The 4 Best Tax-Efficient Withdrawals in Retirement

One of the most important financial decisions in retirement isn’t how you invest your money — it’s how you take it out. Two retirees could start with the exact same nest egg, earn the same returns, and live similar lifestyles yet experience vastly different outcomes simply because they withdrew their money in different ways.

Taxes make the difference.

A smart withdrawal sequence can help stretch your savings further, reduce surprises during tax season, and maintain flexibility over time. While no two retirement plans are identical, there is a general hierarchy that can help guide withdrawals in a tax-efficient way.

Let’s walk through the main withdrawal sources and how each can play a role in building an efficient retirement income plan.

1. Roth Accounts: A Powerful Foundation for Flexibility

Roth IRAs and Roth 401(k)s are often the most tax-efficient accounts to draw from. Withdrawals are generally tax-free, and unlike traditional retirement accounts, they do not increase your taxable income. That means they don’t affect how much of your Social Security benefit is taxed, they don’t push you into higher Medicare premium brackets, and they don’t trigger new tax thresholds.

This flexibility makes Roth accounts a valuable tool. They allow retirees to cover unexpected expenses, supplement income during higher-tax years, and maintain control over taxable income. Because Roth withdrawals do not force additional taxes elsewhere, they help stabilize tax planning and preserve options later in retirement.

2. Taxable Brokerage Accounts: Accessible and Often Efficient

After Roth assets, taxable brokerage accounts are often the next most efficient source of income. When you sell investments from these accounts, only the gains are taxed — and often at favorable long-term capital gains rates. In addition, you have control over when you realize those gains, which allows you to manage your taxable income more intentionally.

These accounts also offer flexibility. If you have investments that have lost value, you can sell those positions to offset other gains. This strategy, known as tax-loss harvesting, can help further reduce your tax burden. And when assets in a taxable account are passed to heirs, they may receive a step-up in cost basis, often reducing future taxes for the next generation.

Because taxable accounts provide access to capital without forcing large income spikes, they complement Roth assets well and help build a flexible, thoughtful income plan.

3. Pre-Tax Retirement Accounts: Valuable, but Less Flexible

Traditional IRAs and 401(k)s have helped many workers save through years of tax-deferred growth. But when you begin taking distributions, every dollar withdrawn is treated as ordinary income. These withdrawals can increase your taxable income quickly, which may push you into a higher tax bracket or increase the taxable portion of your Social Security benefits. They may also influence Medicare premium brackets, leading to higher monthly costs.

This doesn’t mean pre-tax accounts are bad — far from it. They are often the largest source of retirement savings and a core part of income planning. But using them wisely requires attention to timing. Managing withdrawals before required minimum distributions begin at age seventy-three can help smooth income and reduce tax pressure in later years. Without planning, large future withdrawals can create unpleasant surprises.

Balancing pre-tax distributions with other account types helps maintain control and supports a more predictable tax outcome.

4. Home Equity: A Secondary Income Resource

For many retirees, the home is one of their largest assets. While not a typical first choice for income, home equity can serve as a helpful supplement, particularly later in retirement. Downsizing, selling a property, or using a home equity line of credit can all provide access to capital when needed.

Because tapping home equity involves lifestyle changes or borrowing against the property, it is generally used after other financial resources. Still, having housing wealth available can provide meaningful flexibility, especially in situations where medical costs rise or unexpected needs emerge.

Putting It All Together

The goal of retirement income planning is not simply to cover expenses — it is to do so in a way that preserves flexibility, minimizes taxes, and supports long-term security. Roth accounts offer the greatest tax freedom and are often most helpful when used strategically throughout retirement. Taxable accounts allow access to funds with typically favorable tax treatment and broad timing control. Pre-tax accounts, while valuable, require careful management to avoid large tax impacts. Home equity can serve as an additional layer of support later in life.

Thoughtful coordination among these resources is what makes the difference. The most tax-efficient withdrawal strategy depends on your broader financial picture, including timing, account balances, lifestyle needs, and legacy goals. Two retirees with identical savings amounts may experience very different outcomes simply because of how they choose to draw from each account.

Planning ahead offers retirees the opportunity to shape their financial future with intention rather than reaction. A well-designed withdrawal strategy can help lower taxes, maintain steady income, and provide greater peace of mind throughout retirement.

If you would like help reviewing your withdrawal strategy, I’d be happy to discuss how each of these tools can support your goals.

Disclosure

This material is provided for informational and educational purposes only. It is not intended to be, and should not be interpreted as, specific investment, tax, or financial advice. Investing involves risk, including the potential loss of principal. Individuals should consult with a qualified financial professional before making any investment decisions to determine what may be appropriate for their personal situation.