While driving down the mountain after cross-country skiing with my wife today, we discussed our plan for withdrawing from our portfolio when our active income no longer meets our spending needs. This was prompted by a couple of unexpectedly high spending months. Our camper van needed a new engine while we were simultaneously paying for season passes to our local ski area, Christmas presents, new all-weather tires, a spring break cruise, and a few other big expenses. Yikes!
In the middle of our conversation, I realized I hadn’t written this plan down anywhere. If I was gone, what would my wife do about strategies like this that I mostly keep in my head? And if I’m going to write down my plan, why not share it with others who will one day be in a similar position?
So here goes…
This is how I’m planning to withdraw from our brokerage account, traditional IRAs and 401ks, Roth IRAs and 401ks, and HSAs as we shift into portfolio withdrawal mode over the next decade. I’ll start with a set of guidelines and follow with two examples to make it clearer. I hope it helps many of you move confidently toward retirement when the time comes.
1 Gather Active and Passive Income Sources
Right now, we’re both working part-time and bringing in two small paychecks. To supplement that, we have a small rental property business that generates income (most months). We also have a taxable brokerage account with investments that produce interest and dividends. Rather than reinvesting dividends and interest, which creates taxes on top of taxes, we take them as income.
This strategy also allows us to invest a good portion of our paychecks in tax-advantaged retirement accounts—but that’s a topic for another day.
We’ll continue working part-time for as long as we enjoy the work and aren’t itching to spend more time on other projects and hobbies. At some point, however, our income from these sources will drop low enough that we’ll need to start tapping savings to make up for the shortfall. That’s when the strategy gets interesting.
2 Use Taxable Brokerage Before Retirement Accounts
We built up a good-sized taxable brokerage account before I left my full-time career in 2022. This will be the easiest pot of resources to access next since we’ll need it long before age 59 ½. It’s also the most tax-efficient place to pull from because it allows our retirement accounts and HSA to continue growing tax-free.
If the current 0% capital gains tax bracket is still around, we’ll also be able to harvest gains in our brokerage without taxes! More on that below.
3 Perform Roth Conversions and Tax Gain Harvesting to Fill Up Low Tax Brackets
This next step isn’t necessarily about generating income. But it’s worth mentioning because failing to act could mean missing out on a big tax savings!
For example, in 2025, a married couple filing jointly can have $96,950 in taxable income before jumping from the 12% to the 22% federal tax bracket. They can otherwise earn up to $96,700 in long-term capital gains and pay 0%. After accounting for a $30,000 standard deduction, these numbers increase to approximately $126,000!
Note that both forms of income stack up, so you can’t have $96k of active income plus $96k of capital gains and stay in these brackets; the total must fall within these limits.
If we have large unrealized capital gains in our brokerage during the first few years of lower income, we’ll take those gains and pay 0% taxes (known as “tax gain harvesting”). Who knows how long the 0% rate will last!?
Read How to Pay Zero Taxes on 401k and IRA Withdrawals for more on tax gain harvesting.
At the same time, we’ll begin making Roth conversions from our traditional 401ks and IRAs to fill the 12% income tax bracket.
There’s a balance between tax gain harvesting and Roth conversions. Waiting too long to start Roth conversions may result in missing today’s favorable tax rates, while future RMDs (required minimum distributions) could push us into a higher bracket.
If there isn’t room for both, the 0% capital gains bracket takes priority over Roth conversions, however.
4 Use HSA Before Retirement Accounts
Once we’ve taken advantage of Roth conversions and tax gain harvesting, our next move will be tapping our HSAs.
Inherited HSAs do not have favorable tax treatment, unlike Roth IRAs. If someone other than your spouse inherits your HSA, the funds must be withdrawn and taxed. An inherited Roth IRA, on the other hand, remains tax-free.
Of course, HSA dollars can only be withdrawn tax-free for qualified medical expenses. That’s why we’re paying medical costs out of pocket now and saving receipts for future reimbursement, giving our HSA funds more time to grow but planning to begin withdrawals fairly early in retirement.
Any expenses that can’t be covered by active income, dividends, interest, brokerage, and HSA dollars will go to the next stage.
5 Withdraw from Roth to Avoid High Tax Brackets
So far, we’ve moved money from traditional to Roth retirement accounts, but we haven’t spent a penny. We want to give our tax-advantaged money as much time to grow as possible! But now that we’ve exhausted our other options, we’ll begin dipping into retirement savings.
The decision between traditional and Roth is entirely based on taxes. If we’ve filled the 12% tax bracket with Roth conversions, our next dollar from a traditional 401k or IRA will be taxed at a 22% rate. This 10% jump is big enough to warrant withdrawals from our Roth.
Before age 59 ½, we won’t be able to touch the growth in Roth accounts. But we’ll have years of contributions and early Roth conversions to draw from first.
6 Tap Traditional 401k and IRA Strategically to Minimize Taxes
In these situations, we will start withdrawing directly from traditional accounts:
- Our Roth contributions and conversions are running low.
- Tax brackets are set to increase significantly in the near future.
- We’re nearing our 70s and facing large RMDs that will trigger higher taxes.
As I wrote in Secrets to Getting Money out of Your Retirement Accounts Early, we have a couple of options for withdrawals if we’re still younger than 59 ½. We’re already using the Roth conversion ladder, so that won’t help us further. But another option is to set up Substantially Equal Periodic Payments (SEPPs) under IRS 72t rules.
There are 3 different methods to determine required withdrawals, and this calculator by Bankrate will calculate them all for you. If all 3 methods force you to pull out more than you want, don’t worry. There’s a way to fine-tune your withdrawal! Just open a new IRA, transfer the specific amount that gives you the SEPP that you need, and set up SEPPs for the new IRA.
7 Aim to Empty Traditional Accounts Before Roth
The primary goal is to balance withdrawals to minimize lifetime taxes.
The secondary goal is to empty traditional retirement accounts, leaving as much money in Roth accounts as possible for heirs. This could include gifting traditional 401k or IRA assets to charities, who do not pay taxes on gifts.
Similar to the HSA, a traditional 401k or IRA inherited by non-spouses must be withdrawn and taxed within 10 years. The government wants their money! This isn’t as urgent as the HSA, since an inherited HSA is turned from tax-free into taxable. But it could push your heirs into high tax brackets depending on their income and the size of the account.
Goal #1: Keep tax bracket low every year—not just early years!
Goal #2: Leave Roth accounts and real estate to heirs.
Side Note on Large Capital Gains from Real Estate
One situation that could keep you from emptying your traditional accounts before Roth is the sale of real estate.
Real estate gets a step-up in basis when inherited, so it’s a prime candidate to leave to heirs. However, if you have a rental property that you decide to liquidate, it wouldn’t be unusual to see a multi-six-figure capital gain.
A similar situation would happen if you’re fortunate enough to live in a home that’s appreciated more than a million dollars and have plans to move during retirement. This situation is more common than you might think in cities like New York, Honolulu, and San Francisco.
A large capital gain could push you into the highest tax bracket that you’ll have in retirement, which doesn’t make it a good year for Roth conversions or traditional 401k/IRA withdrawals. Therefore, you’ll want to take income from the sale of the property itself that year. If you need the cash from the sale to buy your next home, it will have to come from your Roth.
Obviously, there are other options for appreciated rental properties that you should consider before taking such a tax gain. You could:
- Avoid the situation entirely by doing a 1031 exchange to reset the cost basis long before the need for cash arises. This comes with cost and hassle up front, however.
- Get a loan on the property, assuming rates are favorable and the property will still cash flow.
- Simply withdraw the cash from a Roth, assuming this isn’t just delaying the inevitable sale of the property at a later date.
Examples
Here are two simplified examples—with and without a taxable brokerage—that will drive the concept home.
Example 1: Brokerage
1 Gather Active and Passive Income Sources
It’s 2025. You and your wife have $100k in expenses to cover.
You’re earning a total of $60k between a part-time job and a rental property. You also have $10k in interest and another $10k in qualified dividends, both in a taxable brokerage. The total tax on this $80k of income—ignoring state tax, child tax credits, and Qualified Business Deductions on rental income—is $4,323.
You still need to come up with another $24,323 to cover expenses and taxes.
2 Use Taxable Brokerage before Retirement Accounts
After you take $24,323 from your brokerage, let’s assume that half of it is capital gains, taxed at 0%. But don’t stop there. You still have $34,539 of room left in the 0% capital gains or 12% income tax bracket!
3 Perform Roth Conversions and Capital Gains Harvesting to Fill Up Low Tax Brackets
Now we’ll assume you have $30k in long-term capital gains left in your brokerage. So you’ll harvest those gains by selling and immediately re-buying the investments. This leaves you with $4,539 that you can use for a Roth conversion from your 401k, which creates $545 in taxes at 12%. To cover this, you’ll withdraw another $545 from your brokerage, selling shares with a net capital gain of $0.
This example is summarized in the table below.
| Income Source | Income Amount | Taxes | Total Net Income |
| Active Income | $60,000 | $3,123 | $56,877 |
| Interest | $10,000 | $1,200 | $65,677 |
| Dividends | $10,000 | $- | $75,677 |
| Brokerage | $24,323 | $- | $100,000 |
| Roth Conversion | $- | $545 | $99,455 |
| Additional Brokerage | $545 | $- | $100,000 |
Note that the Roth conversion doesn’t show up as income in Table 1 because you haven’t withdrawn it for expenses.
Example 2: No Brokerage
Now we’ll look at the same case, but this time you don’t have any brokerage assets.
1 Gather active and passive income sources
Again, you’re earning a total of $60k between a part-time job and a rental property. You no longer have the interest and dividend income your brokerage threw off. So this time you’re looking at $3,123 in taxes and $43,123 in income that you still need to generate to cover your $100k in expenses plus taxes.
2 Use Taxable Brokerage before Retirement Accounts
You don’t have a brokerage, so step 2 does not apply.
3 Perform Roth Conversions and Capital Gains Harvesting to Fill Up Low Tax Brackets
Next, you want to fill up the 12% tax bracket, which is $96,700 in 2025. You have $30k in taxable income so far, after the $30k standard deduction, so you make a $66,700 Roth conversion. The tax on the conversion is $8,004. Adding this to $43,123 now puts you at $51,127 in income that you still need to generate.
4 Use HSA Before Retirement Accounts
Let’s say you’ve saved $20k in medical receipts that hasn’t been reimbursed from your HSA. You may have more in the HSA, and you’ll start using it for medical expenses from this point forward, but the rest of your expenses will have to come from retirement accounts this year.
5 Withdraw from Roth to Avoid High Tax Brackets
The remaining $31,127 comes from your early career Roth contributions.
Here’s the summary of our second example:
| Income Source | Income Amount | Taxes | Total Net Income | Roth Contribution Treatment |
| Active Income | $60,000 | $3,123 | $56,877 | |
| Roth Conversion | $- | $8,004 | $48,873 | 5-year rule |
| HSA | $20,000 | $- | $68,873 | |
| Roth Withdrawal | $31,127 | $- | $100,000 | First in, first out |
Again, the Roth conversion is not treated as income in Table 2 because it does not go toward the $100k in expenses. In fact, it creates another $8,004 in “expenses” to the IRS.
Also notice that you added $35,573 more to the Roth than you withdrew. This helps to accomplish the goal of emptying your traditional retirement accounts before your Roth.
Summary of Guidelines
By following these guidelines, you can optimize your withdrawal strategy and leave a lasting legacy for your heirs:
- Gather active and passive income sources
- Use taxable brokerage before retirement accounts
- Perform Roth conversions and capital gains harvesting to fill up low tax brackets
- Use HSA before retirement accounts
- Withdraw from Roth to avoid high tax brackets
- Tap traditional 401ks and IRAs strategically to minimize taxes
- Aim to empty traditional accounts before Roth
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