable accounts: cost basis + gains; only gains are taxed, and at favorable long-term capital gains rates
- Tax-deferred accounts (Traditional IRA, 401k): all withdrawals taxed as ordinary income at your marginal rate
- Roth accounts: qualified withdrawals are completely tax-free, both contributions and growth
- Each account type has different tax characteristics that create sequencing opportunities
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The Three Account Types
- Taxable accounts: cost basis + gains; only gains are taxed, and at favorable long-term capital gains rates
- Tax-deferred accounts (Traditional IRA, 401k): all withdrawals taxed as ordinary income at your marginal rate
- Roth accounts: qualified withdrawals are completely tax-free, both contributions and growth
- Each account type has different tax characteristics that create sequencing opportunities
Conventional Wisdom (and Its Limits)
- Traditional advice: spend taxable first, then tax-deferred, then Roth last
- Logic: let tax-advantaged accounts grow longer; Roth grows tax-free the longest
- Problem: this approach often leads to huge RMDs later, pushing retirees into the highest brackets
- A more dynamic approach, adjusting withdrawals year by year based on tax brackets, usually outperforms
Dynamic Sequencing Strategy
- Each year, assess your taxable income and determine how much bracket space remains before the next rate jump
- Fill lower brackets with tax-deferred (Traditional IRA) withdrawals, this is effectively converting at low rates
- Use taxable account withdrawals for spending above that, capital gains are taxed at preferential rates
- Preserve Roth assets for high-income years, late retirement, or legacy purposes
RMD Management
- Large tax-deferred balances at age 73+ generate forced distributions (RMDs) that may spike your bracket
- Strategic pre-RMD withdrawals and Roth conversions can reduce future RMD amounts
- Every dollar converted to Roth before RMDs begin is a dollar that won't generate forced taxable income later
- Coordinate Roth conversions with the gap between retirement and Social Security/RMD start dates
Impact on Medicare and Social Security
- Higher MAGI triggers IRMAA surcharges on Medicare Parts B and D, potentially $2,000-$6,000+ per person per year
- Roth withdrawals do not count toward MAGI, strategic Roth use can keep you below IRMAA thresholds
- Up to 85% of Social Security benefits become taxable as combined income rises
- Account sequencing directly affects how much of your Social Security is subject to federal income tax
Key Takeaways
- The 'spend taxable first' rule of thumb is often suboptimal, dynamic sequencing produces better outcomes
- Fill low tax brackets with tax-deferred withdrawals; use Roth strategically for high-income years
- Pre-RMD Roth conversions can dramatically reduce lifetime tax liability and IRMAA exposure
- Work with a financial advisor to model your optimal withdrawal sequence across all three account types
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