Once you hit retirement, the focus shifts from saving to spending, and how you take those distributions can have a big impact on how long your money lasts. You’ve done the hard work of building your nest egg; now it’s time to spend it. But creating a retirement income plan isn’t just about maximizing every dollar. It’s about doing so in a way that aligns with your comfort level and your goals, while considering tax efficiency. The most important part of the process is not losing sight of what matters most: the success of your plan and your peace of mind.
The Looming Tax Torpedo
When it comes to retirement income, taxes can get complicated quickly. Withdrawals from different account types (like traditional IRAs, Roth IRAs, and taxable brokerage accounts) are treated differently by the IRS. And it’s not just your federal tax bracket you have to worry about. Retirees often bump into “stealth taxes,” such as:
- Income-Related Monthly Adjustment Amount (IRMAA) surcharges on Medicare premiums, triggered by crossing certain income thresholds. The thresholds are based on modified adjusted gross income (MAGI) and are updated annually. In 2025, IRMAA surcharges begin at $106,000 for individuals and $212,000 for married filing jointly taxpayers.
- Capital gains exposure when you sell investments in taxable accounts. Rates range from 0% to 20%, depending on your taxable income.
- Taxation of Social Security benefits, which can be partially taxed depending on your total income. Up to 85% of your benefit may be taxable, starting at an income of $34,000 for individuals or $44,000 for married taxpayers filing jointly.
The “tax torpedo” is the sharp spike in effective marginal tax rates that can happen when you start receiving Social Security and withdraw income from other sources like traditional IRAs or brokerage accounts. That’s why a smart distribution plan looks beyond this year’s tax return. It coordinates withdrawals across all your accounts and over time, keeping an eye on taxes today and in the future.
The Timing Challenge: Sequence of Returns Risk
As you take distributions from your investment portfolio, the value of your portfolio could be impacted significantly if there is a negative sequence of returns. Basically, if the market drops early in your retirement while you’re withdrawing money, it can seriously reduce how long your portfolio lasts. This is because you are selling holdings at a loss to create income, reducing the value of your assets for future distributions. And that’s true even if the market eventually recovers.
This is why how you take distributions really matters. The way you take distributions, what accounts you draw from, in what order, and how much you take, can help protect your portfolio from this kind of risk.
Personalizing Your Plan
Not everyone wants to handle retirement income the same way. Tools like the RISA® (Retirement Income Style Awareness) Profile help uncover how you prefer to generate income, whether you value flexibility, predictability, or somewhere in between. This is a starting point in determining which implementation tools and strategies resonate with you, allowing you to design a plan you are comfortable sticking with. To illustrate, here’s how different RISA® profiles might approach distribution planning:
- Time Segmentation – Matching Dollars to Timelines: You like structure and want to know that your short-term needs are covered. That might mean using cash or bonds for near-term expenses, while letting stocks grow for the long term. For tax efficiency, this approach often draws first from taxable accounts, leaving Roth or IRA funds for later “buckets.” It’s organized, intentional, and offers peace of mind with a clear timeline.
- Safety First – Prioritizing Predictability: If you value guarantees, you might prefer strategies that ensure your essential expenses are covered. Examples of this include pensions, Social Security, and annuities. Taxes still matter, but the emphasis is on consistency and reliability. You’re less likely to adjust spending based on market swings, and more focused on knowing your income is steady.
- Total Return – Balancing Growth and Flexibility: Total return profiles are comfortable with some ups and downs, as long as their plan is on track. This approach leans into the market, withdrawing a sustainable amount each year from a diversified portfolio. Tax planning for total return strategies often involves blending withdrawals from different account types to minimize surprises and extend the life of the portfolio.
- Risk Wrap – Blending Protection with Participation: This profile resonates with those who want the market’s upside potential, but with some guardrails. Risk wrap strategies may utilize a product such as an indexed or variable annuity with income guarantees, which offers a blend of flexibility and downside protection. Distribution planning may be more product-driven, but tax strategies still play a role, especially in how and when you use these products versus other accounts.
Don’t Get Lost in the Details
It’s easy to get caught up optimizing for taxes. While paying less in taxes means keeping more of your money, taxes should not be the only driver of your plan. The best retirement income strategy isn’t the one with the lowest tax bill; it’s the one you’ll stick with. It will help you sleep at night and live the life you’ve worked so hard to build. So, whether you’re stacking your buckets, locking in guarantees, or riding the market, the goal is the same: build a plan that works for you. Because retirement isn’t about perfection, it’s about confidence.
Want to learn more? Listen to Ep. 185 of the Retire With Style Podcast.
