A common rule of thumb for retirees is to take required minimum distributions (RMDs) first, then withdraw from taxable accounts followed by traditional individual retirement accounts (IRAs) and 401(k) plans. Roth IRAs should be last in line for withdrawals. The rationale for this order is to minimize the tax impact of taking withdrawals, but following it may not always be optimal. Rather, retirees may be better off by using a more flexible approach, writes Morningstar’s Christine Benz.

As a retiree’s tax status changes from year to year, there can be advantages to favoring withdrawals from one type of account over another. Distributions from traditional IRAs and 401(k) plans are taxed at ordinary income rates and have the potential to push a retiree into a higher tax bracket. Distributions from Roth accounts, conversely, are neither taxed nor they do they alter a person’s tax bracket. Investments held in taxable accounts can be eligible for the discounted long-term capital gains and qualified divided tax rates. Plus, realized losses on investments can be used to lower taxable income (up to $3,000 per year).

Given these varying tax treatments, retirees can alter their tax bill by making prudent choices about which account they will withdraw from.

Benz gave a few examples of when it might make sense to stick to the conventional rules of thumb or disregard them:

• Roth IRA Conversions: Converting a traditional IRA (or a 401(k) plan) to a Roth IRA makes the most sense right after retirement but before RMDs have to be taken, since the conversion will boost taxes and potentially put the retiree in a higher tax bracket.
• Unusually High Deductions: The ideal time for taking a withdrawal in excess of the RMD is during a year with unusually high expenses (e.g., medical bills). The tax rate will be lower and future RMDs could be reduced in size.
• Unusually High RMDs: If high portfolio returns result in larger RMDs, favor taking withdrawals from taxable or Roth accounts to avoid paying a higher tax rate.

Source: “Don’t Be Dogmatic About Retirement-Portfolio Withdrawals,” Christine Benz, Morningstar, February 19, 2015.

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