Tax Planning · 7 min read

The Order in Which You Draw Down Accounts Is a Tax Decision

Most households approaching retirement think carefully about how much to withdraw. Far fewer think carefully about where the money comes from. The sequence in which accounts are drawn down — taxable brokerage first, then tax-deferred, then tax-free — can determine whether a retiree pays a marginal rate of 12% or 24% on the same dollar of spending. Over a 20- to 30-year retirement, that difference compounds into a material gap in wealth. Sequencing is not a detail to defer to the accountant in April; it is a planning decision made years in advance.

The Three Buckets and the Default Order

Every retirement portfolio tends to occupy one of three tax buckets:

• Taxable accounts (brokerage, savings): gains taxed as realized; cost-basis reduces the tax bill; qualified dividends taxed at preferential rates.
• Tax-deferred accounts (traditional IRA, 401(k), 403(b)): contributions made pre-tax; every dollar withdrawn is ordinary income.
• Tax-free accounts (Roth IRA, Roth 401(k)): contributions made post-tax; qualified withdrawals — including growth — are tax-free.

The conventional sequencing prescription is: spend taxable first, then tax-deferred, then tax-free. The logic is intuitive: preserve the accounts sheltering the most growth for as long as possible.

That rule is a starting point, not a mandate. The better frame is marginal-rate management — filling the lowest brackets first, regardless of which bucket funds them.

Bracket Management: Filling Rates, Not Just Withdrawing

For 2026, the seven federal income tax rates and their married-filing-jointly thresholds are:

The standard deduction for married filers in 2026 is $32,200, meaning a couple needs roughly $133,000 in gross income before taxable income touches the 22% bracket.

The practical opportunity: in years when income is naturally low — early retirement before Social Security begins, or before Required Minimum Distributions kick in — it may make sense to deliberately pull from the tax-deferred bucket to fill the 10% and 12% brackets, even if you do not need the cash. Those withdrawals shrink the IRA balance that will generate taxable RMDs later. The alternative is to let that balance compound and then receive mandatory taxable income at whatever rate applies in year 73 or 75, with far less flexibility.

Roth conversions operate on the same logic: converting traditional IRA assets to Roth during a low-income window is economically equivalent to locking in a lower rate today against a potentially higher rate later.

The Social Security Tax Torpedo

The most underappreciated sequencing hazard is the interaction between additional income and Social Security taxability. Congress established fixed "provisional income" thresholds in 1984 that have never been adjusted for inflation:

• Single filers: 50% of benefits taxable above $25,000 provisional income; 85% taxable above $34,000.
• Married filing jointly: 50% taxable above $32,000; 85% taxable above $44,000.

Provisional income is defined as adjusted gross income plus nontaxable interest plus half of Social Security benefits. An IRA withdrawal, a capital gain, or even a CD maturing can push a retiree across a threshold — and when that happens, each additional dollar of income effectively triggers taxation of up to $0.85 of previously sheltered Social Security income alongside it.

The result is a stealth marginal rate. A retiree nominally in the 22% bracket can face an effective marginal rate closer to 40% on incremental income in the torpedo zone, because each new dollar raises both the income tax owed on that dollar and the income tax owed on a portion of Social Security. The fix is anticipation: households near these thresholds benefit from sourcing spending from Roth or taxable accounts (harvesting low-basis positions carefully) rather than IRA distributions that detonate the torpedo.

Qualified Charitable Distributions: Giving That Reduces Taxes

For donors aged 70½ or older with charitable intent, a Qualified Charitable Distribution (QCD) is one of the most efficient tools in the sequencing toolkit. In 2026, individuals may transfer up to $111,000 directly from an IRA to a qualified charity — $222,000 per couple if both spouses have IRAs.

The QCD mechanism counts toward — and can fully satisfy — the Required Minimum Distribution for the year, while the distributed amount is excluded from adjusted gross income entirely. This matters for two reasons:

1. It reduces AGI for purposes of the provisional income test, potentially keeping Social Security outside or below the 85% inclusion threshold.
2. It reduces AGI for Medicare IRMAA calculations (income-related premium surcharges), which use a two-year look-back.

A household planning to give $20,000 to charity in a given year is almost always better served routing that gift through the IRA as a QCD than writing a check and claiming a deduction — assuming the standard deduction already exceeds their itemized amount, which is the case for most retirees.

Why the Sequence Matters More Than the Asset Allocation

A portfolio earning 6% per year in an IRA generates a different after-tax outcome than the same portfolio earning 6% in a Roth, even before distributions begin. Sequencing amplifies or negates that gap by controlling when each bucket is drawn and at what rate each dollar is taxed on its way out.

Common sequencing errors we see in practice:

• Withdrawing Roth assets early to avoid IRA income, when the IRA could instead fill low-rate brackets cost-effectively.
• Delaying RMD planning until the RMD year, forfeiting years of bracket-filling opportunity.
• Ignoring provisional income when timing one-time large withdrawals (property sales, large conversions), which can push 85% of Social Security into taxable income for a single year.
• Bunching large IRA withdrawals in years when other income is elevated, compressing into the 24% or 32% bracket unnecessarily.

Sequencing is not about avoiding taxes. It is about paying them at the lowest available rate, in the most strategically chosen years, from the right accounts.

Frequently Asked Questions

Q: Does the "taxable first" rule always apply?

It is a useful default, not a universal rule. In years when income is low — particularly in the window between retirement and Social Security or RMD onset — intentional withdrawals from tax-deferred accounts to fill low brackets can reduce lifetime taxes. The right answer depends on projected income sources, bracket trajectory, and whether Roth conversion makes sense.

Q: What is provisional income, and how does it affect my Social Security taxes?

Provisional income equals your adjusted gross income plus nontaxable interest plus half of your Social Security benefit. For married couples, income above $32,000 in provisional income means up to 50% of benefits become taxable; above $44,000, up to 85% are taxable. These thresholds are not indexed for inflation and have not changed since 1984, meaning more retirees are affected each year.

Q: Can I make a QCD if I am still working and contributing to my IRA?

Yes. The QCD eligibility threshold is age 70½, regardless of employment or contribution status. However, if you have made deductible IRA contributions in or after the year you turned 70½, a portion of QCDs may be subject to tax. This is a nuanced calculation worth reviewing with an advisor.

Q: When should I consider Roth conversions as part of sequencing?

The highest-value conversion windows are typically: years between retirement and Social Security claiming, years when market values are temporarily depressed (reducing the conversion cost), or years in which a one-time deduction (large charitable gift, loss carryforward) offsets the conversion income. Conversions made in years when the marginal rate on the converted amount is lower than the expected future withdrawal rate create measurable tax savings.

Q: How does Medicare's IRMAA interact with withdrawal sequencing?

Medicare Part B and Part D premiums are surcharge-adjusted based on modified adjusted gross income from two years prior. A large IRA withdrawal or Roth conversion in 2026 can trigger higher IRMAA premiums in 2028. QCDs, Roth distributions, and basis recovery from taxable accounts do not count toward IRMAA income, making them valuable for households near surcharge thresholds.

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 an investment adviser registered with the State of Texas. 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. Not personalized investment, tax, or legal advice — figures and rules change. For guidance specific to your situation, talk to a qualified professional.