Kalem Mackey, CFP®, BPC

 

Key Takeaways:

• The years between retirement and age 73 create an important tax-planning window that retirees often miss
• Three strategies can help you reduce lifetime taxes: planning for required minimum distributions (RMDs) before they start, strategic Roth conversions during low-income years, and protecting against sequence of returns risk
• The standard withdrawal sequence (taxable → IRA → Roth) often backfires by creating larger required minimum distributions at age 73
• Coordinating these strategies across your complete financial picture is key for maximum tax efficiency

After decades of building retirement savings, you face a decision that determines how long your money lasts: which accounts to tap first.

Financial advisors tend to recommend the same sequence: drain taxable accounts, then traditional IRAs and 401(k)s, then Roth accounts. But this standard approach is not for everyone.

Why Standard Withdrawal Rules Frequently Backfire

Your retirement accounts fall into three tax categories:

• Taxable accounts (brokerage, savings): You already paid income tax. Withdrawals trigger capital gains tax on growth.
• Tax-deferred accounts (traditional IRAs, 401(k)s): Withdrawals taxed as ordinary income. Required minimum distributions begin at 73.
• Tax-free accounts (Roth IRAs): Qualified withdrawals completely tax-free. No RMDs during your lifetime.

The standard retirement withdrawal strategy drains taxable accounts first, tax-deferred second, and Roth last. This helps preserve tax-advantaged growth as long as possible.

But this generic sequence can create a problem: by age 73, tax-deferred accounts can grow so large that required minimum distributions (RMDs) end up pushing you into the highest tax rates of your retirement. Meanwhile, opportunities to manage those distributions at lower rates have passed.

That’s where strategic planning comes in.

Tax-efficient retirement withdrawal strategies often involve three proactive moves:

Strategy 1: Plan for RMDs Before Age 73

At 73, the IRS requires annual withdrawals from traditional IRAs and 401(k)s, whether you need the money or not. Waiting until they begin to address the tax impact leaves few options.

A smarter approach is to use the years between retirement and 73 strategically. During this window, you control your taxable income completely.

For example: If you retire at 65 and delay Social Security until 70, you have five years of relatively low income. Instead of relying entirely on taxable accounts to support your lifestyle, you can intentionally draw from your traditional IRA to fill up the 12% or 22% tax brackets. This can help reduce a balance that may trigger larger RMDs later at potentially higher rates.

The takeaway? Intentional planning during this timeframe could save you thousands by keeping you in lower brackets throughout retirement.

Strategy 2: Use the Roth Conversion Window

Those pre-RMD years also create a prime opportunity for Roth conversions.

A Roth conversion moves money from a traditional IRA to a Roth IRA. You pay income tax on the converted amount now, but all future growth comes out tax-free. Each dollar converted shrinks your traditional IRA balance, reducing future required distributions.

Consider a 67-year-old couple with a $1 million traditional IRA. Without planning, by age 73 this account could grow to $1.2 million, requiring annual RMDs around $45,000, potentially pushing them into the 24% tax bracket.

Instead, they convert $50,000 annually for five years, paying 22% tax on each conversion ($11,000/year, or $55,000 total). By 73, they’ve moved $250,000 plus growth to Roth. Their remaining traditional IRA now generates RMDs around $25,000 instead of $45,000, keeping them in the 12% bracket.

The result? They pay $55,000 now to avoid approximately $175,000 in higher taxes over their retirement: net savings of $120,000.

The best windows for RMD to Roth conversion planning are:

• Early retirement years: Low-income years before Social Security begins.
• Pre-RMD years: Ages 65-72, when you can fill lower brackets before forced withdrawals.
• Down market years: Convert when balances are temporarily depressed, recover tax-free.

Strategy 3: Take Steps to Protect Against Sequence of Returns Risk

Sequence of returns risk is what happens when market downturns occur early in retirement while you’re taking withdrawals.

It explains how two retirees with identical portfolios and withdrawal rates can have drastically different outcomes based purely on when market declines occur.

Consider two retirees, each with $1 million and taking $50,000 annually. Both experience the same market returns, just in different order. The retiree who faces a 20% decline in year one runs out of money significantly faster than the retiree who faces the same decline later even though their average returns are identical. Selling investments during downturns to fund withdrawals locks in losses that may never recover.

That’s why we recommend The Bucket Plan^® approach. This asset allocation strategy addresses the problem by segmenting your portfolio into time horizons, based on when you’ll need the money:

• The Now bucket keeps 0-2 years of expenses in cash and short-term bonds
• The Soon bucket holds 2-10 years in income-focused investments
• The Later bucket is for 10+ years in growth assets

With this system, you can avoid unnecessary losses by drawing from your cash reserves in the Now bucket during downturns instead of being forced to sell depressed growth investments.

Market downturns themselves also create tax opportunities. Lower capital gains, reduced dividends, and smaller RMDs on depressed balances may temporarily drop your marginal rate, opening windows for Roth conversions at lower tax costs.

Why Coordinating These Strategies Matters

Withdrawal sequencing affects RMD size. Roth conversions change both your tax picture and what you leave to heirs. Market conditions create simultaneous risks and opportunities.

But many advisory relationships fragment this planning. Investments get managed separately from taxes. Estate planning happens with an attorney, not a financial professional. Tax preparation occurs once a year, retrospectively and reactively.

At Prosperity Capital Advisors, we bring the pieces together. Our in-house tax professionals work directly with your advisor to coordinate these strategies into one personalized, holistic plan. We model different distribution scenarios, identify optimal Roth conversion timing, and use The Bucket Plan^® to help maintain flexibility during volatile market conditions.

Coordinating these strategies can help you keep more of your hard-earned savings. Let’s put them to work for your retirement. Find a Prosperity advisor near you.

Frequently Asked Questions about Tax-Efficient Retirement Withdrawal Strategies

Does a Roth conversion count as an RMD?

No, a Roth conversion does not count as a required minimum distribution. RMDs and Roth conversions are completely separate transactions. You must satisfy your full RMD requirement before converting any additional traditional IRA funds to Roth. The IRS treats conversions as elective transfers, not required distributions.

How do you calculate an RMD withdrawal?

To calculate your required minimum distribution, divide your December 31 account balance by the life expectancy factor from the IRS Uniform Lifetime Table. For example, at age 73, the factor is 26.5. If your traditional IRA balance was $500,000 on December 31, your RMD is $18,868 ($500,000 ÷ 26.5). The factor decreases each year as you age, increasing your required withdrawal percentage.

What happens if I miss taking my RMD?

The IRS imposes a 25% penalty on the amount you failed to withdraw. However, if you correct the mistake within two years by taking the missed distribution, the penalty can be reduced to 10%. This is why planning ahead matters: proactive withdrawal strategies can help you avoid both the penalty risk and unnecessary tax burdens.

Schedule a Retirement Income Strategy Review

Implementing these strategies requires coordinating withdrawal decisions alongside your tax situation, investment timeline, and legacy goals.

Schedule a retirement income review with a Prosperity advisor. We’ll analyze your specific situation and develop a tax-efficient withdrawal strategy that works across your complete financial picture.

 

 

Disclosure: Prosperity Capital Advisors delivers holistic wealth management through our Five Pillars framework: Financial Planning, Asset Management, Tax Management, Protection Planning, and Legacy Planning. Our integrated approach coordinates retirement withdrawal strategies with tax planning, ensuring distribution decisions support long-term wealth preservation. See our full list of advisors by clicking [here].