After decades of disciplined saving, retirement marks the point at which accumulated account balances shift from assets to income.
The conventional playbook sounds straightforward: drain taxable brokerage accounts first, leave the 401(k) and individual retirement account, and let compounding do the rest.
But research from the Schwab Center for Financial Research suggests that a widely accepted drawdown sequence could set you up for a larger tax bill.
If tax-deferred balances remain untouched until age 73, mandatory withdrawals must eventually begin under federal law. Those distributions can become large enough to push taxable income into higher brackets.
Schwab challenges the standard 401(k) drawdown order
For most retirees, the drawdown order is less a decision than a default, inherited from decades of planning-industry consensus and rarely stress-tested against their own tax picture.
Hayden Adams, Director of Tax & Wealth Management at the Schwab Center for Financial Research, directly challenges the conventional sequence.
Many investors would pay less over their lifetimes by drawing from both taxable and tax-deferred accounts simultaneously before required minimum distributions begin, Adams noted.
How untouched 401(k) balances create a growing tax liability at 73
Federal law requires retirees born between 1951 and 1959 to begin taking annual withdrawals from traditional IRAs and 401(k) plans at age 73, the Internal Revenue Service confirms.
That threshold rises to 75 for those born in 1960 or later under the SECURE 2.0 Act.
The annual amounts grow each year because the IRS life-expectancy divisor shrinks as the retiree ages, accelerating the drawdown.
How required minimum distributions scale as tax-deferred balances grow
- At age 73, the required withdrawal alone would total approximately $56,604 on a $1.5 million balance, using the IRS Uniform Lifetime Table divisor of 26.5.
- If the account continues to grow through the 70s and 80s, the annual RMD climbs materially. If continued market growth pushes the balance to $2.5 million by age 80, the RMD rises to roughly $123,800 (divisor 20.2).
- By age 90 (divisor 12.2), the mandatory withdrawal rises to $205,000, and the trend accelerates with each passing year.
Source: The Required Minimum Distributions: What’s New in 2026
The required distribution cascade hits Medicare premiums and Social Security taxes
The damage from oversized required minimum distributions extends beyond federal income tax brackets in ways that catch many retirees off guard.
Combined with other income sources, those mandatory 401(k) withdrawals can make up to 85% of Social Security benefits taxable, the Social Security Administration showed.
More Charles Schwab:
- Charles Schwab, Fidelity sound alarm on Roth IRA rule
- Morgan Stanley doubles down on Schwab after earnings
- Schwab plots S&P 500 prediction markets push with Cboe
Medicare’s income-related monthly adjustment amount relies on a two-year income lookback that connects withdrawals at 73 directly to higher premiums at 75.
Because Medicare uses a two-year income lookback, a single filer whose 2024 modified adjusted gross income exceeded $109,000 will pay progressively higher Part B and Part D premiums in 2026, according to the Centers for Medicare & Medicaid Services.
Schwab’s pre-RMD drawdown fills lower brackets before forced distributions take over
The Schwab analysis recommends voluntary, penalty-free distributions from 401(k)s and traditional IRAs starting at age 59½, well before required minimums begin.
Financial planners often call the period between retirement and the mandatory distribution age the ‘gap years,’ during which taxable income typically drops.
The approach centers on filling the current tax bracket with planned distributions each year, rather than leaving that bracket unused.
Joseph Stephens, certified financial planner and financial advisor with Associated Financial Planners, LLC, told GOBankingRates that for high earners, taxes, Medicare premiums, and required minimum distributions tend to compound, making the early retirement years the most consequential for planning.
So decisions made in the first few years of retirement often determine whether someone stays in control long term or ends up reacting to tax consequences later
The firm modeled a married couple earning $275,000 in nonportfolio taxable income after the standard deduction, with $2.5 million across tax-deferred accounts at 59½.
With pre-RMD withdrawals filling the 24% federal bracket annually, the couple stays at that rate through retirement, the firm’s analysis shows.
Without those early distributions, mandatory withdrawal income pushes the same couple into the 32% bracket at 75, the Schwab research projected.
By about age 81, the climbing forced withdrawals then lift the couple into the 35% tier, compounding the total tax cost over two decades.
How your withdrawal sequence shapes the next 20 years of retirement taxes
Adams noted in the report that the conventional approach can still work when the risk of a bracket jump from mandatory distributions stays low.
The decision depends on the specific account balances, income sources, filing status, and the tax laws in effect when one reaches 73.
Three figures shape the decision for most retirees: the projected RMD at 73, the federal bracket that their non-portfolio income already falls into, and their proximity to IRMAA thresholds.
The first can be approximated by dividing the current tax-deferred balance by 26.5, the Uniform Lifetime Table divisor at that age.
A required minimum distribution can also push modified adjusted gross income above the $109,000 single-filer IRMAA threshold or the higher joint-filer equivalent.
Whether partial pre-RMD withdrawals or Roth conversions make sense depends on circumstances beyond this story’s scope, including federal tax rates.
The tax calculation can also change significantly when a surviving spouse moves from joint to single filer, leaving less room in lower tax brackets.
Related: Vanguard data reveals a troubling Roth gap in your 401(k)
