Overview of The Case for Blended (Instead of Sequential) Drawdown for Early Retirees
This BiggerPocketsMoney episode (hosts Mindy Jensen & Scott Trench) features tax expert Mark (an enrolled agent) presenting an alternative to the common “sequential drawdown” retirement withdrawal order. Instead of draining taxable accounts → tax‑deferred (401(k)/Traditional IRA) → Roth, Mark makes the tax case for a blended (and sometimes cyclical) drawdown approach that mixes withdrawals across account types to reduce lifetime taxes, preserve favorable capital gains treatment, protect ACA/Medicare subsidies, and optimize legacy outcomes.
Key concepts and definitions
- Sequential drawdown: deplete taxable brokerage first, then tax‑deferred accounts, finally Roth. Common/simple approach.
- Blended drawdown: each year, withdraw some from taxable, some from tax‑deferred, and some from Roth—structured so tax impacts stack advantageously.
- Cyclical drawdown: vary composition year-to-year (e.g., low-income years for ACA subsidies, higher-income years to harvest gains) to exploit policy/market timing.
- Asset location: allocating asset types across account wrappers (taxable, tax‑deferred, Roth) to match tax treatment of the income they generate.
Why sequential drawdown can be suboptimal (tax & planning reasons)
- Current tax environment is historically low (large standard deductions, reduced brackets since TCJA). Paying some ordinary income tax now may be cheaper than pushing large ordinary distributions into higher future brackets.
- Sequential drawdown can “waste” the standard deduction (and low ordinary brackets) if you only take tax‑free Roth distributions or long‑term capital gains in years when you could instead realize ordinary income taxed at low marginal rates.
- Draining taxable accounts early eliminates future access to preferential long‑term capital gains treatment, step‑up basis benefits, and specific tax strategies (donating appreciated stock, gift transfers, tax‑loss harvesting, borrowing against margin, etc.).
- Tax‑deferred accounts (401k/Traditional IRA) are worst to inherit: distributions are taxed as ordinary income and must be withdrawn within 10 years (for most non‑spouse beneficiaries), possibly causing a large tax bill for heirs.
- Account protection differences: qualified plans (401k) often have stronger creditor protection than IRAs and taxable accounts—this can influence withdrawal sequencing in litigation/credit risk scenarios.
Tax mechanics that matter (what drives optimization)
- Types of income:
- Ordinary income (wages, tax‑deferred distributions, interest, short‑term gains, pensions, taxable Social Security): taxed at ordinary brackets and often subject to payroll taxes if earned.
- Long‑term capital gains & qualified dividends: taxed at lower long‑term capital gains rates (0%, 15%, 20% tiers), which sit on top of ordinary income.
- Non‑taxable income: qualified Roth distributions, qualified HSA/529 distributions, excluded home sale gains (primary residence rules), return of basis.
- Interaction: long‑term capital gains brackets are applied after ordinary income and standard/itemized deductions—mixing ordinary income and long‑term gains strategically can keep gains within the 0% cap gains band.
- Standard deduction and low ordinary brackets are valuable—“fill” those with ordinary taxable income (from tax‑deferred accounts or Roth conversions) rather than letting them go unused.
- MAGI / ACA / Medicare:
- Modified Adjusted Gross Income (MAGI) affects ACA premium tax credit eligibility (generally 100%–400% FPL window) and Medicare IRMAA surcharges.
- IRMAA thresholds and ACA subsidy cliffs make some years more valuable to keep MAGI low—blending or cycling withdrawals can help manage this.
Practical rules & Mark’s two “commandments”
- Do not waste the standard deduction or your itemized deduction. Fill that deductible space with ordinary income (e.g., small distributions from tax‑deferred accounts or Roth conversions) to use cheap ordinary tax brackets now.
- Do not waste the 0% long‑term capital gains bracket. Harvest gains (even if not needed for spending) to use the 0% band and reduce future taxable appreciation.
Other practical recommendations:
- Apply asset location:
- Taxable brokerage: hold long‑term equity positions for qualified dividends / cap gains (growth).
- Tax‑deferred accounts: house assets that generate ordinary income (bonds, REITs, certain managed futures) because withdrawals are taxed as ordinary income anyway.
- Roth accounts: prioritize high-growth equities—growth there is tax‑free forever.
- Use tax‑deferred and Roth accounts for rebalancing to avoid triggering gains in taxable accounts.
- HSA: treat as a medical‑expense reimbursement reserve; plan distributions to avoid dying with a huge HSA (beneficiary taxation concerns). Consider reimbursing qualified expenses periodically to convert invested HSA growth into taxable‑friendly brokerage assets if you might leave less tax burden to heirs.
- Estate planning: Roths are best for heirs (tax‑free + 10‑year rules), taxable assets next (step‑up in basis), tax‑deferred worst (ordinary tax burden + 10‑year rule). Consider drawing down tax‑deferred accounts to reduce heirs’ future tax exposure.
- Asset protection: 401(k) & qualified plans can have stronger creditor protection; this may influence order if legal risk is present.
Example illustration (two‑year contrast — simplified)
- Sequential example: Year 1 = $64k long‑term gains → after standard deduction taxable cap gains fall in 0% bracket → $0 tax. Year 2 = $64k ordinary income → after deduction taxed at 10%/12% → ~$5,552 tax in Year 2. Total ≈ $5,552 over two years.
- Blended example: Each year take $32k cap gains + $32k ordinary. Because the ordinary portion is partially offset by standard deduction, more income sits in lower brackets and the cap gains remain within the 0% band. Result: ~ $1,700 tax/year, ~ $3,423 over two years.
- Rough saving: blended approach saved ~ $2,100 over the two‑year scenario on identical total withdrawals. Note: this is illustrative; real outcomes depend on filing status, exact bracket thresholds, basis amounts, and other income.
When a cyclical approach helps
- If average lifetime spending is above ACA subsidy thresholds but you can manage year‑to‑year MAGI, cycle income composition so some years qualify for subsidies (keeping certain years’ MAGI below 400% FPL) and other years harvest gains or take ordinary income.
- Use cyclical sequencing if you expect income or expenses to vary (market dips, business income years, health costs) to exploit timing advantages.
Actionable checklist (what to do next)
- Inventory your accounts and assets: estimate balances by wrapper (taxable, tax‑deferred, Roth, HSA), basis in taxable holdings, and expected required distributions.
- Model several multi‑year scenarios (5–30+ years): compare pure sequential vs blended vs cyclical approaches for lifetime tax paid, MAGI effects, and heirs’ tax exposure.
- Implement asset‑location changes over time (move bonds to tax‑deferred, growth to Roth/ taxable) when rebalancing opportunities arise.
- Consider periodic Roth conversions sized to fill standard deduction / low ordinary brackets (use low‑bracket years).
- Harvest long‑term gains up to the 0% cap gains threshold in low‑income years.
- Plan HSA reimbursements and investment allocation consistent with your withdrawal strategy and estate goals.
- Document the plan and revisit yearly (market returns, tax law, life events change things).
Caveats, limits & next steps
- Individual circumstances vary widely—results depend on basis, account balances, filing status, state taxes, Social Security timing, and future tax law changes.
- Some data points in the episode are year‑specific (2025 cited thresholds). Always check current brackets, thresholds, and MAGI rules.
- Consult a tax professional and/or CFP to model your specific situation and to implement Roth conversions, gain harvesting, or other tax strategies properly.
- Visuals and slides referenced in the episode are available on the BiggerPocketsMoney YouTube channel and BiggerPocketsMoney resources page.
Notable quotes / takeaways
- “Instead of asking which account to draw down first, ask what blend of accounts each year produces the lowest tax over your intended horizon.”
- Two main commandments: don’t waste the standard deduction; don’t waste the 0% LT cap gains bracket.
Resources / contacts mentioned
- Slides & video: BiggerPocketsMoney YouTube (youtube.com/BiggerPocketsMoney) and resource library at biggerpocketsmoney.com/resources.
- Mark (presenter) contact: markbtaxfi@gmail.com (Mark B — enrolled agent).
- Consider building or using multi‑year tax simulation tools (there are calculators online; a more advanced multi‑year blended drawdown calculator would be useful).
Bottom line: Blended (and sometimes cyclical) drawdown strategies can materially reduce lifetime taxes and improve legacy outcomes for many early retirees by using low ordinary tax brackets and 0% long‑term capital gains bands strategically. It’s not universal—model your situation and consult a tax professional before changing your withdrawal plan.