Tax Planning · 9 min read
Tax Withdrawal Sequencing: Why the Order You Draw Down Accounts Is a Tax Decision
The account a retiree draws from, taxable, tax-deferred or Roth, can change the rate paid on the same dollar of spending. “Taxable first” is a reasonable default, but the stronger approach is managing the marginal rate year by year: filling low brackets in low-income years, avoiding the Social Security tax torpedo, and giving through qualified charitable distributions.
Most retirement planning conversations focus on how much a household can spend. The question of where each year’s spending comes from gets less attention, even though it can decide whether a dollar is taxed at 12 percent or at 22 percent or more. Across a retirement of 20 or 30 years, that difference compounds. We treat withdrawal order as a planning decision made years in advance, not a detail settled at tax time.
What follows is educational. How any specific withdrawal is taxed should be confirmed with a tax professional.
What the Sequencing Question Is Really Asking
A household with money in several kinds of accounts is really choosing, each year, how much taxable income to create. Spending the same $100,000 can produce almost no taxable income or a great deal of it, depending on the source. The goal is not the lowest tax this year. It is the lowest reasonable total across all the years, including the years when required distributions, Social Security and Medicare premiums arrive.
That makes sequencing a question about the future as much as the present: which brackets are empty now, which will be full later, and which thresholds sit in between.
The Rules: Three Account Types and the 2026 Thresholds
Each account type is taxed differently on the way out.
| Account type | Examples | How withdrawals are taxed |
|---|---|---|
| Taxable | Brokerage, savings | Only realized gains, interest and dividends; basis comes back tax-free; qualified dividends and long-term gains at preferential rates |
| Tax-deferred | Traditional IRA, 401(k), 403(b) | Every pre-tax dollar is ordinary income |
| Tax-free | Roth IRA, Roth 401(k) | Qualified withdrawals, growth included, are tax-free |
The 2026 brackets. For married couples filing jointly, the seven federal rates apply to taxable income as follows: (IRS, 2026 inflation adjustments (Rev. Proc. 2025-32))
| Rate | Joint taxable income up to |
|---|---|
| 10% | $24,800 |
| 12% | $100,800 |
| 22% | $211,400 |
| 24% | $403,550 |
| 32% | $512,450 |
| 35% | $768,700 |
| 37% | Above $768,700 |
The 2026 joint standard deduction is $32,200, so a couple can have about $100,800 + $32,200 = $133,000 of gross income before any of it reaches the 22 percent bracket. Long-term gains and qualified dividends are taxed at 0 percent while joint taxable income, counting them, stays at or below $98,900. (Rev. Proc. 2025-32, §4.03) Ordinary income fills that space first, which is why bracket-filling and gain-harvesting compete for the same room.
Social Security’s fixed thresholds. Up to 50 percent of benefits become taxable once provisional income, which is adjusted gross income plus tax-exempt interest plus half of benefits, exceeds the first threshold, and up to 85 percent above the second. (IRS Publication 915)
| Filing status | Up to 50% taxable above | Up to 85% taxable above |
|---|---|---|
| Single | $25,000 | $34,000 |
| Married filing jointly | $32,000 | $44,000 |
The first-tier thresholds date from 1984 and the second from 1994, and neither is indexed to inflation, so each year more retirees cross them. (SSA Office of Retirement and Disability Policy, Income Taxes on Social Security Benefits)
Medicare’s look-back. Income-related Part B and Part D premiums are generally based on modified adjusted gross income from two years earlier. (20 CFR §418.1135) For 2026, surcharges begin above $109,000 for individual returns and $218,000 for joint returns. (CMS, 2026 Medicare Parts A & B premiums and deductibles)
Qualified charitable distributions. From age 70½, an IRA owner can send up to $111,000 in 2026 directly to qualifying charities, or $222,000 for a couple when each spouse gives from his or her own IRA. (IRS Notice 2025-67) The amount counts toward the year’s required minimum distribution and is excluded from adjusted gross income. (IRS Publication 590-B)
The Default Order, and Where It Breaks
The conventional sequence is taxable accounts first, then tax-deferred, then Roth. The reasoning holds up as a starting point: spending taxable money first leaves the tax-sheltered accounts compounding longer. Its weakness is that it ignores brackets. A couple spending only from taxable accounts in their early 60s may report almost no taxable income for several years, leaving the 10 and 12 percent brackets empty, while the IRA keeps growing toward required distributions that start at 73 or 75.
The stronger frame is marginal-rate management: in each year, decide how much ordinary income to recognize given which brackets are open, then fund spending from whichever mix of accounts produces that amount. Sometimes that means withdrawing from or converting part of the IRA in a year the household does not need the cash.
The tax torpedo
The Social Security thresholds create a hidden marginal rate. Within the range where benefits are becoming taxable at the 85 percent rate, each additional dollar of IRA income adds up to $0.85 of benefits to taxable income along with it. For a couple in the 22 percent bracket, $1 of withdrawal can raise taxable income by $1.85, an effective rate of 22% × 1.85 ≈ 40.7 percent. Households near these thresholds often do better funding marginal spending from Roth or high-basis taxable assets rather than from the IRA.
The bracket on the tax table is not always the rate on the next dollar. In the torpedo zone, a couple nominally in the 22 percent bracket can pay about 40.7 percent on additional IRA income.
Giving from the IRA
For households already giving to charity after 70½, routing gifts through a qualified charitable distribution rather than writing a check keeps the amount out of adjusted gross income. That lowers provisional income for the Social Security test and modified adjusted gross income for the Medicare look-back. For the many retirees who take the standard deduction, a check to charity produces no deduction at all, so a $20,000 gift made as a QCD rather than by check usually leaves the household ahead.
A Hypothetical Household, Worked Through
This illustration is hypothetical and simplified. It uses 2026 figures, ignores state tax, investment income and market movement, and is not a recommendation for any household.
A married couple, both 63, has retired, has not claimed Social Security and is not yet on Medicare. They spend $100,000 a year. Their taxable account holds mostly cash and high-basis holdings, so selling $100,000 realizes little gain. They also hold a $1.4 million traditional IRA and a small Roth IRA.
| A. Taxable account only | B. Taxable account plus a Roth conversion | |
|---|---|---|
| Spending source | $100,000 from taxable | $100,000 from taxable |
| Roth conversion | $0 | $133,000 |
| Taxable income | About $0 | $133,000 − $32,200 = $100,800 |
| Federal income tax | About $0 | $2,480 + $9,120 = $11,600 |
The arithmetic for Path B: 10 percent of the first $24,800 is $2,480, and 12 percent of the next $76,000 is $9,120. The conversion is taxed at an average of $11,600 ÷ $133,000 ≈ 8.7 percent.
Path A pays nothing this year, but the $133,000 stays in the IRA, where it will eventually come out as required distributions or withdrawals alongside Social Security. If those same dollars were later taxed at 22 percent, the tax would be $29,260; inside the torpedo zone the effective cost could approach $133,000 × 40.7% ≈ $54,131. Path B also keeps the couple’s modified adjusted gross income well below the $218,000 joint threshold that would raise their Medicare premiums at 65, the year this return will be used.
The trade-off is real. Path B pays tax now that may never have been owed if tax law, spending or longevity turn out differently, and filling the 12 percent bracket with ordinary income moves any gains realized that year out of the 0 percent range.
Same spending, same year. Path A reports almost no income; Path B deliberately reports $133,000 and pays about 8.7 percent on it, to avoid paying a higher rate on the same dollars later.
Where Sequencing Usually Goes Wrong
- Spending Roth money early to avoid IRA income in years when the IRA could have filled low brackets cheaply.
- Waiting until the first required distribution to plan, after the low-income years have passed.
- Overlooking provisional income when timing a large one-time withdrawal, a property sale or a conversion, which can push 85 percent of benefits into taxable income for that year.
- Stacking large IRA withdrawals into years when other income is already high, pushing them into the 24 or 32 percent bracket.
How We Approach This in a Plan
We build a year-by-year income map from retirement through the required-distribution years, then set each year’s withdrawals against it.
- Brackets. We identify the years with open room, especially the window before required withdrawals, and decide how far to fill them; where the 12 percent bracket ends gives the 2026 numbers.
- Conversions. Converting in low-income years follows the same logic as bracket-filling; Roth conversions: when they pay off covers the break-even questions.
- Social Security. Claiming dates and withdrawal sources are set together, with the tax torpedo thresholds in view.
- Medicare. Income two years ahead of each premium year is checked against the IRMAA thresholds.
- Required distributions and giving. Once RMDs begin, qualified charitable distributions can satisfy part of them without adding to income, and the RMD guide covers the schedule.
We revisit the map each year, because markets, tax law and spending all move the answer.
Questions Worth Answering Before You Decide
- How much is in taxable, tax-deferred and Roth accounts, and what is the cost basis of the taxable holdings?
- Which years between retirement and required distributions will have unusually low income?
- When will each spouse claim Social Security, and where will provisional income fall once benefits start?
- How close is projected income to the Medicare surcharge thresholds two years out?
- Is charitable giving part of the plan, and will either spouse be 70½ or older when it happens?
- What is the heirs’ likely tax situation, and which accounts are best left to them?
What This Does Not Mean
- It does not mean avoiding taxes. The aim is paying them at the lowest available rate, in the most suitable years.
- It does not mean one fixed order. The right mix changes as income, brackets and thresholds change.
- It does not mean converting as much as possible. Tax paid early is lost if the expected higher rate never arrives.
- It is not personalized advice. Withdrawal and conversion decisions belong with a tax professional who can see the whole return.
Frequently Asked Questions
Q: Should retirees always spend taxable accounts first?
It is a useful default, not a rule. In low-income years, especially between retirement and Social Security or required distributions, drawing on or converting tax-deferred money to fill low brackets can reduce lifetime taxes.
Q: What is provisional income?
Adjusted gross income plus tax-exempt interest plus half of Social Security benefits. For joint filers, up to 50 percent of benefits become taxable above $32,000 and up to 85 percent above $44,000. These thresholds are not indexed to inflation.
Q: What is the Social Security tax torpedo?
The range where each extra dollar of income also makes up to $0.85 of benefits taxable. A couple in the 22 percent bracket can face an effective rate of about 40.7 percent on additional IRA income there.
Q: How large can a qualified charitable distribution be in 2026?
Up to $111,000 per IRA owner age 70½ or older, or $222,000 for a couple giving from both spouses’ IRAs. It counts toward the required distribution and stays out of adjusted gross income. Deductible IRA contributions made after 70½ can reduce the excludable amount.
Q: How does Medicare’s IRMAA interact with withdrawal order?
Part B and Part D surcharges generally use income from two years earlier, so a large 2026 withdrawal or conversion can raise 2028 premiums. Qualified charitable distributions, qualified Roth withdrawals and the return of basis from taxable accounts do not add to that income.
Q: When do Roth conversions fit into sequencing?
Most often in years with unusually low income, such as between retirement and Social Security, when a conversion can be taxed at a lower rate than the same dollars would face later.
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The views and opinions expressed here are those of The Financial Sciences Company as of the publish date and are provided for informational and educational purposes only. They are not personalized investment, tax, or legal advice. The Financial Sciences Company, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training. Additional information is available in our Form ADV at adviserinfo.sec.gov.
General educational information, current as of 2026. Figures and rules change. For guidance specific to your situation, speak with a qualified professional.