Key takeaways
- In Vanguard's 2026 retirement income modelling, drawing taxable first, then tax-deferred, then Roth cut cumulative taxes paid by age 100 by about 14% against withdrawing pro rata from every account.
- A married couple both over 65 can report $136,300 of ordinary income in 2026 and pay $11,600 of federal tax, an average rate of 8.5%. Strict taxable-first leaves most of that band empty.
- The 0% long-term capital gains ceiling for a couple is $98,900 of taxable income in 2026, and the 12% ordinary bracket ends at $100,800. The two cheap zones are almost the same zone, and they compete.
- An extra dollar out of a traditional IRA can cost 27 cents when it displaces a capital gain from the 0% band, or 22.2 cents when it drags 85 cents of Social Security into tax.
- From 6 April 2027 unused UK pension funds enter the inheritance tax estate, which HMRC expects to add about £34,000 to the average liability where pension assets are counted.
The standard withdrawal order, and what it's actually worth
You've been told to spend your taxable account first, your traditional IRA or 401(k) second, and your Roth last. You want to know whether that's right, and by how much.
It's right often enough to be a reasonable default, and it's worth roughly a seventh of your lifetime tax bill. Vanguard's Principles for Retirement Income, published in 2026, models a 66-year-old with $1,000,000 in a traditional IRA, $250,000 in a Roth IRA and $750,000 in a taxable account. She spends $75,000 a year in real terms, which is 3.75% of the $2,000,000 total, and claims Social Security at full retirement age at $1,900 a month. Against a strategy that withdraws proportionally from all three accounts, Vanguard finds the taxable-then-deferred-then-Roth sequence "reduces cumulative taxes paid by age 100 by about 14%."
That's the number. It's real, it's meaningful, and it is not an optimum. Vanguard says so in the same paragraph: the sequence "serves as a helpful starting place for most people but may not be ideal for everyone."
The rest of this piece is about the "not everyone" part, because the cases where the standard advice reverses are not exotic. They're the cases most retirees are actually in.
Why taxable-first works at all: two different tax systems
The mechanism is simpler than the rule makes it sound. Money in a taxable account has already been taxed once. What's left to tax is dividends and realised gains, and long-term gains get their own rate schedule. For 2026 the IRS puts the 0% capital gains ceiling at $98,900 of taxable income for a married couple filing jointly, and $49,450 for a single filer.
Money in a traditional IRA has never been taxed. Every dollar out is ordinary income. Money in a Roth has been taxed already and never gets taxed again, and the IRS is explicit that "if you are the original owner of a Roth IRA, you don't have to take distributions regardless of your age."
So the standard order is really three separate claims stacked together. Spend the money that's cheapest to spend. Let the tax-deferred pot keep compounding without a tax drag. Let the tax-free pot compound longest of all, because it's the only one with no future tax attached. Vanguard's framing is that this "reduce[s] annual tax payments early in retirement by taking advantage of lower long-term capital gains rates instead of paying higher income tax rates on withdrawals from tax-deferred accounts."
Every one of those three claims has a condition on it. Here's where each one breaks.
Reversal one: the empty bracket you paid for later
This is the big one, and it's arithmetic rather than judgement.
Take a married couple, both 65 or older, in the 2026 tax year. Their standard deduction is $32,200, plus $1,650 each for being over 65, so $35,500 of ordinary income arrives untaxed. The 10% bracket runs to $24,800 of taxable income. The 12% bracket runs to $100,800. Add the deduction back and that couple can report $136,300 of gross ordinary income and owe $11,600 in federal tax, because the IRS schedule for 2026 puts the tax at the top of the 12% band at exactly "$11,600 plus 22% of the excess over $100,800."
An average rate of 8.5% on $136,300. Now consider what a strict taxable-first retiree reports in those years: dividends, some realised gains, maybe Social Security. Often not much ordinary income at all. The $35,500 of deduction goes unused, the $24,800 at 10% goes unused, and $76,000 of headroom at 12% goes unused. Every year.
Meanwhile the traditional IRA compounds. The IRS requires distributions from a traditional IRA to start at age 73, and the Uniform Lifetime Table divisor at 73 is 26.5, which is 3.77% of the prior year balance. A $1,000,000 IRA throws off $37,736 in its first required year whether it's wanted or not. By 75 the divisor is 24.6, or 4.07%. By 80 it's 20.2, or 4.95%, and the required amount is rising while the balance may still be growing.
The rate step from 12% to 22% is ten percentage points. That's the price of the empty bracket, and you pay it in your seventies on money you could have taken in your sixties at 0%, 10% or 12%. Cook, Meyer and Reichenstein tested this in the Financial Analysts Journal in March 2015. Their two improvements are pulling from tax-deferred accounts specifically to level out the average marginal rate, and using Roth conversions. Reichenstein's summary is that these "allow that portfolio to last about three years longer than following the conventional wisdom."
Three years of portfolio longevity is a larger prize than 14% of a tax bill.
Reversal two: the two cheap zones are the same zone
Here's the part that rarely gets said, and it complicates the fix above.
For a married couple in 2026, the 0% capital gains ceiling is $98,900 of taxable income. The 12% ordinary bracket ends at $100,800. Those two numbers are $1,900 apart. They are not two separate allowances you can both use. The 0% capital gains rate is tested against your taxable income, all of it, so ordinary income from an IRA counts towards the same $98,900 ceiling your gains have to fit under. Fill the 12% bracket and you push a dollar of long-term gain out of the 0% band and into the 15% band.
Do the arithmetic on that dollar. It costs 12 cents as ordinary income, and it costs another 15 cents on the gain it displaced. That's 27 cents on the dollar, at a point in the schedule where the posted marginal rate says 12%. A retiree who fills the bracket without checking what's sitting above it has paid a rate they'd have refused if it were printed on the form.
The same logic runs the other way. If you have very few unrealised gains, the 0% capital gains band is worth little to you and the empty ordinary brackets are worth a lot. If most of your taxable account is embedded gain, the reverse. The right decumulation sequencing depends on your basis, which is a fact about your own account and not about the tax code.
Reversal three: Social Security taxes your withdrawal twice
IRS Publication 915 for the 2025 tax year sets the base amount at "$25,000 if you are single, head of household, or qualifying surviving spouse" and "$32,000 if you are married filing jointly." Above the adjusted base amount, which is $34,000 single and $44,000 joint, up to 85% of benefits become taxable.
The mechanism is that combined income counts half your benefits plus your other income. So an extra dollar of tax-deferred withdrawal inside that range doesn't add one dollar to taxable income. It adds one dollar, plus up to 85 cents of newly taxable benefit, so $1.85. At a posted 12% that's 22.2 cents of tax on your one dollar. At a posted 22% it's 40.7 cents.
This is the strongest single argument for the standard advice, and it deserves to be stated as such. Capital gains realised from a taxable account also feed combined income, but part of any taxable withdrawal is return of your own basis, and basis isn't income at all. Pound for pound of spending, drawing from a taxable account first drags far less Social Security into tax. The conventional order isn't a rule of thumb here. It's the direct consequence of how the base amounts work.
Reversal four: you spent the asset that was going to be forgiven
IRS Publication 551 states that "the basis of property inherited from a decedent" is generally "the FMV of the property at the date of the individual's death." An embedded capital gain in a taxable account is erased at death. Nobody ever pays it.
Now look at what strict taxable-first does to an estate. It spends the account whose gain would have been forgiven, and it preserves the traditional IRA, whose entire balance is still untaxed income to whoever inherits it. If leaving money behind matters to you, the standard order hands your heirs the worst of the three accounts and spends the best.
Vanguard makes the same point from the other side: Roth assets "can be passed on to heirs free of income tax, as long as the account has been open for five years." Both the taxable account and the Roth are good things to leave. The traditional IRA is the one nobody wants to inherit. A withdrawal order built for a bequest looks different from one built to die with nothing.
Reversal five: two cliffs that don't care about your marginal rate
Medicare premiums are means-tested with a two-year lag. Vanguard's paper notes that "2026 IRMAA determinations are based on 2024 tax information." For 2026 the standard Part B premium is $202.90 a month, and it stays there while modified adjusted gross income is at or below $218,000 for joint filers or $109,000 for individuals. One dollar over and the adjustment is $81.20 a month, taking the premium to $284.10.
That's $974.40 a year per person, or $1,948.80 for a couple who both cross it, triggered by a single dollar. It's a cliff, not a slope, and the withdrawal that causes it happens two years before the bill arrives. A large tax-deferred withdrawal or Roth conversion at 71 shows up as a higher premium at 73.
The Roth conversion decision has the same shape. Vanguard's break-even tax rate work makes the mechanism unusually clear: if you pay the conversion tax out of the IRA itself, the break-even future rate equals your current marginal rate, so there's no edge. Pay it from a tax-efficient taxable account and the break-even drops from 35% to 30.1%. Pay it from a tax-inefficient taxable portfolio and it drops to 23.5%. Pay it from cash and it's 14.1%. Run the same test on a Roth conversion ladder that fills the 12% bracket rather than converting at 35%, and the break-even future rate lands at 10.98% over ten years.
Read that as a statement about withdrawal order and it says something specific. The taxable account's best use may not be funding your groceries at all. It may be funding the tax on moving money out of the account that's going to be expensive later.
Four accounts, four ways to be taxed: the comparison table
The table below is the whole argument in one place. All figures are 2026 US federal, married filing jointly, and each is sourced below.
| Account | Tax on withdrawal | Forced distributions | What an heir inherits |
|---|---|---|---|
| Taxable | Gains only. 0% up to $98,900 of taxable income, then 15% | None | Basis stepped to market value at death |
| Traditional IRA / 401(k) | Every dollar as ordinary income, 10% to 37% | From age 73, at 3.77% of balance rising to 4.95% by 80 | Fully taxable income to the beneficiary |
| Roth IRA | Nothing, if qualified | None during the owner's lifetime | Free of income tax after five years |
| UK pension (drawdown) | 25% tax-free up to £268,275, remainder at 20% to 45% | None | Inside the estate for inheritance tax from 6 April 2027 |
Read the columns rather than the rows. The taxable account is cheap to spend now and cheap to bequeath. The traditional IRA is expensive to spend late and expensive to bequeath. That asymmetry, not the sequence itself, is what the standard advice is really tracking. If you want the account-by-account version of the same question on the way in rather than on the way out, the case for asset location rests on the identical arithmetic.
The UK version reverses on a specific date
British readers have been given the mirror-image advice for a decade: spend the ISA and the general investment account, leave the pension alone, because a pension sat outside the estate. That changes for deaths on or after 6 April 2027, when unused pension funds and death benefits come into the scope of inheritance tax. HMRC's own assessment is that of around 213,000 estates with inheritable pension wealth in 2027 to 2028, about 10,500 face an inheritance tax liability where previously they had none, and about 38,500 pay more. The average liability rises by around £34,000 once pension assets are counted.
The UK bracket arithmetic then works much like the US version. In the 2026 to 2027 tax year the personal allowance is £12,570 and the basic rate band runs to £50,270. Up to 25% of a pension can be taken tax-free, capped at £268,275. Take £16,760 out of a pension with 25% of it tax-free, and £4,190 arrives free of tax while £12,570 is taxable, which the personal allowance covers in full. Nothing is paid. A retiree who spends only from an ISA, into which £20,000 a year can go, leaves that £16,760 of free capacity unused every year, and the pension keeps growing inside an estate that now gets taxed. The ISA versus pension arithmetic on the way in has a decumulation counterpart, and 2027 changes the sign on it.
What this evidence cannot tell you
Start with whose research it is. The 14% figure is Vanguard's, produced by Vanguard's own simulation engine using capital markets projections run on 28 February 2026, and Vanguard sells the advice service the paper describes. Vanguard states plainly that the results "are hypothetical, do not reflect actual investment performance, and are not guarantees of future outcomes." One investor, one allocation, one spending path.
The three-years-longer figure is from a 2015 journal article, computed under an earlier version of the tax code. The direction of the finding is what carries forward. The magnitude is a 2015 magnitude.
Every threshold above is legislated and can be legislated away. The 2026 brackets came from a revenue procedure issued in 2025. The Social Security base amounts are the ones stated in the 2025 edition of Publication 915. The UK pension inheritance tax change is not yet in force at the time of writing, and applies to deaths on or after 6 April 2027 rather than to anything happening now. Anything here that carries a dollar or pound sign should be re-checked against the current year.
And none of this touches state or devolved taxes, defined benefit pensions, annuities, or the situation where a single account is nearly everything you own. Vanguard notes that if you have only one account type, "the sequence may not impact taxes as much."
What would change the conclusion
If your traditional balance is small, most of this disappears. The reversals are all driven by a tax-deferred pot large enough that required distributions eventually outrun your spending. If the RMD at 3.77% of the balance is less than you were going to withdraw anyway, the bracket never fills from below and the standard order holds.
If the step-up in basis is repealed, reversal four inverts. The taxable account stops being the good thing to leave, and spending it first becomes right again for people with a bequest motive as well as those without one.
If your marginal rate in retirement is genuinely flat, and you have no Social Security in the taxable range, no gains near the 0% ceiling and no IRMAA exposure, then bracket management has nothing to manage and the simple sequence is close to optimal. That describes fewer people than the advice assumes.
The thing to watch isn't the order. It's the size of your tax-deferred balance relative to your spending, because that ratio decides whether the required distribution arrives as income you wanted or income you were forced to take. It's the same variable that drives sequence risk from the other direction, and the same one that decides whether flexible withdrawal guardrails have room to work.