What Order Should I Pull Funds in Retirement? | The Limitless Retirement Podcast

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Many retirees unknowingly set themselves up for higher taxes by following outdated withdrawal advice. Danny Gudorf explains why focusing on tax brackets—not account order—is the smarter path. His three-bucket strategy, combined with careful management of RMDs and Social Security, offers a practical way to minimize taxes and maximize retirement income.

What Order Should You Pull Funds in Retirement?

The Hidden Tax Strategy That Could Save You $70,000 or More

Most financial advisors will tell you to spend your taxable accounts first in retirement. It sounds logical—delay taxes as long as possible, right? But here’s the truth: that “common sense” approach can quietly cost retirees between $50,000 and $100,000 in unnecessary taxes over their lifetime.

The real question isn’t which accounts to spend first. It’s which tax brackets you should fill first. Once you shift your perspective, you’ll never look at retirement withdrawals the same way.

In this article, you’ll learn:

  • Why the traditional withdrawal approach often backfires

  • How tax brackets—not account types—should guide your strategy

  • A three-bucket system that reduces lifetime taxes and creates flexibility

By the end, you’ll see how one strategic shift could keep thousands of dollars in your pocket instead of sending it to the IRS.

Key Takeaways:

  • The order of withdrawals in retirement affects lifetime taxes.
  • Filling tax brackets strategically can save significant money.
  • Roth IRAs should be preserved for as long as possible.
  • Required minimum distributions can push retirees into higher tax brackets.
  • Social Security benefits can be taxed based on other income.
  • Understanding tax brackets gives retirees control over their taxes.
  • Tax bracket arbitrage can optimize tax situations.
  • It's essential to manage overall income levels in retirement.
  • Working with a financial planner can enhance tax efficiency.
  • Long-term tax optimization is key to retirement planning.

The Costly Mistake Most Retirees Make

Meet Tom and Susan. For the first five years of retirement, they followed the standard playbook: spend from taxable accounts first, keep IRAs and Roth IRAs intact.

It felt smart. They paid little in taxes during those years.

But then reality hit. At age 75, required minimum distributions (RMDs) from their IRAs pushed them into a higher tax bracket. Their Medicare premiums doubled due to IRMA surcharges. The result? An extra $8,000 per year in taxes and premiums—money that could have funded travel, hobbies, or grandkids’ college savings.

Don’t let this happen to you.

Why Withdrawal Order Is Really About Tax Brackets

Think of retirement like building a house: your foundation is fixed income sources—Social Security, pensions, annuities, rental income.

Everything else comes from your savings. If you need $10,000 a month and Social Security provides $6,000, you’ve got a $4,000 monthly gap. How you fill that gap matters.

Here’s the big insight:

Retirement income falls into three “buckets”:

  1. Taxable accounts – brokerage accounts where dividends, interest, and gains are taxed annually.

  2. Tax-deferred accounts – traditional IRAs and 401(k)s, where withdrawals are fully taxable.

  3. Tax-free accounts – Roth IRAs, where growth and withdrawals are tax-free.

The traditional wisdom says: spend taxable, then tax-deferred, then Roth. But that focuses only on the short term. The smarter approach? Manage your lifetime tax brackets.

How Tax Brackets Work for You

In retirement, you have something working people don’t: control over your tax brackets.

Take the 2025 brackets for married couples:

  • Standard deduction: $33,200 → your first $33,200 of income is tax-free

  • 12% bracket: up to $96,950

  • Next bracket: 22%—almost double the tax rate

If you spend entirely from taxable accounts, you might pay almost nothing today—but you’re setting up a tax trap tomorrow when RMDs hit.

Instead, blending withdrawals allows you to “fill” the lower tax brackets now.

Example:

  • Withdraw $20,000 from a traditional IRA

  • Take $28,000 from a taxable account

This keeps your effective tax rate at just 3.5%. You reduce future RMDs while still keeping taxes minimal today.

Tax Bracket Arbitrage: The Overlooked Strategy

Here’s where things get powerful.

After covering your spending gap, you can still “fill” the 12% bracket before crossing into the 22% range. That’s where Roth conversions come in.

Suppose you withdraw $48,000 from your IRA and taxable accounts combined. You still have $65,000 of room in the 12% bracket. That’s an opportunity to convert IRA dollars into a Roth IRA, paying a known 12% tax today instead of a 22% (or higher) rate later.

This isn’t just tax management—it’s tax bracket arbitrage.

Four Principles for Smarter Withdrawals

Every retirement plan is unique, but these principles apply almost universally:

  • Let your Roth IRA grow as long as possible. No RMDs, tax-free growth, and great for heirs.

  • Understand RMDs. The bigger your IRA grows, the bigger your forced withdrawals—and tax bill—later.

  • Manage Social Security taxation. Up to 85% of benefits can be taxable if your other income is too high.

  • Avoid IRMA surcharges. Cross certain thresholds, and Medicare premiums jump dramatically.

Each of these factors ties back to one thing: strategically managing your income brackets every year.

Why This Matters

If you can keep your average tax rate at 8% instead of 15%, that’s a 7% savings on every dollar you withdraw.

On $50,000 a year, that’s $3,500 in savings annually. Over 20 years, that’s $70,000—money that could fund more travel, gifts to your family, or simply greater peace of mind.

The order you pull funds in retirement is not an investment decision. It’s a tax bracket decision.

The Bottom Line

The old “taxable → tax-deferred → Roth” strategy might feel intuitive, but it often creates a bigger tax bill in the long run. The smarter move is to:

  • Use your fixed income as the foundation

  • Strategically blend withdrawals from different accounts

  • Proactively manage your tax brackets year after year

Sometimes it means paying a little more tax today to save much more later.

The key is to look at your retirement income as a long-term tax optimization strategy—not just a way to minimize this year’s tax bill.

Next Step

Taxes aren’t just about April 15 anymore. The way you pull income in retirement can mean the difference between keeping tens of thousands of dollars—or losing them to the IRS and higher Medicare premiums.

*This blog post is based on the insights shared by Gudorf Financial Group. For personalized advice tailored to your unique circumstances, always consult a financial, legal, or tax professional.*

Transcript: Prefer to Read — Click to Open


Danny (00:00.108)

Are you making a dangerous mistake with your retirement money right now? If you’re keeping large amounts of cash in those four to 5 % money market accounts, thinking you’re playing it safe, you might actually be putting your entire retirement plan at risk. I’m Danny Gudorf a certified financial planner who’s helped hundreds of people over 50 retire with confidence. And today I’m going to show you why.

that safe cash strategy could cost you thousands of dollars and how to protect your buying power for the next 30 years. You’ve probably heard that cash is king. This popular phrase came from the CEO of Volvo after the 1987 market crash when he talked about having plenty of cash during tough times. Just like Volvo back then, many retirees rely on cash to protect themselves

from financial storms. But here’s what’s happening today. Many people are treating cash like an investment instead of a safety net because of those attractive 4 to 5 % returns we’re seeing right now. The problem is there’s a silent thief working against you every single day and it’s called inflation. Let me explain what’s really happening to your money. When we talk about investment returns,

There are two numbers you need to understand. The first is your nominal return. That’s the headline number you see before considering inflation, taxes, or fees. So if you put $100,000 in the stock market last year and it’s now worth $110,000, your nominal return is 10%. That’s the number that gets all the attention.

but it doesn’t tell the whole story. The real return is what matters for your retirement. This is your return after inflation eats away at your buying power. Using that same example, if your investment returned 10%, but inflation was 6%, your real return was only 4%. That 6 % inflation reduced not just your nominal return, but more importantly,

Danny (02:25.709)

your ability to buy the same goods and services. This is why nominal returns will almost always be higher than real returns, except when we have deflation, which is rare. Here’s the shocking truth about today’s high cash yields. From January not 2022 to April 2025, Vanguard’s Treasury Money Market Fund returned about 14%, averaging

nearly 4 % per year. Sounds great, right? But inflation during that same period completely wiped out every bit of that return. And then some leaving money market investors with a negative 1.42 % real return. And that’s before taxes. So while people felt like they were finally getting paid to keep money in cash, they were actually losing buying power and missing out

on better stock market returns. This isn’t much different from the frustrating period from 2009 to 2020 when money market returns averaged only 0.4 % and inflation was around 1.6%. Cash yields were terrible, but so was inflation, still leaving investors with negative real returns. The pattern is clear.

Over long periods, cash barely keeps up with inflation, if at all. Let me share some historical perspective. For the last 97 years, one-month treasury bills returned about 3 % per year on average. Want to guess what inflation averaged during that same period? Roughly 3%. This means over the long term, cash doesn’t increase your buying power at all.

It just maintains it and sometimes not even that. This is exactly why smart retirement investors put a healthy portion of their money in riskier investments like stocks and bonds. They need positive real returns to protect their buy-in power and reach their retirement goals. Yes, there was a unique period from 1978 to 1999

Danny (04:49.74)

when cash outpaced inflation by about 3 % per year. But even then, stocks outpaced inflation by about 12 % per year. Cash was positive, but it was still a fraction of what the equity market delivered. Here’s what this means for your retirement. If you’re in the accumulation phase and putting a large percentage of your savings in cash, you’re almost

guaranteeing lower returns. Remember that period from 1978 to 1999 when cash had some of its best real returns in history? Sure, you would have beaten inflation by 3 % per year, but the stock market turned $100,000 into $3.3 million during that same time. That’s a wealth building opportunity

most long-term savers can’t afford to miss. For those already in retirement, viewing current money market and CD yields as smart, low-risk investments increases the chances that inflation will eat away at your buying power. In a worst-case scenario, inflation can consume your entire retirement savings. Most retirees need a positive real return.

a return above the inflation rate to maintain their spending over a 30 plus year retirement. To achieve that, you need to allocate some portion of your portfolio to riskier, higher returning investments. Now, I often hear people say they’re using cash as a bond replacement because they don’t think bonds are good investments right now. The challenge with this approach

is that cash doesn’t provide the returns you might need when catastrophic events occur. Let me give you an example. During the great financial crisis from October 2007 to March 2009, the stock market dropped over 50%. Money markets had a total return of about 3 % during that period and provided stability. But intermediate treasury bonds returned

Danny (07:13.917)

over 16%. That 16 % return during one of the worst recessions in history was incredibly helpful for retirees taking regular withdrawals from their portfolios. They could withdraw money from their bond gains while their stocks went through 18 months of volatility. This shouldn’t be surprising. Intermediate treasury bonds contain more risk than money market funds.

so they should provide higher returns. This isn’t an either or decision. Retirement investors should have a mix of cash, short-term bonds, and intermediate-term bonds to create what we call a war chest. A simple rule of thumb is to establish a war chest equal to two to five years of living expenses. It might be two years if you want to take more risk, and closer to five years,

if you’re very risk averse or have already saved plenty for retirement. Cash is king. And for those in or near retirement, a healthy cash balance is absolutely needed to weather unpredictable storms. But cash is not a long-term investment. Those higher yields might seem attractive until we factor in fees, taxes, and most importantly, inflation. Higher cash yields

should not trick long-term retirement investors into thinking they can outsmart the markets and achieve higher returns with less risk. Risk and return go hand in hand. If you want a successful retirement plan that maximizes your retirement income while reducing the chances of running out of money during a 30 plus year retirement, you have to make 30 year investing decisions. Chasing short-term trends

even with something as boring as cash, will only increase the long-term risk of your plan. The key is understanding that cash serves a specific purpose in your retirement strategy. It’s your safety net, your emergency fund, your buffer against market volatility. But it’s not your wealth building tool. For that, you need investments that can outpace inflation over time.

Danny (09:41.925)

even if they come with more short-term volatility. So what should you do? First, make sure you have an appropriate amount of cash for your situation. Typically, two to five years of expenses, as I mentioned. Second, don’t let attractive short-term yields fool you into thinking cash is a long-term investment strategy. Third, work with a qualified financial planner.

who can help you create a balanced approach that gives you both the security you need and the growth potential to maintain your buying power throughout retirement. Remember, the goal isn’t to avoid all risk, it’s to take appropriate risk for appropriate reward. Your retirement depends on making decisions that will serve you well over decades, not just the next few months or years.

Now that you understand why cash alone won’t protect your retirement buying power, you need to know how to build a portfolio that can actually grow your wealth over time. In my next video, I’ll show you exactly how to structure a three bucket retirement portfolio that balances safety with growth potential. Click right here.

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