Tax-Optimized Withdrawals, Part 3: Filling the Low Brackets

By Tom, CPA · Updated October 25, 2026

TL;DR: Every year you have a tax-free zone (the standard deduction) and two cheap brackets (10% and 12%). Space you do not use is gone forever. Early retirees can fill it deliberately with Roth conversions, IRA withdrawals or 0% capital gains, but each choice uses the same space differently.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

The 0% and 10% brackets are a buffet, and most retirees walk past with an empty plate. Not because they are not hungry, but because nobody told them the food was free.

Filling a bracket simply means choosing to recognize enough taxable income in a year to use up the cheap tax rates. While you work, your salary fills them automatically. In early retirement your salary is gone, and unless you do something, those brackets sit empty. Empty brackets cannot be carried forward. December 31 is the expiration date, every year.

CPA Warning Label: Bracket space is use-it-or-lose-it, but so are health subsidies. Check the ACA line before you fill anything.

What filling a bracket means

Picture your taxable income as water poured into a stack of glasses. The first glass is the standard deduction: anything in it is taxed at 0%. The next glass is the 10% bracket, then the 12% bracket, then 22%, and so on. Filling a bracket means pouring in exactly enough income to top off a chosen glass without spilling into the next.

Where does the water come from in retirement? You choose:

• Withdrawals from a traditional IRA or 401(k), which are ordinary income;
• Roth conversions, which are also ordinary income but move the money into the Roth bucket instead of your checking account;
• Long-term capital gains and qualified dividends, which stack on top of ordinary income and get their own rate schedule (see capital gains stacking).

Standard deduction as a free zone

For 2026, the standard deduction is $32,200 for married couples filing jointly, $16,100 for single filers and $24,150 for heads of household (IRS Rev. Proc. 2025-32). Taxpayers 65 or older add $1,650 each if married, or $2,050 if unmarried. Separately, from 2025 through 2028, people 65 and older can claim an additional $6,000 senior deduction each, which phases out above $75,000 of modified AGI ($150,000 joint), per the IRS fact sheet on the 2025 law.

For a married early retiree with no other income, $32,200 can come out of a traditional IRA every year at a 0% federal rate. Over ten years that is $322,000 moved out of the tax-deferred bucket without a cent of federal income tax. Doing nothing wastes it.

2026 bracket thresholds

Add the standard deduction to see gross income limits. A married couple with no other income can recognize $133,000 of ordinary income ($100,800 + $32,200) and still be in the 12% bracket. The federal tax on exactly that amount is $11,600, an average rate under 9%. A single filer reaches the top of 12% at $66,500 of gross ordinary income.

The 0% long-term capital gains rate applies while total taxable income is at or below $98,900 joint or $49,450 single. Notice that the 0% gains line sits just under the top of the 12% ordinary bracket. That near-overlap creates the main trade-off below.

Conversions vs gains harvesting for the space

Ordinary income and capital gains compete for the same space, and ordinary income always gets the bottom seats. Every dollar of conversion pushes your gains one dollar higher up the stack. So the question each year is: what do you want to use the cheap space for?

• Roth conversions lower future required distributions and build tax-free money. Cost: 10% or 12% now.
• 0% gain harvesting raises your cost basis for free, reducing future gains tax. Cost: nothing federally, but it uses room that could have been converted.

Conversions usually deserve priority when the IRA is large, because the alternative is 22% or more later. Gain harvesting deserves priority when the IRA is small and the brokerage account is large, or when you plan to sell big positions before you die. The harvesting vs conversion comparison walks through the decision in detail.

Worked couple example

Illustration. Assumptions: married couple, both 58, filing jointly in 2026; no wages, pension or Social Security yet; living on $70,000 from their brokerage account, which includes $20,000 of long-term gain; $1.1 million traditional IRA; federal tax only; no ACA subsidies in play because they have other coverage.

Option B moves $111,100 into Roth at an average federal rate of about 8.1%. Option C converts $21,900 more, but costs $5,628 more. Part of that is 12% on the extra conversion; the rest is the $3,000 of gains tax created because the conversion pushed the gains above the 0% line. On the last $21,900, the effective marginal rate is about 25.7%, which is no longer cheap.

For this couple, B is the sweet spot. If they had no gains that year, they could convert all $133,000 at 12%. If they expected to face 24% later, even C could make sense. The math changes with every household, which is why the Roth conversion calculator exists.

A year-by-year way to run it

Bracket-filling works best as a routine rather than a one-time project. A simple annual rhythm:

1. January: estimate the income you cannot control, such as interest, dividends, fund capital gain distributions, any part-time earnings and any pension. That baseline already uses part of your space.
2. Pick the line. Decide which ceiling you are aiming for this year: the standard deduction, the top of 10%, the 0% capital gains line, the top of 12%, or an ACA or IRMAA threshold if one is lower.
3. Mid-year check: if markets fell, conversions are cheaper in share terms, because the same dollar amount moves more shares into the Roth. Some people convert part of their target early in a down market.
4. November and December: with most of the year's income known, finish the conversion or gain harvest to land close to the line. Leave a small buffer for surprise year-end fund distributions.
5. Pay the tax: make an estimated payment for the Q4 deadline in January, or use IRA withholding strategies covered in withholding vs estimates.

Repeat for every year until Social Security and required distributions start filling the brackets for you. For many early retirees that is a 10- to 20-year window, and it is the most valuable tax-planning window of their lives. Frugal Fran puts it on her calendar right next to the dentist. Lavish Larry discovers it at 74, which is a bit like discovering the gym the week of the marathon.

Mistakes that waste the space

• Forgetting dividends and interest. They show up whether you sell or not and use space first. Check last year's 1099s.
• Ignoring the ACA cliff. If you rely on premium tax credits, income above 400% of the federal poverty line ends them entirely for 2026, as of October 2026. Filling to the 12% top could cost thousands in premiums.
• Converting in January on a guess. Conversions cannot be undone. Many people convert in December once the year's income is known.
• Overshooting into IRMAA territory at 63+. Medicare looks at income from two years earlier. See Part 6.
• Treating every year the same. A year with a big capital gain from rebalancing, a home sale or a fund distribution is a bad year for a big conversion. A year with low income, maybe after a market drop, is a great one. Flex the target.
• Forgetting the state. Your state may tax conversions at its own rates.
• Paying conversion tax from the IRA. Withholding tax from the conversion shrinks the amount that lands in Roth, and before 59½ the withheld amount can be hit with the 10% additional tax.