How to Spend Down Retirement Assets: Order, RMDs, and Conversions

To spend down retirement assets efficiently, most retirees draw from taxable brokerage accounts first, tax-deferred accounts like Traditional IRAs and 401(k)s second, and Roth IRAs last, while sizing each year’s withdrawals to stay under the tax and Medicare thresholds that quietly raise your costs. That default order is a starting point, not a rule. The bigger gains usually come from what you do in the years between retiring and turning 73: filling lower tax brackets on purpose, converting some Traditional IRA money to Roth, and keeping an eye on how each withdrawal ripples into Social Security taxation and Medicare premiums.

How Each Account Type Is Taxed

Every strategic choice starts here, because the tax treatment differs sharply by account.

Taxable brokerage accounts hold after-tax money. Selling investments triggers capital gains tax only on the profit above your cost basis, and if you held for more than a year, the long-term rate applies — for most retirees, 0% or 15%. There are no age restrictions or penalties on withdrawals.

Tax-deferred accounts (Traditional IRAs, 401(k)s, 403(b)s) hold pre-tax contributions. Every dollar you pull is ordinary income, taxed at your regular rate, and these accounts carry mandatory withdrawals later in life plus a 10% penalty for pulling money out too early.

Roth IRAs hold after-tax contributions that grow tax-free. Qualified distributions are excluded from gross income entirely, provided you’re at least 59½ and the account has been open for five taxable years.¹ Roth IRAs also have no required minimum distributions during your lifetime, which is what makes them the account you want to preserve longest.²

The Default Withdrawal Order and When to Break It

The textbook sequence — taxable, then tax-deferred, then Roth — exists for a reason. Spending taxable assets early means paying lower capital gains rates while your other accounts keep compounding. Once the brokerage account is drained, you shift to Traditional IRA and 401(k) money at ordinary income rates. The Roth goes last because it grows tax-free and is never forced out.

Following that order rigidly is where most people leave money on the table. A retiree with a large Traditional IRA who waits until 73 to touch it often faces oversized required minimum distributions that push them into a higher bracket, trigger Medicare surcharges, and make most of their Social Security taxable. The better move for many households is to blend withdrawals across account types each year, deliberately keeping taxable income below the thresholds that matter. In practice, that usually means pulling some tax-deferred money in your 60s even though you don’t strictly need to.

Using the Gap Years for Roth Conversions

The window between retirement and the start of required distributions is the most valuable planning space in retirement. A Roth conversion moves money from a Traditional IRA or 401(k) into a Roth IRA. You pay ordinary income tax on the converted amount that year, but from then on it grows tax-free and is not subject to RMDs.³ There is no income limit on conversions.

If you retire at 62 and are living mostly on Social Security or taxable savings, you likely have room inside the lower brackets. Converting just enough Traditional IRA money each year to fill those brackets, without spilling into the next one, gradually shrinks the balance that will later be forced out. The result is lower RMDs, lower lifetime taxes, and a larger tax-free Roth balance for late-in-life expenses or heirs.

Size the conversions carefully. Too much in a single year spikes your taxable income and can trigger Medicare IRMAA surcharges or make more of your Social Security benefits taxable. Too little leaves you with the same oversized RMDs you were trying to avoid. Report the conversion on Form 8606, and pay the tax from non-retirement funds if you can, so the full converted amount lands in the Roth.³

Required Minimum Distributions Set the Floor

The IRS does not let you leave money in tax-deferred accounts indefinitely. Under Internal Revenue Code Section 401(a)(9), you must begin taking RMDs from Traditional IRAs, 401(k)s, 403(b)s, and similar accounts once you reach age 73.² Under SECURE Act 2.0, that threshold rises to 75 starting in 2033.⁴ If you’re still working past 73 and don’t own 5% or more of the employer, RMDs from that plan can wait until you actually retire.

The amount is your prior-year December 31 balance divided by a life expectancy factor from the IRS Uniform Lifetime Table.⁵ A different table applies if your sole beneficiary is a spouse more than ten years younger. Your first RMD is due by April 1 of the year after you reach the applicable age, but delaying that first one until April means taking two RMDs in the same calendar year, which usually creates a tax spike worth avoiding.

Missing an RMD is costly. The IRS applies a 25% excise tax on the amount you should have taken, which drops to 10% if you fix the shortfall within a two-year window.² Roth IRAs are exempt from lifetime RMDs entirely.

Deciding How Much to Take Each Year

RMDs set a floor. Above that floor, you decide. Three frameworks capture the main tradeoffs.

The 4% rule, from William Bengen’s 1994 research, calls for withdrawing 4% of your portfolio in year one and adjusting that dollar figure for inflation each year afterward. Every 30-year historical period he tested survived. The strength is a predictable paycheck. The weakness is that it ignores the market: if your portfolio drops 30% in year two, you keep taking the same inflation-adjusted amount, which accelerates depletion at the worst possible time.

The fixed-percentage method reverses that logic. You take a set percentage of the current balance each year, so income rises when the portfolio grows and falls when it shrinks. You cannot run out because you’re always drawing a fraction of what remains, but your annual income can swing widely.

Guardrails split the difference. In the Guyton-Klinger framework, you take inflation-adjusted withdrawals most years, but if your current withdrawal rate climbs more than 20% above your starting rate (the portfolio has fallen hard), you cut spending by 10%; if it drops more than 20% below (the portfolio has grown well), you raise spending by 10%. This handles volatility better than either rigid alternative.

Watch the Social Security and Medicare Thresholds

Retirement withdrawals push up two costs that are easy to miss until the bill lands: taxes on your Social Security benefits and your Medicare Part B and D premiums.

Social Security Taxation

Whether your benefits are taxed depends on your “combined income”: adjusted gross income, plus tax-exempt interest, plus half your Social Security. These thresholds are not indexed for inflation.

Single filers: combined income between $25,000 and $34,000 makes up to 50% of benefits taxable; above $34,000, up to 85%.⁶
Married filing jointly: combined income between $32,000 and $44,000 makes up to 50% taxable; above $44,000, up to 85%.⁶

Traditional IRA and 401(k) withdrawals count toward that combined income figure. Roth withdrawals do not.⁷ That gap is much of the reason Roth conversions before you claim Social Security pay off.

Medicare IRMAA

Higher-income retirees pay more for Medicare Part B and Part D through the Income-Related Monthly Adjustment Amount. It’s based on your modified adjusted gross income from two years earlier, so a big withdrawal or Roth conversion in 2024 hits your 2026 premiums.

For 2026, single filers at or below $109,000 (joint at or below $218,000) pay the standard Part B premium of $202.90 per month. Surcharges climb in tiers above that. At the top, individuals with income of $500,000 or more ($750,000 joint) pay $689.90 per month for Part B, plus an additional $91.00 monthly surcharge on Part D.⁸

If your income has fallen since the year Medicare is using, you can ask for a reduction by filing Form SSA-44. Qualifying life-changing events include retirement, reduced work, death of a spouse, divorce, and loss of pension income.⁹ The two-year lookback often means your first year or two of premiums reflect your working income, and this appeal is the way to reset that.

Qualified Charitable Distributions

If you’re 70½ or older and give to charity, a Qualified Charitable Distribution is one of the most tax-efficient ways to spend down a Traditional IRA. The custodian sends money directly from your IRA to the charity. The distribution counts toward your RMD but is excluded from taxable income.¹⁰

The 2026 QCD limit is $111,000 per person, now indexed to inflation under SECURE Act 2.0. Each spouse can make a QCD from their own IRA. The money must go from the custodian directly to a qualifying charity; if it lands in your account first, it’s not a QCD. On Form 1040, the full 1099-R distribution goes on line 4a, and you subtract the QCD amount and enter the remainder on line 4b with “QCD” written next to it. The 1099-R won’t flag the QCD for you. This mechanism is especially useful for retirees taking the standard deduction, since they get no benefit from itemized charitable deductions.

If You Retire Before 59½

Withdrawing from a Traditional IRA or 401(k) before 59½ normally triggers a 10% additional tax on top of the ordinary income tax.¹¹ Several exceptions apply, and they matter if you’re spending down earlier than the typical retiree.

Separation from service at 55 or later lets you take penalty-free distributions from that employer’s 401(k) or 403(b), but not from an IRA. Qualified public safety employees get this at age 50.¹²
Substantially Equal Periodic Payments (SEPP) let you take a series of roughly equal withdrawals based on life expectancy using one of three IRS-approved methods. Once started, you can’t modify the schedule until the later of five years or reaching 59½, or the 10% penalty applies retroactively to every prior distribution.¹³
Other exceptions include permanent disability, medical expenses exceeding 7.5% of adjusted gross income, and IRS levies on the account.¹²

Inherited Accounts Follow Different Rules

If you inherited a retirement account rather than accumulating it, the spend-down rules that apply to you are not the same. For deaths in 2020 or later, the SECURE Act requires most non-spouse beneficiaries to empty the inherited account within 10 years. If the original owner had already reached RMD age, you must also take annual distributions during that 10-year window; if they hadn’t, you have flexibility on timing within the window as long as the account is empty by the tenth year.

Some beneficiaries are exempt from the 10-year rule and can still stretch distributions over their own life expectancy: surviving spouses, minor children of the deceased (until they reach the age of majority), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased. Surviving spouses have the added option of rolling the inherited account into their own IRA.

1
Office of the Law Revision Counsel. 26 USC 408A – Roth IRAs
2
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
3
Internal Revenue Service. Instructions for Form 8606 (2025)
4
Ascensus. SECURE 2.0 Act Changes RMD Rules
5
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
6
Office of the Law Revision Counsel. 26 USC 86 – Social Security and Tier 1 Railroad Retirement Benefits
7
Internal Revenue Service. Publication 915 (2025), Social Security and Equivalent Railroad Retirement Benefits
8
Centers for Medicare & Medicaid Services. 2026 Medicare Parts A and B Premiums and Deductibles
9
Social Security Administration. Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event
10
Internal Revenue Service. Seniors Can Reduce Their Tax Burden by Donating to Charity Through Their IRA
11
Internal Revenue Service. Hardships, Early Withdrawals and Loans
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Substantially Equal Periodic Payments