In our first article, we covered the foundational shift from accumulation to distribution, the four pillars of retirement income, and the strategies available for turning your portfolio into a reliable paycheck. If you missed it or would like a refresher, ask us and we will send it along.
This second article focuses on a dimension of retirement income planning that most people underestimate until they see their first RMD notice or their first retirement tax return: the tax treatment of your withdrawals matters as much as how much you withdraw. Two retirees with identical portfolio balances and identical spending needs can end up with dramatically different lifetime tax bills depending entirely on which accounts they draw from, in what order, and when.
The good news is that this is one of the most controllable variables in your financial plan. With the right sequencing strategy and a proactive approach to Roth conversions, we can often reduce your lifetime tax burden meaningfully, keep more of your wealth working for you and your family, and give you considerably more flexibility as circumstances change.
Why Withdrawal Order Changes Everything
Most people assume that once they have saved enough for retirement, the income side is relatively simple: draw from the account that needs it, cover your expenses, repeat. In practice, the tax treatment of different account types varies so significantly that the order of withdrawals can easily be worth tens of thousands of dollars over the course of a retirement.
The core issue is this: not all dollars are created equal. A dollar sitting in a Traditional IRA has never been taxed and will be fully taxed as ordinary income when you withdraw it. A dollar in a Roth IRA has already been taxed and will never be taxed again, including all of the growth accumulated over decades. A dollar in a taxable brokerage account falls somewhere in between, taxed on dividends and realized gains each year, but with the benefit of preferential long-term capital gains rates.
When you draw from these accounts in the wrong sequence, or without a plan, you can inadvertently push yourself into a higher tax bracket, trigger additional taxation on your Social Security benefit, expose yourself to Medicare premium surcharges, or create a large and growing RMD problem in your seventies. Each of these outcomes is largely preventable with proactive planning.
The Three-Bucket Framework
A useful way to think about your retirement accounts is as three buckets, each with a different tax character:
- Taxable now (Traditional IRA, 401(k), 403(b)): Every dollar withdrawn is taxed as ordinary income at your marginal rate. These accounts also carry Required Minimum Distributions beginning at age 73, meaning the government will eventually force withdrawals whether you need the income or not.
- Taxable later (Roth IRA, Roth 401(k)): Contributions were made with after-tax dollars, so qualified withdrawals are completely tax-free, including decades of growth. No RMDs apply during the original owner’s lifetime. These accounts are the most valuable to preserve and grow.
- Taxable now on gains (Taxable brokerage / TOD accounts): Interest and dividends are taxed annually. Realized capital gains are taxed at preferential long-term rates if assets are held more than a year. These accounts offer the most flexibility and no withdrawal restrictions.
The art of withdrawal sequencing is in deciding how much to draw from each bucket, in each year, to minimize your total lifetime tax bill while still meeting your income needs and preserving as much Roth and tax-deferred wealth as possible for later years or for your heirs.
Understanding Your Accounts: A Tax Guide
The table below summarizes the tax treatment of the most common retirement account types, which assets tend to belong in each one, and the general timing principles for withdrawals.
| Account Type | Tax Treatment | Best Assets to Hold Here | Withdrawal Timing |
| Traditional IRA / 401(k) | Tax-deferred: contributions reduce taxable income today; all withdrawals taxed as ordinary income | Bonds, REITs, high-turnover funds; assets that generate ordinary income benefit most from deferral | Withdrawals after 59½; Required Minimum Distributions begin at 73 |
| Roth IRA / Roth 401(k) | After-tax contributions; qualified withdrawals are completely tax-free, including all growth | High-growth equities and small-cap positions; the most valuable assets to shelter from future tax | No RMDs during owner’s lifetime; ideal for later years, legacy planning, and tax diversification |
| Taxable Brokerage (TOD) | Dividends and realized gains taxed annually; long-term gains taxed at preferential rates | Tax-efficient ETFs, municipal bonds, buy-and-hold equities; minimize turnover and distributions | Most flexible account type; no age restrictions or required distributions |
| HSA (Health Savings Account) | Triple tax advantage: tax-deductible contributions, tax-free growth, tax-free withdrawals for qualified medical expenses | Growth-oriented investments if medical expenses are covered from other sources near-term | Medical expenses at any age tax-free; after 65, any withdrawal is penalty-free (ordinary income tax applies for non-medical) |
One note on taxable brokerage accounts: at Evergreen we refer to these internally as TOD accounts, short for transfer on death, reflecting the beneficiary designation that typically governs them. If you hear us use that term in a meeting or in correspondence, it refers to your standard taxable investment account.
The Roth Conversion Opportunity
For many clients, one of the highest-value planning opportunities available is also one of the most time-sensitive: the window between retirement and age 73, when Required Minimum Distributions begin. During this period, income often drops significantly, which can mean lower marginal tax rates than at any other point in a client’s financial life. That combination, lower income and years of potential tax-free growth ahead, makes it an ideal time to convert Traditional IRA dollars to Roth.
A Roth conversion works like this: you take a distribution from your Traditional IRA, pay ordinary income tax on that amount in the current year, and move the funds into a Roth IRA where they will grow and be withdrawn tax-free. The tradeoff is paying a known tax today in exchange for eliminating a larger, unknown tax burden in the future.
Why the Math Often Favors Converting
Consider a client with $800,000 in a Traditional IRA at age 65, growing at 6% annually. By age 73, that account could easily reach $1.275 million, generating an initial RMD of roughly $47,000 that grows each year thereafter. If Social Security is also being collected, that RMD alone may push the client into a 22% or 24% bracket, with potentially higher rates ahead depending on future tax law.
If that same client had converted $80,000 to $100,000 per year during the years from 65 to 73, paying 12% to 22% on each conversion, the RMD at 73 would be dramatically smaller or potentially eliminated for the Roth portion. The lifetime tax savings can be substantial, and the Roth assets left to heirs are inherited income-tax-free.
What Limits the Conversion Amount Each Year
The optimal conversion amount each year is not simply ‘as much as possible.’ Several thresholds determine how much makes sense to convert before the tax cost outweighs the benefit:
- Top of your current tax bracket: Converting beyond the top of your current bracket means paying a higher marginal rate on the excess, which often diminishes the long-term benefit.
- IRMAA thresholds: Income above certain levels triggers surcharges on Medicare Part B and D premiums. For 2025, the first IRMAA tier begins at $106,000 for single filers and $212,000 for married couples filing jointly. A large conversion can inadvertently trip this threshold and cost thousands in added Medicare premiums.
- Net Investment Income Tax: Above $200,000 for single filers and $250,000 for married filers, a 3.8% surtax applies to net investment income. Roth conversions do not directly trigger this tax, but they can push other investment income above the threshold.
- State income taxes: Most states tax Roth conversions as ordinary income. Ohio and Michigan both do, which affects the net cost calculation for our clients in those states.
The right conversion amount is different for every client and requires modeling across multiple years, accounting for all of these thresholds simultaneously. This is exactly the kind of analysis we build into your annual plan.
Required Minimum Distributions: Planning Before They Arrive
Required Minimum Distributions are the government’s way of ensuring that tax-deferred retirement savings are eventually taxed. Beginning at age 73, you must withdraw a minimum amount from your Traditional IRA and most employer-sponsored retirement plans each year, calculated based on your account balance and IRS life expectancy tables. The penalty for missing an RMD is 25% of the amount that should have been withdrawn; reduced to 10% if corrected promptly.
For clients who do not need their RMDs for living expenses, this can feel like an unwelcome obligation. But from a planning perspective, the more important issue is what large RMDs do to your overall tax picture over time.
The RMD Snowball Effect
RMDs increase as a percentage of your account each year, as the divisor in the IRS calculation shrinks with age. Meanwhile, if the portfolio continues to grow faster than the RMD rate, the account balance itself may increase, producing even larger mandatory withdrawals. For clients with substantial Traditional IRA balances, this can create a compounding tax burden that builds through the seventies and into the eighties, potentially pushing income well into the 24% or 32% bracket at a stage of life when there is little flexibility to respond.
This is precisely why the years before 73 are so valuable for planning. Roth conversions, strategic portfolio withdrawals, and qualified charitable distributions (QCDs) are all tools that can reduce the future RMD burden. Once RMDs begin, the options narrow considerably.
Qualified Charitable Distributions
For clients who are charitably inclined and have reached age 70½, a Qualified Charitable Distribution allows you to transfer up to $105,000 per year (indexed for inflation) directly from your IRA to a qualified charity. The amount transferred counts toward your RMD but is excluded from your taxable income entirely; a significantly better outcome than taking the distribution, paying tax on it, and then donating the after-tax amount. For clients in higher brackets who give to charity regularly, this strategy can save several thousand dollars per year in taxes with minimal administrative effort.
Managing Your Tax Bracket Through Retirement
One of the most powerful but underutilized aspects of retirement income planning is the ability to actively manage which tax bracket you occupy each year. Unlike during your working years, where income is largely fixed by your salary, retirement income is more controllable. You decide how much to withdraw, from which accounts, and in what sequence. That flexibility is an asset, and using it intentionally can meaningfully reduce your lifetime tax bill.
The table below illustrates how the tax picture typically evolves across the stages of retirement and where the planning opportunities tend to concentrate.
| Scenario | Income Sources | Estimated Tax Rate | Planning Opportunity |
| Early Retirement (before SS and RMDs) | Portfolio withdrawals only | Potentially 10-22% | Prime Roth conversion window; fill lower brackets intentionally |
| Social Security Added | SS benefit + portfolio withdrawals | 12-24%; up to 85% of SS may be taxable | Manage income to limit SS taxation; coordinate account draws carefully |
| RMDs Begin at 73 | SS + RMDs + portfolio withdrawals | 22-32% or higher for large IRA balances | Earlier Roth conversions reduce future RMD burden; pre-73 planning is the leverage point |
| Surviving Spouse | Same income, single filer tax brackets | Often 10-22% higher effective rate | Plan for bracket compression; Roth assets and life insurance can be powerful tools |
The consistent theme across all four stages is that the earlier you plan, the more options you have. The years between retirement and Social Security, and the years between Social Security and RMDs, are typically where the most valuable planning happens. Once all three income sources are running simultaneously, the bracket flexibility narrows substantially.
The Surviving Spouse Problem
One scenario that deserves specific attention is the death of the first spouse. When a married couple transitions to a single filer, they lose the wider married filing jointly brackets but their income often does not decline proportionally. Social Security survivor benefits, RMDs from inherited accounts, and ongoing portfolio income can push a surviving spouse into a meaningfully higher bracket than the couple experienced together.
This is not a morbid planning concern; it is a practical one. We regularly model the surviving spouse scenario for our clients to make sure the plan holds up under that transition. Roth assets, life insurance proceeds, and properly structured account titling can all play important roles in managing this risk.
How We Approach the Tax Dimension With You
Tax strategy in retirement is not something we address once and set aside. It is part of the ongoing work we do with your plan each year, coordinating with your tax advisor where applicable and updating the analysis as tax law, account balances, and your circumstances evolve.
Here is how this work shows up specifically in the tax dimension of your plan:
- Annual Roth conversion analysis: Each year we review your projected income, current bracket, IRMAA thresholds, and future RMD trajectory to determine whether a conversion makes sense and, if so, how much to convert to maximize the long-term tax benefit without triggering unintended costs.
- Withdrawal sequencing plan: We design a specific draw order across your Traditional, Roth, and taxable accounts to minimize taxes paid in each year while keeping your portfolio structured for long-term growth and flexibility.
- RMD projection and management: We project your RMD obligations beginning several years in advance, track them annually, and build the distribution timing into your cash flow plan so there are no surprises and no missed distributions.
- QCD coordination: For clients who are charitably inclined and over 70½, we evaluate whether a Qualified Charitable Distribution strategy is appropriate and, if so, help coordinate the mechanics with your custodian.
- Surviving spouse planning: We model the tax impact of the first spouse’s death for all married clients and make sure the plan accounts for bracket compression, beneficiary account treatment, and the ongoing income picture for the surviving spouse.
- Tax advisor coordination: We work alongside your CPA or tax preparer to make sure our planning recommendations are implemented correctly on your return and that both sides of the picture are aligned.
Your Action Items for This Article
These are specific steps you can take before your next meeting, or items to raise with us if you are not sure where to start.
| ☐ Know Your Account Mix | Make a simple list of your retirement accounts and the tax type of each: Traditional (pre-tax), Roth (after-tax), or taxable brokerage. If you are unsure, your most recent statements will show this clearly. This is the starting point for all withdrawal sequencing work. |
| ☐ Identify Your Roth Conversion Window | If you are within 10 years of retirement, or already retired and not yet 73, ask us whether a Roth conversion analysis makes sense for your situation. The window between retirement and RMD age is often the highest-value planning opportunity available. |
| ☐ Review Beneficiary Designations | Check the beneficiary designations on all retirement accounts. Inherited IRA rules changed significantly in 2019 and many clients have not updated their designations to reflect the new 10-year distribution requirement for most non-spouse beneficiaries. |
| ☐ Understand Your RMD Timeline | If you are 60 or older, ask us to show you a projection of what your Required Minimum Distributions will look like beginning at 73. For clients with large Traditional IRA balances, this number can be surprisingly large and may push you into a higher bracket than expected. |
| ☐ Flag IRMAA Exposure | If your income in retirement may exceed $103,000 (single) or $206,000 (married), you may be subject to Income-Related Monthly Adjustment Amounts on Medicare Part B and D premiums. This is an often-overlooked consequence of large RMDs or Roth conversions and is worth discussing as part of your income plan. |
Questions Worth Reflecting On
Before your next meeting with us, consider the following questions. You do not need answers; just awareness of where the conversation might go next.
Q1 Do you know the tax character of each of your retirement accounts: which are Traditional (pre-tax), which are Roth (after-tax), and which are taxable? If not, this is the single most useful thing to clarify before our next meeting.
Q2 Are you in or approaching the window between retirement and age 73? If so, have we discussed whether a Roth conversion strategy makes sense for your situation?
Q3 Do you have a sense of what your Required Minimum Distributions will look like beginning at 73? If you have a large Traditional IRA balance, this number may be larger than you expect.
Q4 If you are charitably inclined and over 70½, do you know about Qualified Charitable Distributions and how they can reduce your taxable income more efficiently than a standard charitable deduction?
Q5 Has anyone modeled the tax picture for your surviving spouse? If one of you passes first, will the remaining income sources, brackets, and account structure still work as planned?
Q6 Are you coordinating your retirement withdrawal decisions with your tax advisor each year, or are those two conversations happening separately?
| Coming in Article 3: The Silent Risks and Our Full Approach
The final article in this series will cover the two risks that most quietly undermine retirement income plans, and the specific tools we use to protect against them:
As always, if any of these topics feel urgent for your situation before the next article arrives, reach out and we will make time. |
Closing Thoughts
Taxes in retirement are not fixed. They are a function of decisions: which accounts you draw from, when you convert, how you time Social Security, and how you structure your income each year. That means they are, to a meaningful degree, controllable. And controlling them is one of the most direct ways we can add real, measurable value to your plan over the course of your retirement.
The clients who benefit most from this work are not necessarily the ones with the largest portfolios. They are the ones who engage early, ask the right questions, and give us the visibility into their full financial picture that allows us to plan proactively rather than reactively.
If this article raised questions specific to your situation, please reach out. Tax planning is one of those areas where a short conversation at the right time can be worth far more than a long conversation after the fact.
With sincere gratitude,
Evergreen Wealth Management
Disclosures
Evergreen Wealth Management, LLC is a registered investment adviser. The information presented is for educational purposes only and does not constitute tax, legal, or investment advice. The planning concepts discussed herein are general in nature and may not apply to your specific situation. Tax thresholds and rules referenced are based on current law and are subject to change. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed. Past performance is not indicative of future results. The opinions expressed herein are those of the firm and are subject to change without notice.
Evergreen Wealth Management, LLC uses AI tools to support research and client communications. This article has been reviewed and approved by our planning and investment team, and all opinions are our own.