Withdrawal Strategy Case Studies, Part 8: Three Households

By Tom, CPA · Updated October 25, 2026

TL;DR: The best withdrawal order depends on where the money sits. A 401(k)-heavy couple should convert to the top of the 12% bracket, a taxable-heavy single can harvest gains at 0%, and rental income eats bracket room a landlord might otherwise use for conversions.

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.

Three fictional households, zero real clients, plenty of spreadsheets. This final part of the series takes the tools from Parts 1 through 7 (bracket filling, the tax torpedo, RMD planning, IRMAA and the widow's penalty) and applies them to three made-up families with different balance sheets.

All examples use 2026 federal figures from IRS Rev. Proc. 2025-32: a $32,200 standard deduction for married couples filing jointly and $16,100 for single filers, a 12% bracket that ends at $100,800 of taxable income for joint filers and $50,400 for single filers, and a 0% long-term capital gains rate up to $98,900 (joint) and $49,450 (single) of taxable income. State taxes are ignored to keep the arithmetic readable, which is a luxury your actual return will not grant you.

CPA Warning Label: These households are invented, and so are their balances. Your numbers, your state and next year's law will produce a different answer. Run your own.

Household 1: mostly 401(k)

Illustration. Assumptions: Pat and Sam, both 55, married filing jointly, retired in 2026. Balances: $1.6 million in traditional 401(k)s and IRAs, $150,000 in a taxable brokerage account (half of it cost basis), $60,000 in Roth IRAs. Spending: $70,000 a year. Social Security planned at 67 for both. They buy health insurance on the marketplace.

The problem is obvious once you look at it: nearly everything is pre-tax. If they do nothing clever, they spend the taxable account in about two years, then live on 401(k) withdrawals, and RMDs at 75 (both were born after 1959) will be based on a balance that may have doubled by then. Their future required income could push them into the 22% or 24% bracket for decades, plus IRMAA surcharges.

The plan: each year, convert or withdraw traditional money up to the top of the 12% bracket. With no other income, $133,000 of ordinary income minus the $32,200 standard deduction equals $100,800 of taxable income, exactly the top of 12%. Federal tax: $11,600, an average rate under 9% on $133,000 of income. They spend the brokerage account and cash first, so the conversion tax gets paid from taxable money rather than from the converted dollars.

The catch: $133,000 of MAGI wipes out most or all of any premium tax credit. As of Oct 2026 the enhanced credits have expired, so income above 400% of the federal poverty level ($84,600 for a household of two for 2026 coverage, per CMS) gets no credit at all. They have to compare the lost subsidy against the future tax saved. In their case, with $1.6 million pre-tax, the conversions still win on paper, but a household with $600,000 pre-tax might choose to stay under the subsidy line and convert less.

Household 2: big taxable account

Illustration. Assumptions: Jordan, 50, single, retired. Balances: $900,000 in a taxable account with $400,000 of unrealized long-term gains, $300,000 in a traditional IRA, $200,000 in a Roth IRA. Spending: $50,000 a year.

Jordan has the opposite problem: most of the money is already taxed, but the brokerage account is full of embedded gains. Selling shares to fund spending realizes gains, and the question is whether they can be realized at 0%.

The plan: withdraw or convert $16,100 from the IRA, which the standard deduction absorbs completely, then realize up to $49,450 of long-term gains. Taxable income is $49,450, all of it long-term capital gain, all inside the 0% bracket. Federal tax: $0. Jordan sells enough shares to cover $50,000 of spending, and because those sales carry roughly 44% gain and 56% basis, the gains from spending alone are about $22,000. The remaining 0% room can be used for harvesting: sell more appreciated shares and immediately buy them back to reset the basis higher (see 0% gain harvesting).

Because Jordan is under 59½, the IRA dollars would normally face a 10% penalty if withdrawn, so the $16,100 is converted to Roth instead, starting a conversion ladder. Each converted amount becomes available five years later.

What Jordan gives up: the 12% bracket. A bigger conversion would cost 12% on the conversion and also push gains out of the 0% band. With only $300,000 pre-tax, the RMD risk is modest, so Jordan prioritizes 0% gains and converts just the deduction amount.

Household 3: real-estate heavy

Illustration. Assumptions: Riley and Casey, both 58, married filing jointly. Balances: three paid-off rentals producing $40,000 of net taxable rental income after depreciation, $800,000 in traditional IRAs, $100,000 in a taxable account, $50,000 in Roth. Spending: $85,000 a year.

Rental income is ordinary income, and it arrives whether they want it or not. That $40,000 occupies the bottom of their brackets before any conversion. If they want to stop at the top of 12%, their room for conversions is $133,000 minus $40,000, or $93,000. Ordinary income of $133,000 less the $32,200 standard deduction again equals $100,800 of taxable income and $11,600 of federal tax.

The net investment income tax does not apply here, because their MAGI is well under the $250,000 joint threshold, which is not indexed for inflation (IRS Topic 559). It would matter if they ever sold a rental with a big gain in the same year as a large conversion.

Depreciation is the hidden variable. It lowers taxable rental income today, which creates more conversion room, but it is recaptured when the property is sold, with unrecaptured section 1250 gain taxed at up to 25% (IRS Topic 409). Riley and Casey plan to keep the rentals until death, when heirs would generally receive a stepped-up basis, so the recapture may never be paid.

Side by side

Figures use 2026 federal brackets and standard deductions from Rev. Proc. 2025-32. State tax, ACA credits and IRMAA ignored unless noted.

What changed the answer each time

• The size of the pre-tax pile. The bigger the traditional balance relative to spending, the more future RMDs threaten higher brackets, and the more it pays to convert now. Household 1 converts heavily; Household 2 barely converts.
• Embedded gains. A taxable account with large gains makes the 0% capital gains bracket valuable. Conversions and gains compete for the same room because ordinary income fills the brackets first (see capital gains stacking).
• Income you cannot turn off. Rents, pensions, interest and dividends use bracket room automatically. Household 3 has less room to play with.
• Health insurance. Before Medicare, MAGI controls premium tax credits. A large conversion can cost thousands in lost subsidy.
• Age. Under 59½, conversions are the main way to move IRA money without penalty. After 63, conversions also count toward IRMAA two years later.
• Who outlives whom. Married couples should run the survivor scenario. Single brackets are roughly half as wide (see the widow's tax trap).

What none of them did

None of the three households followed the conventional rule of spending taxable first, then tax-deferred, then Roth, without doing anything else. That rule is easy to remember and often expensive: it leaves the low brackets empty in early retirement and stuffs them later. Part 2 of this series ran a 35-year model where the conventional order paid roughly twice the lifetime federal tax of a proportional approach, using the assumptions spelled out there.

None of them tried to pay zero tax every year either. Lavish Larry's opposite twin, Frugal Fran, once spent a decade bragging about her $0 tax bills, then discovered her RMDs at 75 put her in the 24% bracket. Zero this year can mean expensive later. The goal is the lowest lifetime tax, not the lowest tax this April.

Lessons for building your own plan

1. List balances by tax type: taxable (with basis), traditional, Roth, HSA.
2. Estimate spending, and note the income you cannot control: rents, pensions, dividends, Social Security.
3. Find the target bracket. For many early retirees it is the top of 12%, but a large pre-tax balance can justify filling 22%.
4. Check the side effects: premium tax credits, IRMAA from age 63, the Social Security torpedo, and state taxes.
5. Decide between gains and conversions for the remaining room (see the comparison).
6. Revisit every year. Law changes, markets move, and you get older on schedule.

Stress-testing a household plan

A plan that only works in one scenario is a forecast, not a plan. Before committing to a decade of conversions, test it against a few unpleasant alternatives:

• A bad first five years. If markets fall early, conversions of depressed shares are cheaper per share, which is good. But spending from a shrinking taxable account may force IRA withdrawals sooner.
• Higher future tax rates. This strengthens the case for converting now.
• Lower future tax rates. This weakens it. Converting to the top of 12% is fairly robust because rates rarely fall below that level, while filling 24% is a bigger bet.
• One spouse dies early. Usually strengthens the case for conversions in a married household.
• Large medical or long-term care costs late in life. These may be deductible as itemized medical expenses, which can make leftover traditional money cheaper to withdraw then. A reason not to convert everything.

Most households end up with a mix of all three account types, which keeps options open when the future misbehaves.