Ask an Advisor: How to Withdraw From Investment Accounts in Early Retirement (Without Overpaying Taxes)

Ask an Advisor: How to Withdraw From Investment Accounts in Early Retirement (Without Overpaying Taxes)

For successful professionals, business owners, and newly retired households, early retirement presents a valuable and often overlooked opportunity for advanced tax planning. After decades focused on wealth accumulation, the transition to retirement requires a shift toward tax-efficient portfolio withdrawals, income sustainability, and long-term wealth preservation.

A well-structured retirement income strategy does more than generate cash flow. It integrates investment management, tax planning, and estate considerations to maximize after-tax returns and extend portfolio longevity.

Moving From Wealth Accumulation to Tax-Efficient Distribution

During your working years, retirement planning typically centers on tax-advantaged savings vehicles such as 401(k)s and IRAs. In retirement, however, the focus shifts to determining the most tax-efficient way to draw income from those assets.

Many investors follow a conventional withdrawal order:

1. Taxable brokerage accounts
2. Tax-deferred accounts (401(k)s and traditional IRAs)
3. Tax-free accounts (Roth IRAs)

While this framework provides a baseline, optimal retirement income planning for high-net-worth individuals requires a personalized analysis. Factors such as marginal tax brackets, capital gains exposure, estate objectives, and future income sources all influence the best strategy.

Why Early Retirement Creates a Unique Tax Planning Window

Prior to claiming Social Security retirement benefits and before required minimum distributions begin under IRS rules, many retirees experience a temporary reduction in taxable income. For affluent retirees, these early years often represent an opportunistic period for proactive tax planning, including:

• Manage capital gains strategically
• Reduce lifetime tax liability (i.e., Roth conversions)
• Reposition assets tax-efficiently
• Improve long-term portfolio sustainability
• Control future required distributions

Strategic Withdrawals From Taxable Investment Accounts

Taxable brokerage accounts typically provide flexibility because withdrawals often include a return of principal, which is generally not taxable. However, selling appreciated assets triggers capital gains taxes, making asset selection critical.

When multiple taxable accounts or positions exist with varying levels of unrealized gains, choosing which investments to sell first can materially impact long-term wealth outcomes.

A More Tax-Efficient Approach to Capital Gains

Consider two investment accounts:

• A long-held portfolio with significant appreciation
• A newer portfolio with lower unrealized gains

Many investors assume selling the long-held assets first is advantageous. However, this may increase tax liability and reduce overall portfolio efficiency.

A more sophisticated strategy often involves selling assets with lower capital gains first, minimizing current taxes and allowing highly appreciated assets to continue compounding. Selling lower-gain assets first may help investors:

• Reduce immediate tax exposure
• Preserve tax-deferred growth on appreciated assets
• Improve after-tax investment returns
• Extend portfolio longevity
• Maintain greater flexibility in future tax planning

This approach supports a core objective for high-net-worth households: maximizing net wealth after taxes, not simply generating income.

Estate Planning Advantages: The Step-Up in Basis

For investors with legacy planning goals, retaining highly appreciated assets may provide an additional benefit. Under current tax law, many assets receive a step-up in cost basis at death, resetting their value to the market price at that time. This can significantly reduce capital gains exposure for heirs. For families focused on intergenerational wealth transfer, this feature can make delaying the sale of highly appreciated investments particularly advantageous.

Key Principles for Tax-Efficient Retirement Withdrawals

An effective early retirement withdrawal strategy typically emphasizes:

• Selling investments with lower capital gains first
• Preserving highly appreciated assets when appropriate
• Leveraging lower tax brackets in early retirement
• Coordinating withdrawals across account types
• Integrating estate and tax planning objectives

Final Thoughts: Personalized Planning Matters

There is no universal withdrawal strategy suitable for every investor. High-net-worth retirees benefit most from customized planning that aligns tax efficiency, investment performance, and legacy goals.

A thoughtful retirement income strategy can help minimize taxes, increase after-tax income, and preserve wealth across generations — transforming early retirement into a period of financial efficiency rather than uncertainty.

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This article was originally published on Wealthtender and is intended for informational purposes only and should not be considered financial advice. You should consult a financial professional before making any major financial decisions. Wealthtender earns money from financial professionals, which creates a conflict of interest when these professionals are featured in articles over others. Read the Wealthtender editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.

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