retirement planning  |  august 7, 2023

How to Make Your Retirement Account Withdrawals Work Best for You

These approaches can extend the life of your portfolio and preserve assets for heirs.


Key Insights

  • There are alternatives to the conventional strategy of drawing on a taxable account first, followed by tax-deferred and then Roth accounts.

  • Many people can take advantage of income in a low tax bracket or tax-free capital gains.

  • If planning to leave an estate to heirs, consider which assets will ultimately maximize the after-tax value.

Roger Young, CFP®

Thought Leadership Director

Many people will rely largely on Social Security benefits and tax-deferred accounts—such as individual retirement accounts (IRAs) and 401(k) plans—to support their lifestyle in retirement. However, a sizable number of retirees will also enter retirement with assets in taxable accounts (such as brokerage accounts) and Roth accounts. Deciding how to use that combination of accounts to fund spending is a decision likely driven by tax consequences because distributions or withdrawals from the accounts have different tax characteristics (see Figure 1 and Appendix 1 in the full article box below).

A commonly suggested approach, which we’ll call “conventional wisdom,” is to withdraw from taxable accounts first, followed by tax-deferred accounts and, finally, Roth assets. There is some logic to this approach:

  • If you draw from taxable accounts first, your tax-advantaged accounts have more time to grow tax-deferred.

  • Leaving Roth assets until last provides potential tax-free income for your heirs.

  • It is relatively easy to implement.

(Fig. 1) Tax Characteristics of Different Assets

The tax treatment varies significantly by type of account.

How the tax treatment varies between tax-advantaged accounts and taxable accounts.

Unfortunately, the conventional wisdom approach may result in income that is unnecessarily taxed at high rates. In addition, this approach does not consider the tax situations of both retirees and their heirs.

This paper considers three objectives that retirees may have:

  • Extending the life of their portfolio

  • More after-tax money to spend in retirement

  • Bequeathing assets efficiently to their heirs

The first two go hand in hand: If your goal is to have more money to spend in retirement, a strategy that extends the life of the portfolio can also meet that need.2 In both cases, the focus is on the retiree, not the heirs. For people focused on the third objective—leaving an estate—the withdrawal strategy can include techniques to minimize taxes across generations.

So what can investors do, and how can advisors navigate these conversations? We evaluated different withdrawal strategies for a variety of situations and summarized the key techniques for three general scenarios (types of people). Our evaluation was based on assumptions (page 15 in the full article box below), key among them:

  • Because the results depend so heavily on federal taxes, we took into account tax rules on Social Security benefits, qualified dividends, long-term capital gains (LTCG), and ordinary income. See Appendix 1 (in the full article box below) for further discussion of how these tax effects are interrelated.

  • The household uses the married filing jointly status and standard deduction.3 State taxes and federal estate tax are not considered.

  • All taxable investment account earnings are either qualified dividends or LTCG.4

  • All accounts earn the same constant rate of return before taxes.

  • All amounts are expressed in today’s dollars.

1Generally, the owner will be over age 59½ and the Roth account will have been open at least 5 years.
2Because these goals are similar, our analysis focuses on the longevity of the portfolio. Note, however, that the percentage improvement in spending capacity may be lower than the improvement in longevity.
3We used the new rates effective January 1, 2023, as well as the rates that are scheduled to revert to pre-2018 levels after 2025.
4This essentially assumes the account is invested in stocks or stock funds, an approach recommended in research on asset location, including: Dammon, Robert M., Chester S. Spatt, and Harold H. Zhang. “Optimal Asset Location and Allocation With Taxable and Tax-Deferred Investing.” (2004). The Journal of Finance 59 (3): 999–1037. Use of this assumption for withdrawal strategy research was employed in: DiLellio, James, and Dan Ostrov. “Toward Constructing Tax Efficient Withdrawal Strategies for Retirees with Traditional 401(k)/IRAs, Roth 401(k)/IRAs, and Taxable Accounts.” (2020). Financial Services Review 28 (2): 67–95.

Important Information

This material has been prepared for general and educational purposes only. This material does not provide recommendations concerning investments, investment strategies, or account types. It is not individualized to the needs of any specific investor and is not intended to suggest that any particular investment action is appropriate for you, nor is it intended to serve as the primary basis for investment decision-making. Any tax-related discussion contained in this material, including any attachments/links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material.

The views contained herein are those of the authors as of May 2023 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness.

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