For high-income retirees, the order in which you withdraw from your accounts – taxable, tax-deferred, and tax-free – can greatly affect your taxes, Medicare premiums, and how long your savings last. A generic “withdraw taxable first” approach often backfires for wealthier individuals due to larger Required Minimum Distributions (RMDs) and potential Medicare IRMAA surcharges. Here’s the smarter way to plan:
- Start with taxable accounts for flexibility and to manage ordinary income.
- Use early retirement years (before RMDs at 73) to withdraw from tax-deferred accounts or perform Roth conversions at lower tax rates.
- Delay Roth withdrawals to preserve tax-free growth and reduce taxable income later.
- Watch Medicare thresholds to avoid IRMAA surcharges, which are triggered by higher Modified Adjusted Gross Income (MAGI).
- Time Social Security wisely to reduce taxable benefits and maximize lifetime payout.
This tailored approach minimizes taxes, reduces future RMDs, and helps you avoid costly Medicare premium hikes.
The 3 Types of Retirement Accounts and How They’re Taxed
Retirement accounts have different tax rules that determine when taxes are paid, how much you owe, and how withdrawals affect your finances. For retirees with higher incomes, these rules can influence tax brackets, Medicare premiums, and the overall longevity of their retirement savings.
Taxable Accounts
Taxable accounts are funded using after-tax dollars, making them highly flexible. You can access your money anytime without penalties or restrictions, which is a key advantage.
The tax treatment depends on the type of income generated. For example, income from short-term capital gains (investments held for one year or less), bond income, and non-qualified dividends is taxed at ordinary income rates. On the other hand, long-term capital gains (from assets held for over a year) enjoy lower tax rates – commonly 0%, 15%, or 20%, based on your income. Qualified dividends also benefit from these reduced rates, making them more tax-efficient.
Now, let’s look at tax-deferred accounts, which take a different approach by postponing taxes until withdrawals are made.
Tax-Deferred Accounts
Tax-deferred accounts include traditional IRAs, 401(k)s, 403(b)s, and similar retirement plans. These accounts offer an upfront tax advantage by allowing contributions to be made with pre-tax dollars. This lowers your taxable income for the year you contribute, and your investments grow tax-free until you start withdrawing funds. However, when you do withdraw, those distributions are taxed as ordinary income.
For retirees with higher incomes, withdrawals from these accounts increase your Modified Adjusted Gross Income (MAGI), which can push you into higher tax brackets or result in additional Medicare surcharges. Additionally, the IRS mandates that you begin taking required minimum distributions (RMDs) once you reach a certain age. These RMDs can significantly raise your taxable income, even if you don’t need the money at the time, potentially affecting both your overall tax bill and Medicare premiums. Proper planning around withdrawals is essential to minimize taxes over your lifetime.
On the other hand, tax-free accounts allow you to grow your savings without worrying about future taxes.
Tax-Free Accounts
Tax-free accounts, such as Roth IRAs and Roth 401(k)s, provide some of the most favorable tax benefits for retirees. These accounts are funded with after-tax dollars, and as long as you meet the age and holding period requirements, both the growth and withdrawals from these accounts are completely tax-free. This means withdrawals won’t be treated as taxable income, helping you avoid higher tax brackets or additional surcharges.
Another advantage of Roth accounts is that they don’t require lifetime minimum distributions, giving you more flexibility and control over your finances during retirement.
The Standard Withdrawal Order and Why It Falls Short
Most financial advice suggests withdrawing from taxable accounts first, followed by tax-deferred accounts, and saving Roth accounts for last. While this has been the go-to strategy for decades, it doesn’t always work well for retirees with higher incomes.
Why the Standard Sequence Exists
The traditional withdrawal sequence – starting with taxable accounts, then moving to tax-deferred accounts, and finally to tax-free Roth accounts – rests on a simple idea: give tax-advantaged accounts more time to grow. By postponing withdrawals from these accounts, retirees can maximize the benefits of compounding.
"The traditional approach is to withdraw first from taxable accounts, then tax-deferred accounts, and finally Roth accounts, where withdrawals are tax-free. The goal is to allow tax-deferred and Roth assets the opportunity to grow over more time." – Fidelity [1]
Tax-deferred accounts, like traditional IRAs and 401(k)s, grow without being taxed annually, while Roth accounts grow entirely tax-free. Taxable accounts, on the other hand, are funded with after-tax dollars, making them the logical first choice for withdrawals. For retirees with moderate savings, this approach is often efficient.
However, for retirees with significant wealth, this method can lead to unintended tax consequences.
Why It Doesn’t Work for High-Income Retirees
The standard withdrawal strategy begins to falter for retirees with larger portfolios. When substantial savings remain in tax-deferred accounts, delaying withdrawals can result in larger required minimum distributions (RMDs) later. These mandatory withdrawals, which start at age 73, can push retirees into much higher tax brackets than expected.
This sudden increase in taxable income can trigger additional costs, such as higher Medicare IRMAA surcharges. These surcharges, tied to income, create a “tax bump” during retirement, potentially leading to higher lifetime taxes than necessary.
For wealthier retirees, the financial impact is even more pronounced. Take, for example, a couple with $5.5 million in retirement assets. Following the conventional withdrawal order might leave them with an after-tax legacy of $1.63 million by age 95. However, by adopting a more tailored strategy – blending withdrawals from different account types and using Roth conversions strategically – they could increase their after-tax legacy to $2.1 million. That’s an improvement of $477,000 in today’s dollars. This approach also avoids the recurring IRMAA surcharges that often kick in under the traditional method at age 72.
"The traditional retirement strategy is to spend taxable assets first, then go to tax-deferred (IRA) assets, and then finally tap into tax-exempt (Roth IRA) assets. In many cases, this results in higher lifetime taxes. We have now developed more tax-efficient distribution strategies that are possible, including the strategic use of Roth conversions." – Chris Siraganian, Senior Advisor at First Financial Consulting
The issue with the standard withdrawal order is its one-size-fits-all nature. It doesn’t account for differences in income levels, account sizes, or tax situations. For high-income retirees with diverse and substantial savings, sticking to this outdated approach can mean missing out on smarter, more tax-efficient strategies.
Building a Custom Withdrawal Plan for High-Income Retirees
After reviewing account types and standard withdrawal sequences, it’s clear that high-income retirees need a strategy tailored to their unique financial landscape. The goal? Balance taxes, manage Medicare costs, and preserve long-term savings by strategically withdrawing funds over a lifetime.
Choosing Accounts Based on Your Income and Tax Bracket
Your current tax bracket plays a major role in determining which accounts to draw from first. For example, during low-income years – like the early retirement period before Social Security kicks in – it can be smart to withdraw from tax-deferred accounts. Why? Because paying taxes at a lower rate now can save you from higher rates later, when Required Minimum Distributions (RMDs) might push you into a higher bracket.
For high-income retirees, those early retirement years can be a golden opportunity for tax planning. If you retire at 62 and don’t start Social Security until 70, you could have several years of lower income before RMDs begin at age 73. During this window, withdrawing strategically from tax-deferred accounts can make a huge difference.
Here’s a possible approach:
- Use taxable accounts for cash flow, keeping ordinary income manageable.
- Save Roth accounts for later withdrawals, as they’re tax-free.
- Take advantage of the lower tax rates on long-term capital gains from taxable accounts (0%, 15%, or 20%, depending on your income). These rates are often much lower than the rates applied to IRA withdrawals.
For retirees in higher brackets (24% or 32%), tapping taxable accounts can help keep the tax bill under control while leaving room for other strategies. And if you need extra funds but want to avoid increasing your taxable income, withdrawing from a Roth account is a smart move – it won’t impact your tax bracket or Medicare premiums.
The key is to adapt your withdrawals to your yearly tax situation. Some years, taxable accounts might be your primary source of income; in others, larger IRA distributions could help you make the most of a lower tax bracket. While this requires careful planning, it can save tens of thousands of dollars over the course of your retirement.
Now, let’s look at how Roth conversions can further optimize your withdrawal strategy.
Using Roth Conversions
Roth conversions are a game-changer for high-income retirees, but timing is everything. When you convert funds from a traditional IRA to a Roth IRA, you pay taxes on the converted amount that year. The payoff? That money grows tax-free and won’t be taxed when you withdraw it later. Plus, converting reduces the balance in your tax-deferred accounts, which means smaller RMDs in the future.
"If you're already retired and your investment assets are heavily weighted toward tax-deferred accounts, you can use these potentially lower-than-normal income years to convert additional tax-deferred assets into Roth accounts." – UBS [2]
The ideal time to convert is during those low-income years we mentioned earlier. For instance, if you retire at 62 and delay Social Security until 70, you may have up to eight years of significantly lower taxable income. Converting portions of your IRA during this period lets you lock in your current tax rate instead of facing higher rates when RMDs begin.
"The dollars converted would be taxable, but you would increase the balance in the accounts that offer tax-free growth and distribution. You'd also reduce the balance in your tax-deferred accounts, which may lower the size of your required minimum distributions, giving you more flexibility in managing your tax burden in retirement." – UBS [2]
To avoid a “tax time bomb” in your 70s and 80s, consider systematically converting portions of your IRA during your 60s. This spreads the tax impact over several years, preventing a large, one-time tax hit. But be careful – converting too much at once can push you into a higher tax bracket or trigger IRMAA (Income-Related Monthly Adjustment Amount) surcharges. A common tactic is to convert just enough to stay within your current tax bracket. For example, if you’re in the 22% bracket, you might convert up to the threshold of the 24% bracket without exceeding it.
Reducing your tax-deferred balances now also helps you avoid future income spikes, which can drive up Medicare premiums. Speaking of Medicare, let’s dive into how to manage costs effectively.
Avoiding IRMAA and Controlling Medicare Costs
Medicare premiums can become a significant expense in retirement, especially if you trigger IRMAA surcharges. IRMAA is an extra charge on Medicare Part B and Part D premiums for those whose Modified Adjusted Gross Income (MAGI) exceeds certain thresholds. About 8% of Medicare beneficiaries face these surcharges, and the costs can add up fast.
Here’s the tricky part: IRMAA surcharges are based on your income from two years prior. For instance, if your income was high in 2023, you could face higher Medicare premiums in 2025. This two-year look-back means you need to plan ahead; once the surcharge appears, it’s too late to make adjustments.
To avoid IRMAA, manage your MAGI carefully. This includes taxable income, tax-exempt interest, and conversion income. A single dollar over the threshold can result in steep premium increases – often called “income cliffs.” For example, if you’re married and your MAGI jumps from $206,000 to $206,001 in 2023, you could face a significant premium hike in 2025.
Here are some strategies to keep your MAGI in check:
- Spread large Roth conversions over multiple years instead of doing them all at once.
- If selling investment property or taking a large distribution, consider deferring income to avoid crossing into a higher IRMAA bracket.
Also, keep an eye on your income during your final working year. Many retirees see peak earnings in their last year of work, which can trigger IRMAA surcharges two years later. For example, if you retire in 2026, your income that year will determine your Medicare premiums in 2028.
RMDs can also push your income above IRMAA thresholds. Waiting until age 73 to start IRA withdrawals might result in large, mandatory distributions that increase your MAGI. This is another reason to consider taking distributions earlier or executing Roth conversions before RMDs begin.
If you do face an IRMAA surcharge, you may be able to appeal. The Social Security Administration allows appeals for significant life events, like retirement, a loss of income, or the death of a spouse. However, proactive planning is always the better approach.
Managing withdrawals to avoid IRMAA isn’t just about saving on Medicare premiums – it’s about preserving your financial flexibility and minimizing surprises. With a thoughtful plan, you can keep costs low, protect your wealth, and make smarter financial decisions throughout retirement.
Timing Withdrawals With Social Security and RMDs
Balancing Social Security benefits, Required Minimum Distributions (RMDs), and your withdrawal strategy is a key part of crafting a tax-efficient retirement plan. Timing these elements correctly can help you control taxable income and stretch your savings further.
Social Security Timing and Taxable Income
Did you know Social Security benefits aren’t always tax-free? For retirees with higher incomes, a portion of these benefits can become taxable. The IRS uses something called provisional income to determine this. Provisional income is calculated by adding half of your Social Security benefits to your adjusted gross income and any tax-exempt interest. Once your provisional income crosses specific thresholds, up to 85% of your Social Security benefits could be taxed. For married couples filing jointly, these thresholds are $32,000 and $44,000. For single filers, they’re $25,000 and $34,000.
Claiming Social Security early – say, at age 62 – means smaller monthly payments but an immediate increase in taxable income, which could push more of your benefits into the taxable range. On the flip side, delaying Social Security until age 70 increases your monthly payments by about 8% annually after reaching full retirement age. This delay can also give you several years to focus on tax-efficient withdrawals from other accounts.
For instance, during the gap between retirement (often around age 62) and when Social Security and RMDs begin, you might have lower taxable income. This is a prime opportunity to withdraw funds from tax-deferred accounts or convert them to a Roth IRA. These strategies allow you to take advantage of lower tax brackets and reduce the balances in accounts that will later generate RMDs.
Here’s an example: Imagine you retire at 62 with $1.5 million in traditional IRAs and delay Social Security until 70. If you withdraw $80,000 annually during this period, you can stay within a manageable tax bracket while reducing your IRA balance. By the time RMDs begin at age 73, they’ll be calculated on a smaller balance, leading to lower mandatory withdrawals and reducing the risk of higher tax brackets or penalties, such as Medicare surcharges.
By carefully timing your Social Security benefits, you can also align your strategy to better manage RMDs and minimize their tax impact.
Reducing the Impact of RMDs
Strategic withdrawals aren’t just about Social Security – they’re also essential for managing RMDs. Since taxable Social Security benefits can amplify your tax burden, controlling RMDs is critical.
RMDs kick in at age 73, requiring you to withdraw a percentage of your tax-deferred accounts each year. This percentage grows as you age, and the amounts can quickly add up. For example, someone with a $2 million IRA at 73 might face an initial RMD of around $75,000. By age 85, that annual withdrawal could climb past $120,000. Because RMDs are taxed as ordinary income, they can push you into higher tax brackets or trigger surcharges like the Income-Related Monthly Adjustment Amount (IRMAA) for Medicare.
One way to soften the tax blow is to start taking distributions from tax-deferred accounts in your 60s or early 70s, before RMDs become mandatory. This reduces the balance used to calculate future RMDs, resulting in smaller withdrawals and lower taxable income down the road.
Roth conversions during years when your income is lower can also help. By moving funds from a traditional IRA to a Roth IRA, you’ll pay taxes on the conversion now, but future withdrawals from the Roth will be tax-free – and Roth accounts aren’t subject to RMDs.
If you don’t need all the income from your RMDs, Qualified Charitable Distributions (QCDs) are another option. Starting at age 70½, you can donate up to $100,000 annually directly from your IRA to a qualified charity. These donations count toward your RMD but don’t increase your taxable income.
Lastly, be cautious about delaying your first RMD too long. Waiting until the last possible moment could create a large income spike, which may lead to higher taxes or penalties.
Adding Charitable Giving and Legacy Goals to Your Withdrawal Plan
In addition to strategies for lowering taxable income and managing Required Minimum Distributions (RMDs), incorporating charitable giving and legacy planning can further refine your withdrawal approach. By aligning your strategy with these goals, you can reduce your tax burden while leaving a meaningful impact. Let’s look at how Qualified Charitable Distributions (QCDs) and tax-efficient legacy planning fit into your overall financial plan.
Using Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) offer a smart way to support causes you care about while managing your taxes. Once you reach age 70½, you can transfer funds directly from your IRA to a qualified charity. This donation counts toward your RMD and is excluded from your taxable income, helping to lower your adjusted gross income (AGI).
Here’s why QCDs are so effective: Unlike withdrawing from your IRA and then donating, which results in taxable income, a QCD bypasses the tax altogether. This can help you avoid higher Medicare premiums and protect more of your Social Security benefits. If you’re 73 or older and subject to RMDs, directing part or all of your RMD as a QCD can be a great way to manage your income levels.
To make a QCD, instruct your IRA custodian to transfer the funds directly to a qualified 501(c)(3) charity, and ensure you keep proper documentation of the transaction.
While QCDs address charitable giving, planning for a tax-efficient transfer of wealth is equally important to secure your financial legacy.
Tax-Efficient Wealth Transfer
The type of retirement account you leave behind can have a big impact on how much your heirs ultimately receive. Roth IRAs, for example, are one of the most tax-efficient options. Beneficiaries inherit them tax-free and can often spread withdrawals over a 10-year period without owing taxes. In contrast, traditional IRA and 401(k) accounts are taxed as ordinary income and typically must be fully distributed within 10 years, which can significantly reduce the net inheritance.
Taxable brokerage accounts offer another advantage: they receive a cost basis reset upon inheritance, which can lower capital gains taxes if the assets are sold later. With the lifetime estate and gift tax exemption set at $13.99 million per person for 2025, most estates won’t face federal estate taxes.
For larger estates, advanced strategies can help minimize estate taxes. Options like Grantor Retained Annuity Trusts, Intentionally Defective Grantor Trusts, Family Limited Partnerships, or donor-advised funds may be worth considering. However, balancing your current retirement needs with the assets you wish to leave behind requires careful planning. Aligning your withdrawal strategy with your long-term priorities is essential.
Conclusion: Creating Your Withdrawal Strategy
When it comes to planning your retirement withdrawals, there’s no one-size-fits-all solution. It’s about crafting a strategy that works for your financial situation. For retirees with higher incomes, every decision can ripple through your tax bill, Medicare premiums, Social Security taxation, and the longevity of your portfolio.
As we’ve discussed, the conventional method – drawing from taxable accounts first, then tax-deferred, and finally tax-free accounts – can actually backfire for those with significant retirement savings. Instead, a tailored approach is key. Consider factors like your tax bracket, required minimum distributions (RMDs), and income thresholds that could trigger additional costs, such as IRMAA surcharges.
Start by analyzing your current tax position. During lower-income years, you might benefit from strategies like Roth conversions or taking early withdrawals from tax-deferred accounts to trim down future RMDs. If you’re over 70½ and interested in charitable giving, qualified charitable distributions (QCDs) can help you meet RMD requirements while reducing your adjusted gross income (AGI).
Don’t stop at short-term tax planning – think about your long-term goals. How do your income needs, Social Security timing, and legacy objectives fit together? For instance, delaying Social Security benefits while tapping into IRAs could boost tax efficiency, leaving Roth accounts untouched for tax-free inheritance opportunities.
The big picture? A well-thought-out plan that minimizes taxes throughout retirement doesn’t just save you money – it helps safeguard your portfolio. Prepare for RMDs, anticipate income needs, and stay aware of changing tax laws. By coordinating your accounts, income sources, and goals, you can ease both your tax burden and Medicare costs, setting yourself up for a more secure financial future. At First Financial Consulting, tax planning is at the core of what we do for our clients. If you need help deciding how or where to withdrawal money for retirement, use the link below to schedule a complimentary meeting with one of our advisors today.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
