Increasingly, American workers are retiring with multiple types of investment and retirement accounts, including taxable accounts like bank or brokerage accounts; tax-deferred accounts like 401(k), 403(b), SEP IRA and traditional IRA retirement accounts; and Roth 401(k) and Roth IRA accounts, from which withdrawals are tax-free.

Many retirees don’t realize that the order in which they withdraw funds from their investment accounts can have a major effect on how much they keep and the taxes they pay.

Often, investors are inclined to take money from the account that’s most convenient, or to sell investments based on some expectation of where the markets are headed. But paying attention to the tax consequences of withdrawals from different accounts can have a significant positive benefit.

It’s critical to recognize that you’ll pay income tax on money pulled from traditional IRAs and 401(k)s. As a result, for retirees in their 60s, the first bucket for withdrawals should typically be their taxable accounts. The rationale is that cash withdrawn from these accounts isn’t subject to income tax, because the accounts were originally funded with after-tax dollars. And while the potential capital gains tax incurred on selling investments in a taxable account can reduce the net amount available for withdrawal, the impact is small compared to ordinary income tax rates, which range from 10% to 39.6%.

For most investors, capital gains taxes will be 15% on investments owned over one year. The rates are as low as 0% for those in the lowest tax brackets and as high as at 20% for those in the highest brackets.

The order of withdrawals changes a bit after age 70 1/2, however. At that point, the IRS requires all owners of IRAs and retirement plan accounts to begin taking so-called required minimum distributions. In a nutshell, the dollar amount of those distributions is based on your age and the value of the accounts (watch Springwater’s video on RMD’s here).

Taking those required distributions should be the first priority for every retiree, because the penalties for not doing so are quite severe.

Roth IRAs, which are funded by after-tax contributions, should generally be last in line for withdrawals. Because withdrawals from Roth accounts are free of both income and capital gains taxes, it makes sense to allow them to continue to grow as long as possible.

You can read the entire June 14, 2014 Wall Street Journal post on this topic here.