After decades of squirreling away money for retirement, there comes a time when retirees must start withdrawing money from their accounts.
Drawing down 401(k), IRA and other assets earmarked for retirement shouldn’t be willy-nilly. The reason: What investment accounts retirees pull from — and when and why — can make a big difference in maximizing a nest egg over 10, 20, even 30 years.
When it comes to taking retirement withdrawals, it’s all about making savings last as long as possible and minimizing taxes. There are smart and not-so-smart ways to take distributions.
Why you need retirement withdrawal strategies
There are several key factors retirees must consider: Longevity, IRS rules, income levels, IRS tax brackets, required minimum distributions (RMDs), tax treatment of retirement accounts and, of course, meeting both short- and long-term financial goals.
There are general rules that Wall Street recommends when drawing down retirement assets, such as withdrawing money first from accounts that yield the smallest tax bill and enabling money invested in tax-deferred accounts to grow as long as possible.
Financial advisers say there are other tactical moves and withdrawal strategies (even counterintuitive ones) that retirees can employ throughout retirement as their financial circumstances change, to keep more of their savings in their wallets and pay less to Uncle Sam.
Here are four smart ways to pull from a retirement nest egg without cracking it.
1. Make tax-efficient withdrawals
The adage "It’s not what you earn but what you keep," also applies to retirement balances.
Before taking withdrawals, be aware that different types of investment accounts have different tax treatments. That means some withdrawals can net more post-tax dollars than others.
Withdrawals from savings accounts and money market funds, for example, have zero tax impact. Investments in taxable brokerage accounts, such as individual stocks, bonds, or funds, held more than one year, receive favorable capital gains tax treatment.
The tax rate on most net capital gains is no higher than 15% for most individuals. For 2026, the long-term capital gains rate is 0% for married filers with taxable income less than $98,900. The 15% rate applies to couples filing jointly with income between $98,901 and $613,700.
Capital Gains |
Taxable Income |
Taxable Income |
Taxable Income (Married Filing Separate) |
Taxable Income (Head of Household) |
0% |
Up to $49,450 |
Up to $98,900 |
Up to $49,450 |
Up to $66,200 |
15% |
$49,451 to $545,500 |
$98,901 to $613,700 |
$49,451 to $306,850 |
$66,201 to $579,600 |
20% |
Over $545,500 |
Over $613,700 |
Over $306,850 |
Over $579,600 |
Traditional 401(k)s and IRAs are taxed at ordinary income rates, which range from 10% to 37%. Withdrawals from Roth IRAs and Roth 401(k)s are tax-free.
"The less retirees are spending on taxes, the more they have for the future," says Nancy Anderson, regional director of financial planning at Key Private Bank.
"Tax-efficient withdrawals allow them to take out more money for income and also makes their money last longer."
Pay attention to the order in which you withdraw from accounts
To minimize taxes on asset sales, the recommended order of account withdrawals starts with cash equivalents.
Next, retirees should withdraw from brokerage accounts, then from traditional retirement accounts. Finally, retirees should withdraw from Roth accounts after all other accounts, since these Roths benefit most from long-term tax-deferred compounding.
Here’s a basic example, summarized in the table below.
Say a retiree needs $10,000. If it’s pulled from a savings account, only $10,000 needs to be withdrawn.
Now imagine the retiree wants to withdraw $10,000 from a brokerage account, where $6,000 is the original investment (also called your "cost basis" or principal) and $4,000 is the profit. The retiree only owes the 15% tax on the $4,000 gain. So the capital gains tax would be $600. They would need to withdraw roughly $10,600 in gross to net $10,000.
If the money comes from a traditional 401(k) and the retiree is in a 22% tax bracket, the after-tax cost rises to $12,821.
A tax-free Roth withdrawal would be just $10,000, but barring an unforeseen emergency, financial advisers prefer to let that Roth money ride to benefit from tax-deferred growth and tax-free withdrawals later in life on a much larger balance.
Source of Funds |
Amount Needed |
|---|---|
Savings account |
$10,000 |
Brokerage account ($6K principal, $4K profit) |
$10,600 |
Traditional 401(k) |
$12,821 (22% tax bracket) |
Roth 401(k) |
$10,000 |
2. Manage tax brackets
What retirees should avoid, if possible, is taking withdrawals from accounts that increase taxable income and push them into a higher, more costly tax bracket.
"Tax bracket management is key," says Anderson.
A better strategy for retirees is to fill lower tax brackets up to the top, but not generate so much additional income from account withdrawals that they enter a higher bracket.
This is a good example of the retirement rule of $1 more, where poor planning can mean that just one more dollar earned, spent, or withdrawn, under certain circumstances, can result in hundreds or even thousands of dollars in lost savings.
For example, let’s say a retiree is near the high end of the 12% tax bracket, which, for married couples in 2026, tops out at taxable income of $100,800.
Given that the 22% bracket kicks in above that income level, pulling, say, $50,000 from a traditional 401(k) to help an adult child with a home down payment will be costly. Why? A large chunk of that financial assistance will be taxed at the higher 22% bracket.
Coming up with that $50,000 will result in a $14,103 tax hit at the 22% tax rate, effectively requiring a $64,103 withdrawal to net $50,000.
The downside is twofold: the retiree is paying more in taxes while also shrinking their nest egg.
"If you can whittle down, say, a $2 million nest egg to $1 million at favorable tax rates by the time you must start taking RMDs, it’s a win."
3. Adopt a flexible withdrawal strategy
Sure, general rules are useful guideposts. But taking a flexible approach to retirement account withdrawals as life circumstances change can go a long way toward extending the life of your nest egg, says Bob Peterson, senior wealth adviser at Crescent Grove Advisors.
Things change in life. People lose jobs. Incomes fluctuate year to year. Workers retire earlier than they had planned. Tax laws change. Eventually, retirees must begin taking RMDs at age 73.
All these life changes affect financial decisions and can lead to different tax-related withdrawal strategies than the original plan.
A good example is retirees who think it’s always a good idea to pay as little tax as possible in any given year.
"You have to get the client to understand that sometimes you want to pay taxes," says Peterson.
He acknowledges that it’s a counterintuitive way to view taxes, but retirees must look at their tax situation over many years — their lifetimes. Their withdrawal strategies must also be adjusted to take advantage of the tax code's benefits at specific points in retirement.
Case in point: the day the paycheck stops.
"When someone's still working, there are only so many levers you can pull," says Peterson. "The second you retire, the W-2 disappears; that's kind of like the bonanza of planning strategies, because your tax bracket typically drops off a cliff."
That creates tax-saving withdrawal opportunities now that can also benefit the retiree later.
For example, let’s say a retiree with a hefty 401(k) balance quits working, falls into a very low tax bracket and plans to wait until age 70 to take Social Security. From a tax-planning perspective, there’s now a multiple-year window before RMDs kick in that the retiree can pull from his accounts in a low-bracket, tax-friendly way.
"You really have to say to the client, 'Look, this is a spectrum over time, and you just went from a really high tax bracket to a really low bracket,'" Peterson explained. "'But, because of all these retirement assets you have, when you reach your 70s (and must take RMDs), you might be back in a 32%-plus bracket.'
"Don't focus on paying the absolute minimum. In the years between retirement and Social Security and RMDs (when you’re in a lower tax bracket), we may want to take distributions or do Roth conversions. 'Pay 22% now because I know it's going to be 32% later.' The default mentality is to pay the least amount possible, but that's going to blow up in your face."
If you can whittle down, say, a $2 million nest egg to $1 million at favorable tax rates by the time you must start taking RMDs, it’s a win.
In most cases, paying taxes at a lower rate today can result in savings tomorrow.
"I've never had a client upset when I lay it out over the long term and show them a tax projection and say, 'Hey, you know you're used to paying 32% in taxes; we're going to take this money out at 12%, or we're going to convert it to a Roth IRA at 12%, and you'll never pay tax again,' " says Peterson. "If you can see that train wreck coming, you can start to plan for it."
4. Manage withdrawals to create a paycheck
Creating a withdrawal strategy that generates a paycheck-like income stream unaffected by financial market volatility can give retirees peace of mind and a good night’s sleep, says Anderson.
She advises setting up a tax-efficient distribution plan from retirement funds that can build up enough cash, or liquidity, to cover one to three years’ worth of income.
“Having that liquidity bucket and then transferring money on a monthly basis to a checkbook is very helpful and can help people stay invested in the long term,” she says.
In general, retirees should think of how to generate about 240 "paychecks" in retirement.
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