How to Withdraw From Your 401(k) and IRA in Retirement: A Tax-Smart Guide for Texas Retirees

Most decumulation conversations start with the 4% rule and stop shortly after. That is a problem. The 4% rule is a useful framework drawn from a specific historical period; it is not a recipe. The harder questions for a Texas-resident household are which account to draw from in which order, how to use the years between retirement and Required Minimum Distributions, and how to respond when the first ten years of returns are not the average ones.

Why Decumulation is a Different Problem from Accumulation

Accumulation is forgiving: long horizon, regular contributions, and the freedom to ignore short-term volatility. Decumulation is less forgiving because withdrawals lock in losses during a market downturn, the horizon shortens with every year, and the order in which returns arrive matters enormously. The same portfolio can support a 35-yearretirement comfortably or run out in 20, depending almost entirely on whether the worst returns arrive in year one or year fifteen.

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The 4% Rule as a Framework, Not a Recipe

The 4% rule originated in William Bengen's1994 research using US stock and bond returns from 1926 through 1992. It found that a retiree could withdraw 4% of an initial portfolio balance, adjusted annually for inflation, with high confidence of the portfolio lasting 30 years. It is a useful starting framework. It is not a recipe. The result depends on the underlying data window, the assumed allocation (typically 50 to 75%equities), and the 30-year horizon. It does not adapt to market conditions, individual longevity, or changing spending needs.

Subsequent research has refined the framework: Jonathan Guyton's guardrails approach, Wade Pfau's variable-percentage withdrawal work, and Michael Kitces's risk-based guardrails research all introduce dynamic adjustments, increasing withdrawals in strong markets, trimming in weak ones, or anchoring withdrawals to a percentage of the current portfolio balance rather than the initial one. Each modification trades a different combination of income smoothness, sustainability, and complexity. None of the frameworks should be applied without considering the household's actual circumstances.

Withdrawal Order: Taxable, Tax-deferred, Roth

The traditional rule, spend taxable first, tax-deferred second, Roth last, was built on the intuition that letting tax-deferred and tax-free accounts compound longest is tax-efficient. The traditional rule is often right, but not always. Modern decumulation research increasingly favours a more blended approach that uses the household's marginal tax bracket as the guiding lever, drawing from each account type in proportions that keep the household in a target bracket and avoid spikes from Required Minimum Distributions at age 73 or 75.

The interaction with Social Security matters here. A household that delays Social Security and uses the pre-FRA or pre-claiming years to draw down tax-deferred balances can flatten the lifetime tax curve. A household that claims Social Security early and delays tax-deferred withdrawals can find itself in a high bracket once RMDs begin. Neither pattern is universally right, the correct pattern depends on the relative size of the accounts, the expected Social Security benefits, and the household's longevity expectations.

Roth Conversion Windows: the Years Between Retirement and RMDs

The years between retirement and the first Required Minimum Distribution are often the lowest-tax window of a household's life. Earned income has stopped. Social Security may not yet have started. RMD shave not yet begun. For many high-earning households, this is the only meaningful window to convert traditional IRA or 401(k) balances to Roth at moderate tax brackets. Conversions in this window reduce the future RMD base, reduce the share of Social Security taxed under Section 86, and create tax-free growth for the surviving spouse and for heirs.

Conversions have a cost: tax is paid now on the converted amount. The decision is fundamentally about whether the marginal tax rate today is higher or lower than the marginal tax rate that will apply when the amount would otherwise be withdrawn. For Texas residents, federal marginal rate alone matters, there is no state-tax side of the calculation. The conversion analysis is most usefully done year by year with current bracket figures, projected RMD amounts, and the household's other income.

Sequence-of-returns Risk and the Role of Cash Reserves

Sequence-of-returns risk describes the asymmetry between withdrawal years and accumulation years. Two retirees with the same average annual return over 30 years can experience very different sustainability outcomes if the order of returns differs. A retiree who faces a deep drawdown in years one and two is selling shares at low prices to fund withdrawals, locking in losses, and reducing the base on which future returns compound. The same average return delivered with the bad years late causes much less damage.

One common response is to maintain a cash reserve sized to cover 12 to 24 months of planned withdrawals. The reserve insulates the equity portfolio from forced selling during a downturn. There is no universally correct reserve size; it depends on the household's other income, the volatility of the portfolio, and the household's tolerance for income variability. The decision to use, refill, or restructure the reserve sits inside the household's Investment Policy Statement, see the IPS article in Related reading.

Required Minimum Distributions Under SECURE 2.0

The SECURE 2.0 Act, enacted at the end of2022, raised the starting age for Required Minimum Distributions. For those born 1951 through 1959, RMDs begin at age 73. For those born in 1960 or later, RMDs begin at age 75. The first RMD must be taken by April 1 of the year after the RMD age is reached; subsequent RMDs are due by December 31 each year. Deferring the first RMD to April 1 of the following year results in two RMDs in the same tax year, which can push the household into a higher marginal bracket.

RMDs apply to traditional IRAs, 401(k)s, and most other employer-sponsored retirement accounts. Roth IRAs are exempt from RMDs during the original owner's lifetime; under SECURE 2.0, Roth 401(k)accounts are also exempt from RMDs from 2024 onward. RMDs are calculated by dividing the prior year-end account balance by the IRS Uniform Lifetime Table factor for the account-holder's age.

What Texas Residency Changes, and What it Does Not

Texas does not levy a state income tax. Fora Texas-resident retiree, every dollar withdrawn from a 401(k), IRA, or Roth IRA is taxed only at the federal level. That simplifies the after-tax math relative to residents of California, New York, or other high-tax states. The Roth conversion math, the withdrawal-order math, and the RMD-bracket math all sit cleanly inside the federal-tax framework.

Texas residency does not change the federal decisions. The 4% framework, the sequence-of-returns risk, the Roth conversion windows, and the RMD calculations are identical for a Texas retiree and an Oklahoma retiree. State residency is a backdrop that simplifies after-tax outcomes, not a planning lever in itself. The article is about decumulation, not about Texas as a tax-arbitrage destination.

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An Illustrative Example, the Pre-RMD Conversion Window

The following example is illustrative only; individual facts differ. It is not a projection of outcomes or a recommendation.

Consider a hypothetical Texas-resident household retiring at age 63 with $1.5 million in traditional IRA balances,$400,000 in a Roth IRA, $300,000 in a taxable brokerage account, and Social Security claimed at FRA of 67. Between ages 63 and 67, the household has limited earned income, no Social Security, and no RMDs. By drawing modest amounts from the taxable account for cash flow and converting $100,000 to$150,000 per year of traditional IRA balances to Roth at federal brackets in the 12 to 22% range, the household reduces the IRA base on which RMDs will eventually be calculated and creates a Roth balance that grows tax-free for the survivor. The same household, if it instead drew Social Security at 62 and deferred IRA withdrawals until 73, would face a much higher RMD base and a larger share of Social Security taxed under Section 86. Both pictures use the same starting numbers.

Questions To Raise With A Qualified Adviser

These are not recommendations. They are questions to take into a conversation with a cross-border adviser who understands both sides of the Atlantic.

• Given our account balances and projected RMDs at 73 or 75, what is the federal marginal bracket trajectory we should be planning around?
• Between retirement and our first RMD, how much Roth conversion can we do each year without crossing into a higher bracket, and is it worth doing?
• What is our cash-reserve policy and how do we refill it after a market drawdown?
• Which withdrawal-order pattern fits our Social Security claiming plan and our RMD trajectory most cleanly?
• How much do we need to withdraw to support our actual standard of living, and how is that compared with the framework's headline rate?
• If markets fall 30% in the first three years of retirement, what does our written rule say we do, cut withdrawals, sell from a different account, or refill from the cash reserve?

Do we have an Investment Policy Statement that documents these answers in advance, before they are tested by real conditions?