The Sequence Question

Which retirement account you tap first — and whether you convert along the way — quietly determines your lifetime tax bill and what you leave behind.

A retired couple sits down at our conference table with $1.5 million spread across three account types. Their question is simple: How much can we spend, and where should it come from? The first half of that question gets most of the attention. The second half — which account each dollar comes from — is where the real planning lives. It is also where most retirees leave six figures on the table without realizing it.

This brief walks through three approaches to the same problem: a 65-year-old couple needing $80,000 per year of total income for a 30-year retirement, with $45,000 of that coming from combined Social Security benefits starting at age 67. Same lifestyle, same starting balance, same tax law. Only the withdrawal sequence changes. The difference at age 94 ranges from $3.4 million to $14.1 million in remaining wealth — and the lifetime federal tax bill ranges from $80,000 to $209,000. Both extremes belong to defensible strategies. The right answer for any individual client depends on what they value most.

The Three Buckets

Most retirees arrive at retirement holding money across three distinct tax containers. Each behaves differently when you withdraw from it — and the differences compound dramatically over a 30-year horizon.

Conventional advice usually says to drain pre-tax first, then brokerage, then Roth — letting the tax-advantaged accounts compound as long as possible. As we will see, that conventional wisdom is often wrong. The most powerful approach treats all three buckets as a system to be coordinated, not a queue to be drained one at a time.

A Working Example

Throughout this brief, we follow a hypothetical couple — both age 65, married filing jointly, just retired — to illustrate how each approach plays out over 30 years. The mechanics generalize to most situations; the dollar amounts will scale to your own numbers.

Approach One: Drain Pre-Tax First

This is what most clients do by default — often without thinking about alternatives. The 401(k) feels like the "main" retirement account, so it gets tapped first. Brokerage and Roth dollars are saved for later, on the theory that tax-advantaged compounding should run as long as possible.

For our couple, the pre-tax bucket lasts much longer here because Social Security covers most of their spending starting at 67 — pre-tax does not deplete until age 82. The 30-year federal tax bill comes to $86,000, with brokerage left at $2.11 million and Roth still at $5.03 million at age 94 (untouched throughout).

Approach One: Pre-Tax First — Annual Federal Tax

Hypothetical for illustrative purposes only. Annual federal tax under Approach One. Tax climbs steadily as inflation pushes both pre-tax withdrawals and Social Security benefits higher each year. Once the pre-tax bucket depletes around age 82, taxes drop sharply because brokerage gains can fall in the 0% LTCG bracket and Social Security taxability falls back when total ordinary income drops.

There is nothing catastrophic about this outcome — the family ends with $7M of remaining wealth. But $86,000 of federal tax is paid because Social Security and pre-tax withdrawals together push taxable ordinary income up high enough that 85% of Social Security benefits are taxable in most years. Worse, the early years pay ordinary tax at the 10–12% marginal rate while the brokerage and Roth — both higher-growth assets — are never touched. We can do better.

Approach Two: Withdraw Proportionally

A meaningful upgrade is to spread withdrawals across all three buckets every year. For our couple, with Social Security covering the bulk of spending, that looks like roughly $14,000 from pre-tax, $14,000 from brokerage, and $12,000 from Roth annually. 

Compared to draining one bucket at a time, this approach keeps all three accounts working for the entire 30 years. The $14k pre-tax withdrawal stays small enough that, even on top of Social Security, taxable ordinary income remains modest. Brokerage gains often qualify for the 0% LTCG bracket (because total taxable income stays under the $96,700 MFJ threshold most years). Roth withdrawals are tax-free.

Approach Two: Proportional Withdrawals — Annual Federal Tax

Hypothetical for illustrative purposes only. Annual federal tax under Approach Two. Tax stays moderate throughout retirement because the smaller per-bucket withdrawals limit how much Social Security becomes taxable, and brokerage gains often fall in the 0% LTCG bracket.

Total federal tax over 30 years: $126,000. The portfolio ends at $5.72 million, with all three buckets still meaningfully funded — $557,000 in pre-tax, $1.87 million in brokerage, and $3.29 million in Roth. The proportional approach saves $40,000 of lifetime tax versus Approach One while keeping the portfolio working across all three buckets.

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With Social Security covering most of the spending need, the conversation shifts. The question is no longer just 'how do I get my money out?' — it becomes 'what should the rest of these accounts become before I need them?' That is where conversions earn their keep.

Approach Three: Brokerage Spending + Roth Conversions + Asset Location

The most powerful sequence stops trying to minimize current-year taxes and starts using empty bracket room as a planning asset. It combines three coordinated moves:

1. Spend from brokerage to fund living expenses. Brokerage withdrawals trigger only LTCG tax on the gain portion — and with no other ordinary income, that gain falls in the 0% bracket. Cash flow to the household is fully spendable.

2. Convert pre-tax to Roth annually, filling the 12% federal bracket. Each year, our couple converts approximately $80,000 of pre-tax money to Roth — but the SS interaction matters here. Because Social Security taxability climbs as conversions push provisional income higher, the effective marginal rate on conversion dollars can run a few points above the headline 12%. Even so, these conversions are dramatically cheaper than what the family would face later if RMDs forced large pre-tax withdrawals on top of full Social Security.

3. Pay the conversion tax from brokerage, and place high-growth assets in Roth. Paying tax from brokerage means every converted dollar lands in Roth and starts compounding tax-free immediately — none is siphoned off to withholding. Asset location goes one step further: putting your highest-growth assets (small-cap, emerging markets, growth equities) inside the Roth means tax-free compounding works on the most aggressive returns. Bonds, REITs, and other ordinary-income generators live in pre-tax, where their distributions stay sheltered.

Approach Three: Brokerage + Roth Conversions + Asset Location

Hypothetical for illustrative purposes only. Annual federal tax under Approach Three. Years 65–66 carry $7,500–$8,000 of voluntary conversion tax. Once Social Security begins at 67, the cost climbs into the $15,000–$17,000 range as more of the benefit becomes taxable. After conversions stop and the pre-tax bucket is empty, the remaining 24 years are nearly tax-free.

Result: $80,000 in lifetime federal tax — actually less than Approach One ($86k) and meaningfully less than Approach Two ($126k). In exchange, the family converts $571,000 from pre-tax to Roth at favorable rates, eliminates the RMD problem, and ends at age 94 with $14.06 million in Roth — wealth that passes to heirs entirely tax-free. That is roughly $7 million more in legacy than Approach One, with $6,000 less in lifetime tax.

Side by Side

Three approaches. One couple. The same $80,000 of total annual income — $45k from Social Security plus the rest from the portfolio — in every case.

Lifetime Federal Tax – Three Approaches Compared

Hypothetical for illustrative purposes only.

Wealth Remaining at Age 94

Hypothetical for illustrative purposes only.

Why the 0% LTCG Bracket Changes the Math

The mechanic that powers Approaches Two and Three is one of the most underused features of the federal tax code: the 0% long-term capital gains bracket. For 2026, married couples filing jointly pay 0% federal tax on long-term capital gains as long as their total taxable income (ordinary income plus LTCG) stays at or below $96,700. Above that line, the rate jumps to 15%; above $600,050, it jumps to 20%.

For retirees with substantial Social Security and brokerage assets, this bracket can be the difference between paying 0% and 15% on tens of thousands of dollars of gains every year. The catch: every dollar of other ordinary income — including taxable Social Security and pre-tax withdrawals — fills the bracket from below, pushing capital gains out of the 0% zone.

Same $10,000 gain. Same federal tax brackets. The only difference is how aggressively the family is pulling from pre-tax — and that one decision determines whether their gains are taxed at 0% or 15%. Multiplied across $20,000–$30,000 of gains every year for 30 years, the difference compounds into serious money.

Where This Gets More Nuanced

The numbers above assume a clean scenario. Most real plans have wrinkles that change the answer:

Bucket ratios. A client with 90% of wealth in pre-tax has a much larger conversion runway than someone whose wealth is mostly already in Roth. The optimal strategy depends entirely on what you have to work with.

Spending need. A 4% withdrawal rate behaves very differently from a 6% rate. Higher spending leaves less bracket room for conversions and shrinks the Approach Two tax-free zone.

Other income streams. Pension income, Social Security, rental property, and consulting fees fill the lower brackets from the bottom up. The more you have, the costlier conversions become — and the more important precise sequencing is.

State of residence. Illinois does not tax retirement plan distributions or Social Security, which makes conversions cheaper than for a California or New York resident. State tax matters a lot.

Health and longevity expectations. Roth conversions are most valuable when you have a long horizon for tax-free compounding. A client with meaningful health concerns may prefer the simpler proportional approach.

Estate and legacy intent. If passing wealth to heirs matters, Roth assets are vastly more valuable than pre-tax dollars — heirs inherit Roth tax-free but pay full ordinary tax on inherited IRAs over a 10-year window.

How We Approach this with Clients

We model your specific buckets, expected income, and goals against a baseline of doing nothing — then show you what changes when conversions and asset location enter the picture. Most reviews surface planning opportunities that were not visible from inside the 401(k) statement. There is no fee for the initial conversation; reach out when you are ready.

Important disclosures
All figures and outcomes shown are hypothetical and for illustrative purposes only. The example couple described in this brief is not based on any specific client and does not represent the experience of any Shoreline Financial Partners client. Projections are derived from the specific assumptions stated; actual results will vary materially based on individual circumstances, investment performance, future tax law, inflation, longevity, and other factors. Past performance is not indicative of future results. All investments involve risk, including the potential loss of principal.

Tax brackets, deduction amounts, RMD rules, and capital gains thresholds shown are estimates for the 2026 tax year and are subject to change by future legislation. The model does not account for state income taxes, the Net Investment Income Tax, IRMAA Medicare premium surcharges, ACA premium credits, or other phase-outs that may affect your specific situation. Tax information provided is for general planning purposes only and should not be construed as tax advice. Please consult your tax professional regarding the implications of any transactions.

Registered representative offering securities through Cetera Wealth Services, LLC, member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. Neither Cetera nor any of its representatives may give legal or tax advice.