A dollar from your IRA and a dollar from your Roth aren't equal

Quick answer: Money out of a traditional IRA or 401(k) is taxed as ordinary income. Qualified Roth withdrawals aren't taxed at all. Brokerage sales are taxed only on the gain. And what you pull from one account can change what you owe on your Social Security and what you pay for Medicare. Limits and thresholds change, so check IRS.gov, SSA.gov and Medicare.gov before you act.

Your bracket isn't your tax rate

Start with the most common mistake. People see "22 percent bracket" and assume 22 percent of everything goes to the IRS.

It doesn't. Brackets are layers. The first slice of your taxable income is taxed at the lowest rate, the next slice at the next rate, and so on. Moving into a higher bracket only taxes the dollars above the line at the higher rate. Nobody gets a raise and ends up with less take-home because of it.

So the question in retirement isn't "which bracket am I in?" It's "which dollars am I stacking into which layers, and what else does each dollar set off?"

Four accounts, four different tax behaviors

Traditional IRA or 401(k). Every dollar out is ordinary income. You got the deduction going in, and now the bill arrives. Required minimum distributions eventually force the issue. Under current law they start at 73 for some people and 75 for those born later, but confirm your own start age at IRS.gov.

Roth IRA or Roth 401(k). Qualified withdrawals don't count as taxable income, and they don't push up the numbers that trigger other costs. That makes Roth money the most flexible dollar you own.

Taxable brokerage account. You don't pay tax on the whole withdrawal, only on the gain. Hold the shares more than a year and the gain is taxed at long-term capital gains rates, which are lower than ordinary rates. For taxpayers with modest taxable income, the rate can be zero.

Cash and savings. You already paid the tax. Spending principal costs nothing. The interest it earned is taxable.

One example, three results

This is an illustrative worked example with round numbers. It's not a forecast, and it's not advice for your situation.

Take a single retiree. She collects $30,000 a year in Social Security and needs another $20,000 to cover the year.

From the Roth: She takes $20,000. Her taxable income from the withdrawal is zero. Her Social Security stays largely untaxed.

From the brokerage account: She sells $20,000 of shares that cost her $8,000. Only the $12,000 gain is counted, and it's taxed at the lower capital gains rate.

From the traditional IRA: She takes $20,000 and every dollar is ordinary income. But that's not the whole cost.

Here's the part the bracket chart doesn't show. Social Security has its own formula. The IRS adds your other income to half your benefit and calls the total "provisional income." Cross certain thresholds and a portion of your benefit becomes taxable. The thresholds for a single filer have long been $25,000 and $34,000, and for married couples filing jointly $32,000 and $44,000. They aren't adjusted for inflation, so more retirees cross them every year. Verify the current numbers at SSA.gov and IRS.gov.

Run our example. Her $20,000 IRA withdrawal plus half her benefit ($15,000) puts provisional income at $35,000. That's over the upper threshold for a single filer. Under the formula, about $5,350 of her Social Security becomes taxable on top of the $20,000 she withdrew. She's taxed on roughly $25,350 of income to spend $20,000.

Note what that is. It isn't an 85 percent tax rate. At most, 85 percent of the benefit can become taxable, and that's a very different thing. But in the zone where the benefit is phasing into taxability, each extra dollar of IRA money is effectively taxed more than once. Some planners call this a tax torpedo. It's only a bump in the road if you see it coming.

The Medicare surcharge nobody mentions

There's a second tripwire. Medicare Part B and Part D premiums rise for higher-income households. The extra charge is called IRMAA, and it's based on your income from two years earlier.

Two things make it sting. It works in steps, not a smooth slope, so one extra dollar of income can push you across a line and cost you for the full year. And the lookback means a big one-time income spike in your early sixties, like a large withdrawal or a business sale, can show up in premiums later.

The tiers and cutoffs get updated. Medicare.gov and SSA.gov publish the current ones. Look them up before a big withdrawal, not after.

Fill the low brackets on purpose

Here's the idea underneath all of this. Low brackets are a use-it-or-lose-it resource. Every year you don't use the bottom layers, they go unused.

A lot of retirees have a gap between the day they stop working and the day Social Security and RMDs begin. Income is low. Brackets are sitting empty. A common move is to pull from the traditional account in those years, or convert part of it to a Roth, and pay tax at the low rates now. The goal is to avoid being forced to take large, taxable RMDs later, stacked on top of Social Security.

It isn't free. A conversion creates a tax bill this year, and it counts as income for IRMAA purposes. Do it too aggressively and you've just moved yourself into the wrong bracket early. Plenty of sensible people skip it entirely. If your traditional balance is modest, there may be little to fix.

The point isn't to follow a rule. It's to look at your own next five to ten years of income and decide where the layers are cheapest.

A checklist before you take the next withdrawal

• Know your balances in each bucket: traditional, Roth, brokerage, cash.
• Estimate this year's income, Social Security included, before you decide where to pull from.
• Find out how close you are to the next Social Security taxability line and the next IRMAA step.
• For brokerage sales, check your cost basis first. Selling the highest-basis shares can cut the gain.
• Ask whether this is a low-income year worth using, or a high-income year to go easy in.
• Check what you've named as beneficiaries. Heirs who inherit a traditional IRA owe income tax on it, which is covered in Your Will Doesn't Control Most of Your Money.

For the order question, which account to draw from first and why the textbook answer isn't always right, see Which Retirement Account To Spend From First.

Where the real money is

None of this takes cleverness. It takes a spreadsheet, an honest look at next year's income, and the patience to do it before the year ends, when you can still change the outcome.

Tax law moves. Deductions for seniors, bracket widths, RMD ages and Medicare tiers have all changed in recent years and will change again. Treat anything here as a map of how the pieces connect, not a current rate sheet. The numbers belong to IRS.gov, SSA.gov and Medicare.gov.

And this is general education, not individual financial, legal or tax advice. Before you move money between accounts or convert anything, sit down with a fee-only fiduciary adviser or a CPA who'll run your actual numbers. An hour of their time is cheap next to a mistake made on a December afternoon.

You spent forty years earning it. Spend a little time learning how to keep the legal share.