Most Americans spend decades asking one financial question: How much can I accumulate for retirement? We contribute to 401(k)s, fund IRAs, watch the markets, celebrate the good years and complain about the bad ones. Then retirement arrives, and the question changes: How do I take the money out?I once met a man who proudly told me he had beaten the market for 30 years. I congratulated him. Then he showed me his withdrawal plan, and I stopped congratulating him. He had built a race car and installed bicycle brakes.He isn’t unusual. Nearly everything on a financial statement measures growth; almost nothing tells you how efficiently that money can become income. Accumulation gets the headlines. Distribution determines your lifestyle.The number on your statement isn’t necessarily the number you can spendImagine a retiree with $100,000 in each of three accounts: A traditional IRA, a taxable brokerage account and a Roth IRA. On paper, she has $300,000. In practice, those balances are worth very different amounts.Every dollar that leaves the traditional IRA is taxed as ordinary income. In the 22% federal tax bracket, that $100,000 is closer to $78,000 of spending money, before state tax. Part of the account effectively belongs to the IRS; she just doesn’t know yet how large its share will be. About Adviser IntelThe author of this article is a participant in Kiplinger’s Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.In the brokerage account, only the growth is taxed, and long-term gains get preferential rates — as low as 0% for retirees whose taxable income stays below certain thresholds. The Roth, if the rules are followed, is hers in full.Think of them as three orchards. One produces fruit that can be harvested tax-free. One creates a tax bill only when gains are realized. The third lets you postpone the tax until the government eventually collects its share. Owning all three gives you flexibility. Knowing when to harvest each is what turns that flexibility into money.Withdrawal order mattersI once worked with a retired plant manager whose records were immaculate. His plan was to draw from whichever account had the largest balance and keep everything roughly even. It was simple. It was also potentially expensive. He wasn’t making an investment mistake; he was making a withdrawal order mistake.The popular rule of thumb — spend taxable money first, then tax-deferred, then Roth — isn’t a cure-all either. Followed rigidly, it can leave a retiree with almost no taxable income in the early years, wasting low brackets that won’t come around again, then bunch income together later. Often a blend works better — drawing just enough from tax-deferred accounts each year to fill a lower bracket, and covering the rest from taxable or Roth money. The question isn’t only, “How much should I withdraw?” It’s also, “Where should that withdrawal come from this year?”Don’t confuse paying less tax today with paying less taxOne retiree I worked with was determined to avoid taxable withdrawals early in retirement. For several years, his returns looked terrific. Then required minimum distributions (RMDs) began (at 73 for people born from 1951 through 1959, and 75 for those born in 1960 or later) and stacked on top of Social Security and his pension. His taxes and Medicare premiums ended up higher than under the staged-withdrawal strategy we had modeled. He hadn’t eliminated the tax bill; he had postponed and possibly enlarged it. He avoided the sprinkle and ran into a thunderstorm.The storm can grow. When one spouse dies, the survivor generally files as a single taxpayer, with brackets roughly half as wide, while the RMDs stay about the same. And traditional IRAs left to adult children must generally be emptied within 10 years, often during the heirs’ peak earning years.That’s why the years between retirement and RMDs deserve careful attention. With paychecks gone and Social Security perhaps not yet started, many retirees sit in the lowest brackets they’ll see for decades. That makes those years a window for deliberate withdrawals or partial Roth conversions. There is no universal sequence, and generating taxes for their own sake is never the goal. The point is to judge your strategy across many tax returns rather than one.Medicare can make tax decisions more expensiveMedicare Part B and Part D premiums rise at higher incomes through surcharges known as IRMAA, based on your tax return from two years earlier. The surcharges work like cliffs: Exceed a threshold by a single dollar and you owe the full surcharge for that tier. The retiree who takes an extra IRA distribution for a new car, a kitchen remodel or a child’s down payment may see the bill arrive two years later. Roth conversions count, too.The lookback cuts both ways. If your premiums are being set by income from your final working years, you can ask Social Security to use your current income by filing Form SSA-44 and citing work stoppage.A withdrawal affects taxable income. Taxable income can affect Medicare premiums. Social Security can affect taxable income. RMDs can affect both. One gear moves another.Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.Social Security is part of the withdrawal strategy, tooPeople often ask me the best age to claim Social Security. I don’t believe that can be answered intelligently without seeing the rest of the plan.Up to 85% of benefits can be taxable. In certain income ranges, each additional IRA dollar pulls more of your benefit into taxable income, pushing your effective marginal rate well above your bracket. Delaying Social Security while living on IRA withdrawals can help on several fronts at once:It shrinks the balance that will drive future RMDs.It replaces fully taxable IRA income with benefits that are at most 85% taxable.It locks in a larger check: 8% more for each year you wait past full retirement age, up to 70. A surviving spouse can keep that check if it’s the larger of the two.Delay isn’t right for everyone; health and cash needs matter. But it shows why claiming and withdrawals are one decision, not two.The bottom lineRetirement income works best when you stop asking, “How can I pay the least tax this year?” and start asking, “How can I manage taxes over my entire retirement — and my spouse’s and heirs’ lives, too?” You don’t necessarily need a more complicated plan. You need a coordinated one, built before withdrawals are forced on you and revisited every year. After 40 years building the race car, don’t wait until retirement to think about the brakes.Related ContentWhich of These Four Withdrawal Strategies Is Right for You?A Retirement Plan Isn’t Just a Number: Strategic Withdrawals Can Make a Huge DifferenceThe 3 Biggest Tax Mistakes Retirees Can Make in Their 60s: One Involves Roth ConversionsDon’t Let a Market Crash Crush Your RetirementHow to Structure Retirement Income to Tamp Down TaxesThis article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
