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What’s the Right Mix of Taxable, Tax-Deferred, and Tax-Free Accounts in Retirement? Thumbnail

What’s the Right Mix of Taxable, Tax-Deferred, and Tax-Free Accounts in Retirement?

Investing Retirement


Q: How should retirees balance their different account types to support long-term income and minimize taxes?

A: A smart retirement income plan blends withdrawals from all three types of accounts—taxable, tax-deferred, and tax-free—to help control your annual tax bill, support long-term growth, and maintain flexibility over time.

Why Account Type Mix Matters

  • Each account type has different tax rules and benefits.
  • Managing when and how you draw from each can reduce taxes over time.
  • A poor strategy could push you into higher tax brackets or increase Medicare premiums.

Overview of the 3 Account Types

1. Taxable Accounts (Brokerage Accounts)

  • Capital gains are taxed when realized.
  • Interest and dividends may be taxed annually.
  • High flexibility: withdraw anytime, with few restrictions.

2. Tax-Deferred Accounts (401(k), Traditional IRA)

  • Taxes are deferred until withdrawal.
  • Withdrawals are taxed as ordinary income.
  • Required Minimum Distributions (RMDs) begin at ages 73-75.

3. Tax-Free Accounts (Roth IRA, Roth 401(k))

  • Withdrawals are tax-free if qualified.
  • No RMDs for Roth IRAs.
  • Great for managing tax brackets and legacy planning.

Blending Withdrawals Strategically

  • Start with RMDs once they begin at age 73 to avoid penalties.
  • Use taxable accounts early in retirement for spending flexibility and potential tax efficiency.
  • Tap tax-deferred accounts strategically to manage your income bracket and avoid large spikes.
  • Draw from Roth accounts to fill income gaps without increasing your taxable income.

Real Example – The Tax-Smart Withdrawal Plan

We helped a Portland couple:

  • Withdraw from their brokerage account first to minimize capital gains.
  • Use their 401(k) to stay under the IRMAA Medicare threshold.
  • Tap Roth funds when larger spending was needed—without triggering a tax hike.

This approach gave them tax control, spending flexibility, and long-term peace of mind.

Conclusion: Your Retirement Account Mix is a Tax Strategy

Using your account types in the right order is a powerful way to manage taxes, spending, and risk. But having multiple account types is only part of the picture.

The next step is understanding your income style. Are you someone who values predictability and guarantees, or do you prefer growth potential and flexibility?

That’s where the RISA® (Retirement Income Style Awareness) assessment comes in.

As a Portland-based retirement income advisor, I help clients align their income strategy with their personal style—and that starts with the complimentary RISA. It’s the bridge between your retirement resources and how you want to use them.

FAQs

Q: Which account should I withdraw from first in retirement?

A: It depends on your income needs, tax bracket, and Social Security timing. Often, starting with taxable accounts can help delay tax-deferred withdrawals.

Q: Can I reduce RMDs with this strategy?

A: Yes, blending withdrawals and doing Roth conversions early can reduce future RMDs.

Q: Should I convert to a Roth IRA before I retire?

A: For many, yes. It depends on your current and future tax brackets. We can help evaluate if it’s right for you.