For retirees using a Systematic Withdrawal Investment Plan (SWIP), the question of how much can I safely spend each year is central to retirement confidence.
Many people are familiar with the so-called 4% rule—the idea that withdrawing about 4% of a portfolio annually (adjusted for inflation) has historically supported a 30-year retirement. A common follow-up question is:
“If I’m withdrawing $40,000 a year, does it really matter whether that money comes from a brokerage account, an IRA, or a Roth?”
The answer is yes—it matters a great deal.
The Overlooked Factor: Tax Drag
The reason lies in something often under-appreciated in retirement planning: tax drag.
Tax drag refers to the ongoing reduction in portfolio growth caused by taxes that must be paid along the way—before you even take withdrawals. This is most pronounced in taxable brokerage accounts, where investors are exposed to:
- Taxes on dividends
- Taxes on interest income
- Taxes on realized capital gains (even when reinvesting)
Each year, those taxes quietly reduce the amount of capital left in the portfolio to compound going forward.
Why This Matters for Withdrawal Sustainability
Safe withdrawal rates aren’t just about how much you take out. They are about how much remains invested and growing after withdrawals.
When ongoing taxes reduce growth:
- The portfolio compounds more slowly
- The margin for error shrinks
- The sustainable spending rate declines
This is why two retirees withdrawing the same dollar amount can experience very different long-term outcomes, depending solely on which account they are spending from.
Different Accounts, Different “Safe” Withdrawal Rates
Retirement researcher Dr. Wade Pfau has quantified this difference by examining after-tax sustainable spending rates across account types. Here’s what the research shows:
- Roth accounts: ~4.00%
- Taxable brokerage accounts: ~3.74%
- Traditional IRAs / tax-deferred accounts: ~3.43%
These percentages reflect after-tax, inflation-adjusted spending that has historically been sustainable—not just pre-tax withdrawal amounts.
Why Roth Accounts Have the Highest Sustainability
Roth accounts enjoy two powerful advantages:
- No ongoing tax drag inside the account
- Tax-free withdrawals
Because every dollar remains invested and compounding without erosion from annual taxes, Roth assets can typically support a higher safe spending rate over time.
Why Tax-Deferred Accounts Often Come Last
Traditional IRAs avoid tax drag during accumulation, but:
- Withdrawals are fully taxable
- Required Minimum Distributions (RMDs) can force higher withdrawals later
- Taxes increase sequence-of-returns risk in down markets
When measured on an after-tax spending basis, this lowers the sustainable rate.
What This Means for SWIP Retirees
If you’re using a Systematic Withdrawal Income Plan (SWIP), the key takeaway is this:
Safe withdrawal rates are not one-size-fits-all. They are account-specific.
A well-designed retirement income plan does not ask, “What percentage should I withdraw?” Instead, it asks:
- “Which dollars should I spend first?”
- “Which accounts should grow as long as possible?”
- “How do taxes affect sustainability over decades, not just this year?”
The Bigger Picture: Tax-Aware Income Planning
This is why effective retirement income planning:
- Coordinates account location
- Manages tax brackets intentionally
- Integrates Roth strategies
- Aligns withdrawals with market conditions and cash-flow needs
The goal isn’t simply spending—it’s sustainable, tax-efficient spending that supports flexibility, longevity, and peace of mind.
Bottom Line
If you’re withdrawing $40,000 per year, the source of that $40,000 may matter just as much as the amount itself. Understanding tax drag—and planning around it—is a critical step toward a more resilient retirement.
Nigel Valdez is a fee-based fiduciary advisor who specializes in advanced, tax-efficient retirement planning for affluent federal employees. He helps clients optimize federal benefits, manage investment risk, and make informed long-term decisions around strategies such as Roth conversions.
