You’ve spent decades diligently saving for retirement. You’ve built a well-diversified portfolio spread across different accounts. But when it comes time to flip the switch from saving to spending, a critical question arises: What’s the smartest way to actually take the money out?

Many people focus solely on how much to withdraw (the famous 4% rule), but they overlook a crucial factor that can make or destroy a retirement plan: the order of withdrawal. Getting this right can mean more after-tax income, a longer-lasting portfolio, and significant tax savings.

Let’s break down a powerful, two-step strategy for withdrawing your retirement funds.

Step 1: Master the Tax Game—Where to Pull the Money From

This is the most important decision you’ll make each year. Your retirement savings likely live in three main types of “tax pools,” and the order in which you use them matters immensely.

1. The “Tax Now” Bucket: Traditional IRAs and 401(k)s This is your pre-tax money. Every dollar you withdraw is taxed as ordinary income. While that sounds like a bad deal, it’s your most powerful tool for controlling your tax bracket.

• Your Annual Strategy: Each year, calculate all your other sources of taxable income (like Social Security or a pension). Then, deliberately withdraw from your Traditional IRA/401(k) just enough to “fill up” your current federal tax bracket (for example, the 12% or 22% bracket).
• The Brilliant Twist: This money isn’t just for spending. If you don’t need it to live on, you can convert it to a Roth IRA. You’ll pay a relatively low tax rate now, and then that money will grow completely tax-free for the rest of your life, with no required minimum distributions. This is a key tactic for long-term tax reduction.

2. The “Tax-Friendly” Bucket: Your Taxable Brokerage Account This account is funded with after-tax dollars. When you sell an investment, you only pay tax on the growth (the capital gain).

• When to Use It: Once you’ve filled a low tax bracket with withdrawals from your Traditional IRA, turn to your brokerage account for any additional income you need.
• The Advantage: Long-term capital gains often have lower tax rates than ordinary income. If your total income is low enough, you might even pay 0% in federal taxes on those gains.

3. The “Tax-Free” Bucket: Your Roth IRA This is your crown jewel. Since you’ve already paid taxes on the contributions, the growth and withdrawals are tax-free.

• When to Use It: This should be your account of last resort. By letting this money grow untouched for as long as possible, you maximize its tax-free potential and create a fantastic safety net for later in life or for unexpected large expenses.

The Golden Rule of Withdrawal Order: Use your Traditional IRA to manage your tax bracket, your brokerage account for supplemental needs, and your Roth IRA as your final, tax-free reserve.

Step 2: Be a Smart Seller—What to Sell Inside Each Bucket

Once you’ve decided which account to withdraw from, the next question is which investments to sell within that account. The answer lies in a concept you already know: rebalancing.

Instead of selling investments randomly, use your withdrawals as an opportunity to rebalance your portfolio back to its target allocation.

• How it Works: If your stock holdings have had a great year and now represent a larger percentage of your portfolio than you intended, sell from those stocks to generate your cash. This automatically forces you to “sell high” and trim your winners.
• The Benefit: This disciplined approach systematically manages risk and keeps your portfolio aligned with your long-term strategy. If stocks are down, you’d sell from bonds or other safer assets, preserving your stocks to recover when the market rebounds.

Putting It All Together: The Complete Withdrawal Picture

A successful retirement income plan blends these two steps seamlessly:

1. Tax Efficiency First: Determine your annual income need and use the “Tax Pool” strategy to generate that cash in the most tax-efficient way possible.
2. Risk Management Second: Within the chosen accounts, sell the specific assets that rebalance your portfolio, maintaining your desired level of risk.

This integrated approach does more than just provide you with a paycheck. It actively lowers your lifetime tax bill, controls investment risk, and preserves your wealth for the long haul. By being strategic about not just how much you take, but where you take it from and what you sell, you can ensure your hard-earned savings last as long as you need them to.

Disclaimer: This article is for informational purposes only and should not be considered financial or tax advice. Please consult with a qualified financial planner or tax advisor to discuss your personal situation.