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How withdrawal sequencing works
The order you draw down accounts in retirement changes your lifetime tax and how long the money lasts - the logic, the default order, and the bracket and IRMAA crossings to watch.
Withdrawal sequencing is the order in which you pull money from your accounts once you are spending the portfolio rather than adding to it. It sounds like a detail. It is not: the same total spending, drawn in a different order, can change your lifetime tax bill and how many years the portfolio lasts, because each account type is taxed differently when you tap it.
Why the order matters
You typically retire with three kinds of money:
- Taxable accounts - the principal is already-taxed, but the income along the way is taxed too: dividends and interest each year, plus gains when you sell (long-term gains at preferential rates, short-term gains and most interest at ordinary rates).
- Tax-deferred accounts (traditional IRA/401(k)) - withdrawals from fully pre-tax balances are ordinary income. If you have nondeductible IRA basis or after-tax 401(k) contributions, part of each withdrawal comes back tax-free under the pro-rata rule.
- Tax-free accounts (Roth) - qualified withdrawals are not taxed at all, and the original owner has no lifetime RMDs. (A withdrawal is qualified once the account is at least five years old and you are 59½ or older; before that, earnings can be taxable and may face an early-withdrawal penalty.)
Draw them in the wrong order and you either pay tax sooner than you had to or bunch income into high-bracket years. The art is keeping your taxable income smooth and low across retirement instead of letting RMDs spike it late.
The default order, and the floor on top of it
A common default order is: spend already-taxed taxable income first, then taxable principal (so you control when gains are realized), then tax-deferred (ordinary income), and let tax-free / Roth grow the longest.
Sitting on top of all of that is a non-negotiable floor: Required Minimum Distributions. Once you reach RMD age, the IRS forces a minimum withdrawal from tax-deferred accounts whether you need the cash or not - computed per owner, since a household with two IRA owners of different ages has two different divisors. RMDs come out first; the discretionary order fills in the rest of your spending need around them.
A worked example: a household needs $120,000 and has a $50,000 RMD. The RMD comes out first as ordinary income; the remaining $70,000 is then drawn in the discretionary order - and whether that next $70,000 comes from taxable or tax-deferred can be the difference between staying in a bracket and crossing into the next one, or staying under an IRMAA tier and tripping it.
How Ironlake treats it
Ironlake's Withdrawal Sequencing Planner is a planner, not an optimizer. You define the order; the engine walks each retirement year and shows the amount pulled from each source, its tax character, the tax impact, your bracket position, and a flag whenever a year crosses a federal bracket or an IRMAA tier. It never reorders your sequence or auto-adjusts - you own the order, the tool shows the consequences.
The planner uses its own deterministic, per-bucket year-by-year walk - not the three-trace projection engine, which models one sleeve-weighted portfolio rather than separate tax buckets.
Honest limits
The plan depends on future tax brackets, returns, and spending, all of which will change. A real retirement also has irregular years - a big purchase, a health event - that no single ordering handles perfectly. Ironlake shows you the year-by-year consequences of the order you chose so you can adjust it; it does not claim an optimal sequence exists or pick one for you.