Why order matters at all. Each bucket is taxed differently on the way out. Taxable accounts owe capital-gains tax only on growth (often at preferential 0/15/20% rates), and get a step-up in basis at death. Tax-deferred withdrawals are fully ordinary income. Roth withdrawals are tax-free and never forced. Because these rates differ and because tax brackets are progressive, which dollars you pull — and when — determines how much the IRS takes over your whole retirement.
The conventional rule of thumb. The textbook order is: spend taxable first, let tax-deferred and Roth keep compounding; then tax-deferred; then Roth last. The logic is to preserve tax-advantaged growth as long as possible and save the tax-free bucket for the end. It's a reasonable default and better than spending randomly. But it has a flaw: by leaving the traditional IRA untouched for years, it lets that balance grow into large RMDs at 73, which can then erupt into a high bracket, tax your Social Security, and trip IRMAA — the very spike Chapter 13 warns about. The naïve order can minimize taxes early and maximize them late.
The better way: fill the brackets every year. Rather than emptying buckets in strict sequence, aim to realize roughly the same, moderate amount of taxable income each year — smoothing your rate across retirement instead of letting it swing from near-zero to very high. In practice that often means: in low-income gap years, deliberately pull from (or convert) the tax-deferred account to fill up the 10%/12% brackets — even if the rule of thumb says leave it alone — while using taxable and Roth dollars to top off spending without adding taxable income. You're voluntarily paying a little tax in cheap years to avoid a lot in expensive ones. This is the same insight as Roth conversions, applied to spending: the enemy is a lumpy tax-rate profile.
Two retirees, same spending
Two retirees each spend $70,000/year from a mix of $600k traditional, $300k taxable, and $200k Roth. Retiree A follows the strict rule of thumb: taxable first. For years his taxable income is tiny (just the gains on brokerage sales), so he "wastes" his low brackets — then at 73 his still-large traditional IRA throws off big RMDs that land him in the 22%+ zone with taxed Social Security. Retiree B instead pulls ~$30k/year from the traditional IRA even while spending taxable dollars, filling the 12% bracket every year. By 73 her traditional balance — and thus her RMDs — is far smaller, keeping her in low brackets and under IRMAA for life. Same spending, same investments; B keeps materially more.
Coordinate with the other levers. Sequencing is where the whole plan comes together: - Social Security timing (Ch 14): the gap years before you claim are your best low-rate window — lean on tax-deferred withdrawals or conversions then. - RMDs (Ch 21): once they start, RMDs are mandatory taxable income; sequence around them, not into a pile-up. - IRMAA (Ch 12) and the tax torpedo (Ch 11): every sequencing choice moves your MAGI, so watch the two-year IRMAA lookback and Social Security taxation thresholds. - Legacy: taxable assets get a step-up in basis at death and Roth passes tax-free, so if leaving money to heirs matters, that shifts which buckets you preserve.
Don't over-optimize into fragility. The goal is a smooth, sensible rate profile, not squeezing the last dollar. Rules change, markets surprise, and life is lumpy. A robust plan that keeps you in low-to-middle brackets most years beats a hyper-tuned one that assumes everything goes to script.
The bucket that isn't a bucket. One source sits outside this whole ordering: borrowing. A draw on a pledged asset line or a home-equity line raises cash with zero reported income, which makes it useful in the years when the sequencing above runs out of room — a large one-off expense that would otherwise blow through a bracket or an IRMAA tier, or a down market where the tax-efficient bucket is exactly the one you don't want to sell. It is not free money: it carries a variable rate and, usually, the lender's right to call it. See Chapter 18 before treating it as a fourth bucket.