Withdrawal Sequencing: The ‘Order of Operations’ That Extends Your Portfolio by 5 Years
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Result: Smoothing tax rates saved ~$40,000 over retirement.
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Withdrawal Sequencing: The “Order of Operations” That Extends Your Portfolio by 5 Years
CORE INSIGHTS
- The Default Rule: Standard advice is “Taxable First, Roth Last.” This delays taxes but can create a massive RMD liability later in life.
- The RMD Cliff: If you save your Traditional IRA for last, RMDs at age 73 may push you into a higher tax bracket and trigger IRMAA surcharges.
- Bracket Filling: The optimal strategy is often to withdraw from your Traditional IRA early (to fill the 12% bracket) while letting your Taxable account grow.
You spent 30 years saving into different buckets. Now, the order in which you tap them determines your tax bill. A smart Withdrawal Sequence minimizes lifetime taxes, not just this year’s taxes.
What-If Scenario: The $1 Million RMD Problem
| Strategy | Tax Paid (Early) | RMD Tax (Late) |
|---|---|---|
| Taxable First | Low (Cap Gains) | High (24% Bracket) |
| Bracket Filling | 12% (Smooth) | Low (Reduced RMD) |
Visualizing Portfolio Survival
*Figure 1: Longevity. Optimized withdrawals (Green) extend the portfolio life by 4 years.*
Strategic Action Steps
1
Know Your Brackets
Identify the top of the 12% bracket. Withdraw from Traditional IRAs until you hit this line. Don’t waste low-tax space.
Identify the top of the 12% bracket. Withdraw from Traditional IRAs until you hit this line. Don’t waste low-tax space.
2
Spend Cash/Roth for Excess
If you need more money above the bracket line, pull from Taxable or Roth. This keeps your marginal rate low.
If you need more money above the bracket line, pull from Taxable or Roth. This keeps your marginal rate low.
3
Asset Location Swap
As you spend down Taxable accounts, rebalance by buying stocks inside your IRA to maintain your risk target.
As you spend down Taxable accounts, rebalance by buying stocks inside your IRA to maintain your risk target.
The Bottom Line: Who Should Choose What?
- Choose Taxable First: Retirees with small IRAs who won’t face big RMDs.
- Choose Bracket Filling: Retirees with >$1M in Pre-Tax IRAs. You must diffuse the RMD bomb early.
Frequently Asked Questions
What is the standard withdrawal order?
Conventionally: 1) Taxable Brokerage, 2) Traditional IRA, 3) Roth IRA. This lets tax-sheltered accounts grow longer.
When should I break this rule?
If you have low income early in retirement, withdraw from your Traditional IRA to ‘fill up’ low tax brackets (10-12%) instead of wasting them.
How much does this save?
Optimal sequencing can add 0.70% to 1.00% in annual tax-adjusted alpha, extending portfolio life by 3-7 years.
Disclaimer: This content is for informational purposes only. Tax brackets change. Consult a CPA.