If you have spent decades building a business or stockpiling investments, drawing down those assets makes you feel like you have won some race. It is also one of the most consequential tax-planning windows of a person’s life. The wrong withdrawal sequence can easily cost six figures over a long retirement, but spending decades of funds while keeping the tax bracket low can help with financial wellness and save a substantial amount for retirement.
For entrepreneurs winding down a business and early retirees stepping away before Social Security or Medicare kicks in, the years between active income and required minimum distributions (RMDs) are among the best planning gifts.
This blog will explore and give a clear understanding of tax-efficient withdrawal strategies for entrepreneurs and early retirees in 2026.
Rethinking the Old "Order of Withdrawals" Rule
Textbook advice says: spend taxable accounts first, then tax-deferred accounts like traditional Individual Retirement Accounts (IRAs) and 401(k)s, then tax-free Roth accounts last. This logic is all about letting the tax-advantaged assets compound longer. However, this rule usually leaves money on the table. If a person drains only their taxable account in their 60s, they might arrive in their 70s with a swollen traditional IRA.
This triggers large RMDs at higher brackets, costlier Medicare premiums through Income-Related Monthly Adjustment Amount (IRMAA) surcharges, and a more taxed portion of Social Security. It is very important to follow a blended approach that offers the best of modest traditional IRA withdrawals with taxable funds, with selective Roth conversions.
The Roth Conversion Window
A Roth conversion window is all about moving money from a traditional, tax-deferred retirement account—such as a 401(k) or traditional IRA—into a Roth IRA. You’ll pay taxes on the amount converted in the year of the transaction, but future withdrawals from the Roth account are tax-free. This strategy can be useful for people who are in a higher tax bracket during retirement. This also allows them to lock in lower tax rates now while securing tax-free income later.
Under SECURE 2.0, RMDs start at age 73 for people born between 1951 and 1959, and at age 75 for people born in 1960 or later. The years after a business exit but before RMDs begin are often the lowest-income years of an entrepreneur's adult life. This is also the best time to move pre-tax dollars into a Roth IRA.
Fill up the 12% and 22% federal brackets every year with strategic Roth conversions. The One Big Beautiful Bill Act of 2025 made the federal bracket structure permanent, so the long-term planning runway is clearer. You pay tax now at a known rate to avoid paying at an unknown rate, which is likely to be higher. Future growth, qualified withdrawals, and inheritances from a Roth are all federal-income-tax-free.
Cautions:
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Conversion income can push you over the Net Investment Income Tax (NIIT) threshold of $200,000 single or $250,000 married filing jointly, adding 3.8% to investment income.
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In any year you buy ACA marketplace coverage, even a moderate conversion can sharply reduce the premium tax credit.
Qualified Charitable Distributions (QCDs)
One way to lower the tax burden in retirement is through QCDs. For retirees aged 70½ and older, QCDs provide a tax-free withdrawal from the IRA. This tax-free withdrawal from the IRA can satisfy the RMDs while also supporting your favorite charity. A QCD allows you to donate up to $105,000 per year directly from your IRA to a qualified charity. It can lower the taxable income and reduce the taxes you owe on other retirement account withdrawals.
Moreover, the amount donated counts toward the RMDs but is excluded from your taxable income. This can also lower your Adjusted Gross Income (AGI), which may help reduce Medicare premiums and decrease the tax impact on Social Security benefits. If you’re feeling generous, there’s also a gift tax exclusion that allows you to gift up to $19,000 to family members without incurring any gift tax. This is an effective way to pass on wealth to your children or grandchildren. Unlike with annual gifts, there’s no limit to the number of gifts you can give.
Donor-advised funds (DAFs) are another way to decrease your income and lower your tax liability. DAFs are investment funds to which you can donate cash, stocks, and other assets. Donors can deduct up to 60% of their adjusted gross income. The DAF possesses the potential to grow tax-free and can be invested again without tax consequences. It also helps to retain control over the distribution to charities.
Capital Gains Harvesting at 0%
Early retirees have a quietly powerful tactic in 2026; long-term capital gains are taxed at 0% if the total taxable income stays below $49,450 (single) or $98,900 (married filing jointly).
If the spending is low and you have appreciated brokerage holdings, you can sell, realize the gain at 0% federal tax, and immediately repurchase the same shares. The wash sale rule applies only to losses, not gains. You effectively reset your cost basis upward at zero federal tax cost.
Coordinate this carefully with Roth conversions, because both strategies compete for the same low-bracket real estate.
Asset Location, Not Just Allocation
Two investors can hold the same portfolio and pay very different tax bills if their assets are in the wrong accounts. A simple framework:
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Taxable brokerage: Broad-market index funds, individual stocks, municipal bonds. These get an advantage from long-term capital gains rates, qualified dividends, and a step-up in basis at death.
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Traditional IRA or 401(k): Bonds, Real Estate Investment Trust (REITs), actively managed funds. Ordinary-income distributions are sheltered from annual taxation.
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Roth IRA: Highest-growth assets. Every dollar earned here is permanently tax-free. Additionally, if you leave a Roth account to an heir, their withdrawals may also be tax-free.
Switching to a Roth IRA before retirement is among the best ways to potentially decrease future tax burdens. Moreover, they don’t need RMDs. This helps the funds grow longer.
Watch the Cliffs and Phaseouts in 2026
Retirement tax planning is all about staying just below specific thresholds:
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IRMAA Medicare surcharges: 2026 surcharges kick in when your 2024 modified AGI exceeded $109,000 (single) or $218,000 (joint). They step up on cliffs, not slopes.
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ACA subsidy cliff: Returned January 1, 2026, when enhanced premium tax credits from the Inflation Reduction Act expired. Households above 400% of the federal poverty line now lose marketplace subsidies. For pre-Medicare early retirees, a single Roth conversion or harvested gain can cost thousands in lost subsidies. This is the most important new planning constraint this year.
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NIIT: Hits at $200,000 single or $250,000 joint MAGI.
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Social Security taxation: Ramps to 85% of benefits based on provisional income. OBBBA added a new $6,000 senior deduction for filers who are aged 65 and older (2025-2028, phasing out from $75,000 single / $150,000 joint). This softens the bite but won’t eliminate it.
A single oversized Roth conversion can trigger several cliffs at once. Multi-year planning, with a CPA running scenarios across a 5to10 year horizon, is the difference between paying for the plan and being paid by it.
Special Considerations for Entrepreneurs
If you recently sold a business, several layers still apply. The One Big Beautiful Bill Act expanded Qualified Small Business Stock (Section 1202) benefits for C-corp shares acquired after July 4, 2025: a tiered exclusion of 50% at three years, 75% at four years, and 100% at five years, with a per-issuer cap raised from $10 million to $15 million. For founders of technology companies, including businesses that develop a website to app converter or other digital software solutions, these expanded tax benefits can make a successful business sale even more financially rewarding. Stock acquired before that follows the older five-year, $10 million rules.
There are some more levers, which include:
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Installment-sale income spreads over the years.
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Charitable strategies like donor-advised funds or charitable remainder trusts offset a large exit year.
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State residency: Establishing domicile in a no-income-tax state before closing a sale saves substantial dollars. Few states have 4.4% flat state income tax, which is modest, but on a multi-million-dollar exit, even a modest rate adds up.
Tax-Efficient Withdrawal for Side Income Earners
Many early retirees usually earn side income through consulting, teaching, or freelance work. This income changes the withdrawal strategy:
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Use side income to fill low federal brackets before pulling from retirement accounts
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Track how side income affects ACA subsidies and Medicare premiums
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Consider setting up a Solo 401(k) to shelter side income tax-deferred
The Bottom Line
Tax-efficient withdrawal isn't a single rule. It is a year-by-year optimization across federal brackets, state rules, healthcare thresholds, and Social Security mechanics. If done well with proper planning, it adds a decade of safe withdrawals to any reasonable portfolio.
If you are approaching this stage and want a second set of eyes on your sequence, work with a CPA who plans across years rather than just files one. This investment pays for itself many times over.
Lockhart and Company helps Colorado entrepreneurs and pre-retirees structure withdrawals and Roth conversions with this multi-year view in mind. Contact us to map your withdrawal strategy before the next tax year begins.
