The $94,000 Tax Mistake That Costs Retirees With $2.6 Million in Savings

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The conventional retirement playbook says spend taxable money first, let tax-deferred accounts grow, and touch the Roth last. For a 65-year-old couple sitting on $2.6 million across a traditional IRA, a Roth, and a taxable brokerage, that order sounds tidy. It also quietly hands the IRS an extra $94,000 over the rest of their lives.

The reason is mechanical. Drain the brokerage first, and you spend your 60s in a near-zero tax bracket, then walk straight into a wall at 73 when required minimum distributions start, Social Security is already flowing, and every additional dollar gets taxed at 22% or 24%. The fix is unglamorous: pull from the IRA earlier than feels natural, and protect the brokerage for the step-up in basis at death.

The couple, in five lines

• Both are age 65, married filing jointly, and fully retired
• $1.4 million traditional IRA, $400,000 Roth IRA, $800,000 taxable brokerage
• Spending $130,000 a year after tax
• Social Security claimed at 70: $60,000 combined
• Eight-year window (65 to 72) before RMDs and Social Security collide

Why the 12% bracket is the whole game

In 2026, a married couple filing jointly can typically withdraw roughly $130,000–$135,000 from a traditional IRA and remain within the 12% federal bracket, assuming no other meaningful income. That window represents one of the last periods of unusually low tax efficiency in retirement planning. Once Social Security begins and required minimum distributions (RMDs) eventually take effect, taxable income becomes far less flexible.

Under a conventional “taxable-first” approach, retirees may preserve tax-deferred balances for too long, leading to larger RMDs later in life and potentially higher marginal tax rates in their 70s. A more deliberate strategy—such as partial IRA withdrawals or Roth conversions in the early retirement years—can help smooth taxable income across time and reduce the risk of concentrated tax exposure later. The magnitude of the savings depends heavily on account balances, spending needs, investment returns, and tax law assumptions.

Three paths, ranked by what they actually cost

1. Bracket smoothing with Roth conversions. Pull or convert about $60,000 a year from the traditional IRA between 65 and 72, fund the rest of the $130,000, spend from the brokerage’s cash and dividends, and leave the Roth alone. By 73, the IRA is much smaller, RMDs stay inside the 12% bracket, and the brokerage is still intact for a step-up at death. This is the $196,000 lifetime tax outcome.
2. Taxable first, then IRA, then Roth. The default advice. It maximizes tax-deferred growth but compresses all the ordinary-income tax into the RMD years, when Social Security is already filling the lower brackets. Works best for couples who expect to die early or who have very small IRAs. For this couple, it costs an extra $94,000.
3. Aggressive Roth conversions to the top of the 22% bracket. Convert $150,000 or more a year and clear the traditional IRA fast. The math can win on paper, but it pushes income above the $218,000 IRMAA threshold for joint filers, adding several hundred dollars a month in Medicare Part B and Part D surcharges at 65. Only worth it if heirs are in very high brackets.

What to do this year

Two decisions matter more than the rest.

First, look at projected RMDs at 73 on the current IRA balance. If they push joint taxable income above $100,800, every year between now and then spent at a 12% marginal rate is money the IRS will never get back. Second, check the IRMAA tier every fall before finalizing conversions. Crossing $218,000 of modified adjusted gross income adds $81.20 per person per month in Part B premiums alone, which can quietly erase a year of tax savings.

The common mistake is treating the brokerage as the obvious first piggy bank because withdrawals feel tax-free. Those withdrawals spend down the one asset that gets a stepped-up basis at death, while leaving a tax-deferred account to compound into a future RMD problem. Reversing that order is where the $94,000 lives.

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