The Smartest Way to Withdraw From a 401(k) or IRA
For most of your working life, your goal was to save as much as possible into your 401(k) and IRA, and let it compound for retirement.
Now that you’re nearing or in retirement, you need to determine how much you should take out, from which account(s), and in what order so that you keep the most of what you've built.
The wrong withdrawal sequence can cost you tens or hundreds of thousands in taxes over a 20–30 year retirement through higher tax brackets, Medicare premium surcharges, and large RMDs.
When talking about retirement withdrawal strategies, many people think about the 4% Rule or the Three Bucket Approach. Both of these are good starting frameworks (and we have articles on each, which you can read by clicking on the links). This article instead focuses on how retirement withdrawals affect your income and tax bill, especially with new rules from the One Big Beautiful Bill.
Why Withdrawal Order Matters More Than You Think
Most retirees default to spending their taxable savings first, then tax-deferred accounts (traditional 401(k)/IRA), and Roth accounts last.
This is a reasonable starting point but can backfire for a few reasons.
Required Minimum Distributions (RMDs)
If you defer all traditional IRA withdrawals, your account will keep growing tax deferred. That seems like a good thing until RMDs force your hand (currently age 73, rising to 75 for those born in 1960 or later), and that larger balance leads to a larger RMD. Large RMDs can push you into a higher bracket than expected. A retiree who spent decades in the 24% bracket can suddenly find themselves in the 32% or 35% bracket once RMDs, Social Security, and investment income stack together.
Unexpected Consequences of Higher Income
Income spikes affect more than your tax bracket. They can trigger things like: IRMAA surcharges (higher Medicare Part B and Part D premiums, which are based on your income from two years prior); increased taxation of Social Security benefits (up to 85% of benefits become taxable at higher income levels); loss of certain tax deductions and credits tied to income thresholds.
Roth Conversions: The Underused Tool
In a Roth conversion, you move money from a traditional IRA into a Roth IRA, paying ordinary income tax on the converted amount now, in exchange for tax-free growth and withdrawals later.
For high net worth retirees, Roth conversions are a powerful tool, especially in the years after retirement but before RMDs begin. This window tends to be a period of lower taxable income, making it an ideal time to convert.
Roth conversions have several benefits:
It shrinks future RMDs: Every dollar converted today is a dollar that won't generate a forced, taxable distribution at 73 or later.
It benefits your heirs: Since the SECURE Act eliminated the "stretch IRA" for most non-spouse beneficiaries, inherited traditional IRAs must generally be fully distributed (and taxed) within 10 years. An inherited Roth IRA has the same 10-year rule, but the distributions are tax-free.
Remember that the outcome of a Roth conversion will vary depending on your financial situation. If you convert too aggressively in a single year, you can trigger the same problems you're trying to avoid like higher tax brackets, IRMAA surcharges, and increased Social Security taxation. The smartest approach is usually a multi-year conversion, where you convert a calculated amount each year to "fill" a target tax bracket without overflowing it.
Changes from the One Big Beautiful Bill
The One Big Beautiful Bill Act (OBBB) introduced several provisions that affect withdrawals and Roth strategies for retirees.
Senior Bonus Deduction
Taxpayers 65 and older can claim an additional deduction of up to $6,000 per person ($12,000 for married couples) for tax years 2025 through 2028, on top of the existing standard deduction and age 65 add on. It starts to phase out when your MAGI is over $75k for single filers, and $150k for joint filers.
For many retirees, this creates a window where more income (like Roth conversion income) can be absorbed at a lower effective rate, but it also means a poorly timed large withdrawal can phase out a deduction you'd otherwise receive.
Increased SALT Cap
For high earners in California, the State and Local Tax (SALT) deduction cap rose to $40,000 (2025–2029), and the cap starts to phase out when your MAGI is $500k. A large Roth conversion or RMD in a given year can push your MAGI into or through this phase-out range, reducing your SALT deduction at the same time you're paying more in conversion tax.
Charitable Deduction Changes
Starting with your 2026 tax return, you can no longer deduct every dollar of charitable giving. Instead, your charitable deduction is only available for the amount that exceeds 0.5% of your adjusted gross income (AGI). This is similar to the existing rule for medical expenses, where you can only deduct costs above 7.5% of your AGI.
For high-income itemizers, the 0.5% floor won't eliminate the deduction entirely, but it will reduce it. A family with $500k in AGI, for example, would automatically lose the first $2,500 of their charitable deduction. Unused amounts can be carried forward for up to five years, so the dollars aren't lost, but the timing and structure of your giving strategy may need to change.
For those who don't itemize, even if you take the standard deduction, you can still deduct up to $1,000 in charitable cash gifts ($2,000 for joint filers).
California and Idaho Specific Considerations
California
California taxes traditional 401(k)/IRA and Roth conversion income as ordinary income, at rates up to 13.3% for high earners.
California does not tax Social Security benefits which is a meaningful offset, but they do fully tax pension and retirement account withdrawals.
Because California has no separate capital gains rate, taxable brokerage withdrawals are taxed the same as ordinary income at the state level, reducing (but not eliminating) the state-tax advantage of drawing from taxable accounts first.
High earners should also factor in the 1% Mental Health Services surtax on income over $1 million when modeling large one-time events like Roth conversions.
Idaho
Idaho uses a flat 5.3% income tax rate on all taxable income, including 401(k)/IRA withdrawals, Roth conversions, and capital gains. There is no preferential rate for investment income.
Idaho does not tax Social Security benefits.
Because Idaho's rate is flat rather than progressive, the "bracket-filling" strategy behind Roth conversions works differently than in California. The state tax cost of a conversion is the same whether it's your first dollar or your five-hundred-thousandth.
For clients relocating between California and Idaho, timing matters significantly. Roth conversions completed before establishing California residency, or after establishing Idaho residency, can change the state tax cost of the same conversion. Residency timing, income sourcing rules, and part-year filing requirements should be considered before a large conversion.
There is no universal "right" withdrawal order. The smartest strategy depends on your account balances, current and projected tax brackets, state of residence, charitable intentions, Medicare timing, and estate goals. What does tend to be consistent though, is that:
Withdrawal sequencing should be planned multiple years in advance, not decided account-by-account each year.
Roth conversions are most powerful when done gradually, in the years before RMDs and Social Security begin.
Tax law changes from the OBBB create new phase-out thresholds that can erode the benefit of a poorly timed withdrawal.
As always, we recommend working with a professional who understands both tax strategies and wealth management.
Author: Ryan McCloskey, CFP®
This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.
