Retirement Withdrawal Planner

Why withdrawal order matters

Most retirees have money in three types of accounts: taxable brokerage (taxed on gains each year), traditional IRA/401(k) (taxed on every dollar withdrawn), and Roth IRA (never taxed again). The question of which account to spend from first is not just about preference — it has direct tax consequences that compound over decades.

Consider a retiree with $300,000 in a taxable brokerage, $800,000 in a traditional IRA, and $200,000 in a Roth IRA. They need $80,000 per year after taxes. Where they pull from each year determines:

1. Their tax bill this year. Roth withdrawals add zero to taxable income. Traditional withdrawals add the full amount. Taxable withdrawals add only the capital gains portion.
2. Their tax bill in future years. Spending the taxable account first leaves a larger traditional IRA, which means larger RMDs starting at age 73, which means higher taxes later.
3. Their Medicare premiums. Higher withdrawals from traditional accounts increase MAGI, which can trigger IRMAA surcharges two years later.
4. Their ACA subsidies. For pre-65 retirees, higher MAGI from traditional withdrawals or Roth conversions reduces healthcare subsidies.

The difference between a good withdrawal sequence and a poor one can exceed $100,000 in cumulative tax savings over a 30-year retirement. This is not a minor optimization — it is one of the largest levers available to retirees.

The three account types and their tax treatment

The withdrawal sequencing problem

The conventional advice is to spend taxable first, then traditional, then Roth. This is a reasonable starting point but it is not optimal for everyone. Here is why:

Spending taxable first makes sense in early retirement because you pay only capital gains rates on the growth, and you may be in the 0% capital gains bracket if your income is low. But it leaves the traditional IRA untouched, where it grows and eventually generates large RMDs that push you into higher tax brackets with IRMAA surcharges on top.

Spending traditional first reduces future RMDs and the associated tax bomb, but it means paying ordinary income tax rates now. In years where you have high income from other sources (salary, pension, Social Security), adding traditional withdrawals pushes you into even higher brackets.

Using Roth at the right time can save the most money. Roth withdrawals in high-income years (when you are already in a high bracket from RMDs or a pension) cost you nothing in taxes. Saving Roth dollars for those years — or for years where you need to stay below an IRMAA or ACA threshold — is often the best strategy.

The real answer is that the optimal withdrawal order changes every year. Some years you should spend taxable. Some years you should spend traditional (especially during the Roth conversion window when you are doing conversions anyway). Some years you should spend Roth (when other income is already high and you need to keep MAGI below a threshold). Static rules cannot capture this dynamism.

How spending changes across retirement phases

Retirement spending is not flat. Research from the Society of Actuaries and others shows that spending follows a "smile" pattern across three broad phases:

1. Early retirement (ages 60-70): The "go-go" years. Spending is often highest in the first decade of retirement. Travel, hobbies, home projects, and an active lifestyle mean you may need more income than you expected. This is also the prime Roth conversion window — low income before Social Security and RMDs, but also years where ACA subsidies make MAGI management critical.
2. Mid-retirement (ages 70-80): The "slow-go" years. Spending naturally declines as activity levels decrease. Social Security has started, Medicare is covering healthcare, and RMDs are beginning. This is where the tax bill from a large traditional IRA really starts to bite — the RMDs pile on top of Social Security, creating a high MAGI that triggers IRMAA and potentially pushes you into the 32%+ bracket.
3. Late retirement (ages 80+): The "no-go" years. General spending continues to decline, but healthcare and long-term care costs can spike dramatically. A year in an assisted living facility costs $50,000 to $100,000 depending on location. This is where having a Roth balance is most valuable — it provides tax-free income when you need it most and may also help with Medicaid planning.

Planning with a single flat spending number across all three phases leads to poor withdrawal decisions. You might over-withdraw in early retirement (paying unnecessary taxes) or under-withdraw in mid-retirement (triggering surprise RMD costs). ThunderHarbor lets you set different spending levels for different phases and models the withdrawal order for each.

How ThunderHarbor models the optimal withdrawal order

ThunderHarbor does not use a static withdrawal order. For each year of your projection, it evaluates the tax cost of taking from each account and chooses the combination that minimizes your total tax burden while meeting your spending needs. Here is how:

1. Starts with fixed income — Social Security, pension, any salary or rental income
2. Calculates the gap between your fixed income and your spending need for the year
3. Evaluates the tax cost of filling the gap from each source: taxable account withdrawals (capital gains only), traditional account withdrawals (full ordinary income), and Roth withdrawals (zero tax)
4. Checks constraints — IRMAA thresholds (two-year lookback), ACA subsidy limits (if pre-65), tax bracket boundaries, and RMD requirements
5. Selects the withdrawal mix that meets your spending need at the lowest total cost (income tax + IRMAA + lost ACA subsidies)
6. Factors in Roth conversions — in years where bracket headroom exists, converts traditional to Roth up to the optimal limit before accounting for the withdrawal need

The result is a year-by-year withdrawal plan that adapts to your changing income, account balances, and tax situation. You can see exactly which account each dollar comes from and why — and compare the optimized sequence against a static strategy to see the cumulative savings.

Frequently asked questions