Your retirement tax bill is mostly a choice you make

Quick answer: Retirement income is taxed in layers, and you decide how the layers stack. Spreading withdrawals across years and accounts usually costs less than draining one account at a time. Every number below is an example. Check current brackets and thresholds at IRS.gov.

Picture two brothers-in-law, Frank and Walt. Same savings, same size house, same spending, same fishing boat. (Both are made up for this piece.) Frank follows the rule he heard at the barbershop: spend the taxable account first, leave the IRA alone as long as you can. Walt takes a measured slice from his IRA every year starting at 65.

Ten years on, Walt has paid more tax early. Frank has the bigger problem.

Brackets are a staircase, not a cliff

The federal income tax is marginal. The rates run 10, 12, 22, 24, 32, 35 and 37 percent, and each rate applies only to the dollars inside its band. Moving into a higher bracket doesn't tax your whole income at the higher rate. People still fear that it does, and some turn down income because of it. Don't.

What matters is what counts as income:

• Traditional IRA and 401(k) withdrawals are ordinary income, dollar for dollar.
• Roth withdrawals (qualified ones) aren't income at all.
• Taxable account sales count only the gain, not the money you put in.
• Social Security is partly taxed, depending on your other income.

You can aim at a bracket by choosing which of these you pull from. Few people ever do.

The hump nobody warns you about

Social Security isn't taxed all at once. Once your other income passes a threshold, a portion of your benefit starts counting as income, and the share rises until it caps at 85 percent. Inside that zone, one extra dollar from your IRA pulls up to 85 cents of benefit into taxable income with it.

Example: you're in the 22 percent bracket and take an extra $10,000 from your IRA. If that also makes $8,500 of Social Security taxable, you're taxed on $18,500. That's $4,070, or about 41 percent of the withdrawal. In the 12 percent bracket the same move costs $2,220, about 22 percent.

Nobody votes for that rate. It's just how the formula works. The thresholds don't move with inflation, so more retirees land in the zone each decade. Look up the current numbers on SSA.gov and IRS.gov instead of trusting anybody's memory, including mine.

The gap years are the cheap years

Say you stop working at 63 and wait until 70 to claim Social Security. For seven years your taxable income might be very low. The standard deduction wipes out the first stretch, and the 10 and 12 percent brackets sit right above it. Required minimum distributions don't start until your seventies (73 or 75, depending on your birth year; confirm at IRS.gov).

That window is open once. Two ways to use it:

1. Withdraw from the IRA on purpose and fill the low brackets, even if you don't need the cash.
2. Convert some of it to Roth. You pay tax now at 10 to 12 percent so the money grows and comes out tax-free later.

Long-term capital gains can also be taxed at 0 percent when your income is low enough. A taxable account can be sold down cheaply in these years too.

What Frank missed

Example, with assumptions labeled: Suppose Frank's untouched IRA grows to $1.5 million by 73. The IRS divisor near that age is about 26.5, so his first required distribution is roughly $56,600. It's forced and it lands on top of his Social Security, every year, for life. He can't turn it off. He's now in the hump permanently.

Walt shrank his IRA on his own schedule, in lower brackets, so his forced distributions are smaller.

Now suppose $20,000 of Frank's income each year lands in the 22 percent bracket instead of 12. That's $2,000 a year, or $20,000 over ten years. The saving is real, but it's smaller than it looks. Walt paid 12 percent on his early withdrawals, and that wasn't free either. The win comes from paying at 12 instead of 22, not from paying nothing.

For the case on which account to spend from, read Which Retirement Account To Spend From First. This piece is the reason the answer isn't one fixed order.

The costs of the clever move

Roth conversions aren't free money. Know the annoying parts:

• You pay the tax now, and ideally from a taxable account, not from the conversion itself.
• Medicare premiums can jump. The surcharge (IRMAA) is based on income from two years back, and it kicks in at thresholds. Cross one by a dollar and you pay for the whole year. Check Medicare.gov for the current tiers.
• If you retire before 65 and buy health insurance on the exchange, extra income can shrink your subsidy.
• State tax varies. Some states tax retirement income, some don't. Your state's revenue site will tell you.
• It doesn't always win. If your income in your seventies will be low anyway, converting at 22 percent now to save 12 percent later is a loss.

A sensible person can look at the same numbers and decide not to convert. That's fine. What isn't fine is never having run them.

Your heirs have a bracket too

Money left in a traditional IRA is taxable to whoever inherits it. Most non-spouse heirs must empty the account within ten years, which can push a grown child into a higher bracket during their peak earning years. Roth money passes differently. Who is named on the account also matters more than your will, as Your Will Doesn't Control Most of Your Money explains.

A paid-off house helps too, because it shrinks the paycheck you have to generate. See When To Pay Off The Mortgage Before You Retire.

Do this before you retire

• Pull your last two tax returns. You can't plan a bracket you haven't found.
• Sketch income year by year from your retirement age to about 85. Include Social Security, pensions and projected required distributions.
• Find your gap years, the ones where income is lowest.
• Look up the IRMAA tiers and the Social Security taxation thresholds.
• Check your state's rules on retirement income.
• Confirm your beneficiaries on every account.

Bring the sketch to a fee-only fiduciary adviser, a CPA, or an estate attorney. They don't earn commissions on what they recommend, and tax software won't run multi-year what-ifs for you. This piece is general education, not advice for your situation. Limits, ages and thresholds change, so verify against IRS.gov, SSA.gov and Medicare.gov before you act.

The IRS will collect exactly what the rules say. It won't collect a dollar more because you looked, and it won't collect a dollar less because you didn't.