Which Retirement Account to Draw From First in 2026: A Guide for New Jersey Retirees

The traditional rule is simple: spend taxable savings first, then the traditional IRA, and save the Roth for last. For many New Jersey retirees, that order produces a higher lifetime tax bill than it needs to. A stronger default for 2026 is to set a target income level each year. Draw from the traditional IRA, or convert IRA money to a Roth, up to that level. Cover the rest of spending from savings and brokerage accounts. Keep Roth money for late retirement or for heirs.

A small number of specific lines set that target. For a married couple where both spouses are 65 or older, the lines that matter most in 2026 are:

• About $148,300 of federal adjusted gross income (AGI). This is where the 12% federal bracket ends once the new senior deduction is included.
• $150,000 of modified AGI. The $6,000-per-person senior deduction starts to shrink above this line.
• $100,000, $125,000, and $150,000 of New Jersey total income. At each of these lines, New Jersey’s pension exclusion steps down.
• $218,000 of modified AGI. Medicare premium surcharges start here, based on income from two years earlier.

In the example later in this article, a Monmouth County couple spends the same $127,000 in a year. Changing only which accounts fund that spending changes their combined federal and New Jersey tax by about $10,100.

Why the traditional order often raises the lifetime tax bill

The traditional order creates two very different phases of retirement.

In the early years, a retiree who lives on brokerage and savings accounts reports very little taxable income. Those years could have absorbed IRA withdrawals at 10% or 12%, but that low-bracket room goes unused. Meanwhile, the traditional IRA keeps growing untouched.

Later, required minimum distributions (RMDs) begin, usually alongside full Social Security benefits. The IRA is now larger, so the required withdrawals are larger. That stacked income is taxed in higher brackets and can cross New Jersey’s pension-exclusion lines and Medicare’s premium thresholds. At death, a large pre-tax IRA passes to heirs, who generally must withdraw it within 10 years, often during their own highest-earning years.

A bracket-aware approach spreads IRA income more evenly across retirement. It fills the low brackets in early years and reduces the size of later RMDs. The goal is not the lowest possible tax this year. The goal is the lowest total tax across the retirement and, where it matters, across the next generation.

The 2026 income lines that decide the answer

Federal lines

• Tax brackets. For 2026, the 12% bracket ends at $100,800 of taxable income for married couples filing jointly and $50,400 for single filers. The 22% bracket runs to $211,400 (joint) and $105,700 (single). Source: IRS, 2026 inflation adjustments (IR-2025-103).
• Standard deduction. The standard deduction is $32,200 (joint) and $16,100 (single). Each person 65 or older adds $1,650 on a joint return or $2,050 on a single return. Source: Revenue Procedure 2025-32.
• Senior deduction. For 2025 through 2028, each person 65 or older can deduct an extra $6,000, whether they itemize or not. The deduction shrinks by 6 cents for every dollar of modified AGI above $150,000 (joint) or $75,000 (single). It disappears entirely at $250,000 (joint) and $175,000 (single). The phase-out applies to each spouse’s $6,000 separately. Source: IRS, deductions for working Americans and seniors.
• Where the 12% bracket ends in AGI terms. For a joint filer couple, both 65+, with the full senior deduction, total deductions are $47,500 ($32,200 + $3,300 + $12,000). The 12% bracket therefore ends at about $148,300 of AGI, just under the $150,000 phase-out line. For a single filer 65+, the same calculation gives about $74,550 of AGI.
• 0% capital gains rate. Long-term capital gains and qualified dividends are taxed at 0% while total taxable income stays at or below $98,900 (joint) or $49,450 (single). IRA withdrawals fill this same space first. A retiree generally cannot use the 12% bracket for IRA income and the 0% rate for gains at full size in the same year.
• Social Security. Up to 50% of benefits become taxable once “combined income” passes $32,000 (joint) or $25,000 (single). Up to 85% become taxable above $44,000 (joint) or $34,000 (single). Combined income means AGI plus tax-exempt interest plus half of benefits. These thresholds are not adjusted for inflation. Source: IRS, Social Security benefits may be taxable.
• Medicare premium surcharges (IRMAA). Medicare sets each year’s premiums using income from two years earlier. For 2026, the standard Part B premium is $202.90 a month. Couples with 2024 modified AGI above $218,000 (single filers above $109,000) pay at least $284.10 per person per month. That is about $974 more per person per year at the first tier, and the surcharges rise from there. Income earned in 2026 sets 2028 premiums, and those thresholds are adjusted for inflation each year. Source: CMS, 2026 Medicare Part B premiums.

New Jersey lines

• Social Security. New Jersey does not tax Social Security. Benefits also do not count toward New Jersey’s income tests.
• Pension and retirement income exclusion. Taxpayers 62 or older can exclude pension, annuity, and IRA withdrawals from New Jersey income. How much they can exclude depends on New Jersey total income:
  • $100,000 or less: exclude up to $100,000 (joint) or $75,000 (single).
  • $100,001 to $125,000: exclude 50% of taxable pension and IRA income (joint) or 37.5% (single).
  • $125,001 to $150,000: exclude 25% (joint) or 18.75% (single).
  • Above $150,000: no exclusion.
  Source: NJ Division of Taxation, Retirement Income Exclusions.
• Capital gains and interest count. New Jersey taxes capital gains as ordinary income. Gains, interest, and dividends all count toward total income, so selling appreciated stock can move a retiree across an exclusion line.
• IRA basis. New Jersey never allowed a deduction for traditional IRA contributions. Contributions made directly to a traditional IRA were already taxed by New Jersey, so they come out tax-free at the state level. Money rolled into an IRA from a 401(k) is different: New Jersey never taxed it, so the full amount is taxable when withdrawn. Source: NJ GIT-1 & 2, Retirement Income.

One practical consequence: the same couple has two different income numbers each year. Federal AGI includes up to 85% of Social Security. New Jersey total income includes none of it. A plan that watches only one of these numbers will miss lines on the other.

How New Jersey’s pension exclusion steps change the math

New Jersey’s exclusion does not taper smoothly as income rises. It drops in steps. One additional dollar of income can change how much of all the couple’s retirement income New Jersey excludes.

The table below shows New Jersey tax for a married couple, both 65+, whose only New Jersey income is IRA withdrawals. It uses 2026 joint rates and $4,000 of personal exemptions. Figures are rounded.

IRA withdrawals (NJ total income)	Share of IRA income excluded	Approximate NJ tax
$100,000	All of it (up to $100,000)	$0
$100,001	50%	$735
$125,000	50%	$1,015
$125,001	25%	$2,185
$150,000	25%	$3,220
$150,001	None	$5,290

The step at $150,000 is the largest. Moving from $150,000 to $150,001 of income raises New Jersey tax by about $2,070. The step at $100,000 is smaller in dollars, but it applies to many more Monmouth County households.

Four kinds of income commonly push New Jersey retirees across these lines:

• a large capital gain from rebalancing
• a Roth conversion
• a charitable IRA gift (see the charitable section below)
• two RMDs landing in the same year (see the RMD section below)

Each of these can be timed or sized to stay under a line once it is planned for.

New Jersey tax rates and exemptions are in the NJ-1040 instructions.

A worked example: the same spending, two different tax bills

The couple. A married couple in Monmouth County, both 67, filing jointly in 2026:

• Social Security: $60,000 a year combined.
• Traditional IRA: funded mostly by 401(k) rollovers, so New Jersey taxes the full withdrawal.
• Brokerage account: each $1 of stock sold includes about 33 cents of long-term gain.
• Spending need: $127,000 from their accounts this year, on top of Social Security.

Plan A: all $127,000 from the IRA.

• Federal: 85% of Social Security becomes taxable, so federal AGI reaches $178,000. That is above the $150,000 line, so their senior deduction falls from $12,000 to $8,640. About $33,000 of income lands in the 22% bracket. Federal tax is about $18,870.
• New Jersey: total income is $127,000, which falls in the 25% exclusion band. New Jersey tax is about $2,265.
• Combined tax: about $21,140.

Plan B: $86,000 from the IRA plus $41,000 from brokerage. The $41,000 sale includes about $13,670 of gain.

• Federal: AGI is about $150,670, so the senior deduction stays almost whole. Ordinary income stays in the 12% bracket. About $9,300 of the gain is taxed at 0% and the rest at 15%. Federal tax is about $10,905.
• New Jersey: total income is about $99,670, just under the $100,000 line. The full IRA withdrawal is excluded, and only the gain is taxed. New Jersey tax is about $135.
• Combined tax: about $11,040.

The couple spends the same $127,000 either way. Plan B produces about $10,100 less tax this year.

This is a one-year view, and it is not the whole answer. Plan B leaves more money in the IRA, which means larger RMDs later. It also uses brokerage assets that could have received a stepped-up basis at death (see the heirs section below). The right mix changes as the couple ages, as the senior deduction expires after 2028, and as RMDs begin. The durable lesson is how the decision is made: choose each year’s withdrawal mix by checking both the federal lines and the New Jersey lines, rather than following a fixed account order.

Where Roth conversions fit for New Jersey retirees

A Roth conversion moves money from a traditional IRA to a Roth IRA. The converted amount is taxed in the year of the conversion. After that, qualified withdrawals are tax-free, and Roth IRAs have no RMDs during the owner’s lifetime.

How New Jersey taxes a conversion. New Jersey taxes a conversion the same way it taxes a regular withdrawal. Contributions New Jersey already taxed are not taxed again. Earnings and any money rolled over from a 401(k) are taxed. Source: NJ Division of Taxation, Roth IRAs.

New Jersey reports the taxable part of a conversion as an IRA withdrawal. As a result, it generally qualifies for the pension exclusion when the retiree is 62 or older and total income stays within the limits.

The ages 62 to 64 window. Take a couple, both 64, who have retired, have not yet claimed Social Security, and live on savings.

• They convert $100,000 in 2026.
• Federal taxable income is $67,800, so federal tax is about $7,640.
• New Jersey total income is $100,000, so the conversion is fully excluded. New Jersey tax is about $0.

That is roughly 7.6% total tax on $100,000 moved permanently out of the traditional IRA.

Four things to check before converting:

• Medicare look-back. Medicare premiums use income from two years earlier. A large conversion at age 63 or later can raise premiums at 65 or later.
• Marketplace health coverage. A retiree who buys health coverage through the marketplace before Medicare should know that conversion income can reduce premium subsidies.
• The senior deduction. Between 65 and 2028, conversion income that pushes AGI above $150,000 (joint) shrinks the deduction. That raises the true tax rate on the converted dollars.
• Social Security taxation. Once benefits have started, conversion income can increase the share of benefits that is taxed.

Who benefits most, and who doesn’t:

• Conversions tend to help most when heirs are likely to be in high tax brackets, or when the IRA is large enough that future RMDs will land in higher brackets.
• They help least when the IRA is going to charity. A charity pays no income tax on an inherited IRA, so converting first only adds tax.

Social Security: timing, and what the senior deduction does and does not do

The federal senior deduction is often described as “no tax on Social Security.” It is not that. The rules that make up to 85% of benefits taxable are unchanged. The senior deduction is a separate $6,000-per-person deduction for people 65 and older, and it applies from 2025 through 2028. For many retirees it offsets some or all of the tax on their benefits. For retirees above the phase-out range, it offsets nothing.

Delaying benefits. Social Security benefits grow 8% for each year a retiree waits past full retirement age, up to age 70. Waiting also extends the low-income years before benefits begin. Those are often the best years for Roth conversions and planned IRA withdrawals.

New Jersey. New Jersey does not tax benefits at any income level.

Required minimum distributions: the dates and the stacking issue

When RMDs start. RMDs begin at age 73. Under SECURE 2.0, the starting age rises to 75 for people born in 1960 or later.

The first-RMD timing choice. A retiree may delay the first RMD until April 1 of the following year. That places two RMDs in the same tax year. For a New Jersey retiree, two RMDs in one year can push total income across the $100,000 or $150,000 line. Taking the first RMD in the year it is due is usually the cleaner choice.

Roth accounts. Roth IRAs and Roth 401(k) accounts have no RMDs while the owner is alive. Source: IRS, RMD FAQs.

Charitable gifts from an IRA: federal and New Jersey treatment differ

Federal treatment. A qualified charitable distribution (QCD) moves money directly from an IRA to a charity.

• Eligibility: available from age 70½.
• 2026 limit: $111,000 per IRA owner.
• RMDs: a QCD counts toward that year’s RMD.
• Tax effect: the amount is excluded from federal income, so it lowers AGI. A lower AGI can reduce the taxable share of Social Security, protect the senior deduction, and help avoid Medicare surcharges.
• 2026 changes don’t affect QCDs: itemizers can now deduct charitable gifts only above 0.5% of AGI, and non-itemizers can deduct up to $1,000 ($2,000 joint) of cash gifts. Neither rule applies to QCDs.
• Donor-advised funds: gifts to a donor-advised fund do not qualify as QCDs.

Rules: IRS Publication 590-B.

New Jersey treatment. New Jersey has not adopted the federal exclusion. For New Jersey purposes, a QCD is an IRA withdrawal like any other. It is taxable to the extent the IRA money was never taxed by New Jersey, and it counts toward New Jersey total income. A couple near the $100,000 or $150,000 line should plan the QCD amount with the New Jersey exclusion steps in mind. For most retirees the federal benefit is still larger than the New Jersey cost.

Planning for heirs: the 10-year rule and New Jersey inheritance tax

Federal rules

• Surviving spouse. A surviving spouse can roll an inherited IRA into their own IRA.
• Most other heirs. Most other heirs must empty an inherited IRA by the end of the 10th year after the owner’s death.
• Annual RMDs for some heirs. If the owner had already reached the RMD starting date, the heir must also take annual RMDs in years 1 through 9. The IRS enforces these annual RMDs starting in 2025, after waiving them for earlier years.
• Inherited Roth IRAs. These follow the same 10-year deadline, but withdrawals are generally tax-free.

Source: IRS Publication 590-B.

New Jersey inheritance tax

New Jersey has no estate tax. It does have an inheritance tax, and it applies to IRAs. The rate depends on who inherits:

• Class A (no tax): spouse, civil union partner, children, stepchildren, grandchildren, parents, grandparents.
• Class C: brothers, sisters, and a child’s spouse. The first $25,000 is exempt, then rates run from 11% to 16%.
• Class D: everyone else, including nieces, nephews, and friends. The rate is 15% on the first $700,000 and 16% above that.
• Class E (no tax): qualifying charities.

Sources: NJ inheritance tax rates, NJ beneficiary classes.

What that means for a $500,000 traditional IRA:

• To a child: no New Jersey inheritance tax.
• To a brother: about $52,250.
• To a niece: $75,000.

In every case, the heir also pays income tax on the withdrawals.

Planning moves

• Leave the IRA to charity, other assets to relatives. A retiree who plans to leave money to both relatives and a charity can name the charity as the IRA beneficiary and leave other assets to the relatives. The charity pays neither income tax nor New Jersey inheritance tax on the IRA.
• Convert during life. Lifetime Roth conversions pay the income tax during the owner’s life. That reduces the value that passes to Class C and Class D heirs, and it leaves those heirs a tax-free account.
• Keep appreciated investments if the heirs are Class A. Under federal law, most inherited investments receive a new cost basis equal to their value at death. For a family leaving money to Class A children, keeping highly appreciated brokerage holdings and spending IRA money during life can lower the family’s total tax. This is the reverse of the traditional withdrawal order.

A 2026 year-end checklist

• Project both income numbers. Estimate 2026 federal AGI and New Jersey total income, including gains realized so far.
• Find the nearest line. Identify which line is closest: the 12% bracket edge, $150,000 for the senior deduction, the $100,000 / $125,000 / $150,000 New Jersey steps, or the Medicare threshold that will apply to 2028 premiums.
• Decide on any 2026 Roth conversion by December 31. Conversions count in the calendar year they happen and cannot be undone.
• Complete QCDs by December 31, and account for the New Jersey income they add.
• If 2026 is your first RMD year, decide whether to take it now or stack it with the 2027 RMD.
• Time any sale of appreciated stock with the New Jersey total-income lines in mind.
• Review IRA beneficiary designations, especially where brothers, sisters, nieces, nephews, or friends are named.

What a withdrawal plan covers when John Geantasio, CPA builds it

A withdrawal plan works when federal and New Jersey rules are modeled together, across several years instead of one. John Geantasio, CPA has advised retirees and families for more than 37 years from Spring Lake in Monmouth County. A planning engagement covers:

• A year-by-year income map that places federal AGI and New Jersey total income against every line in this article.
• An account order and dollar amount for each year, including Roth conversion amounts where they make sense.
• RMD and QCD timing coordinated with the New Jersey exclusion steps.
• A beneficiary review that accounts for both the federal 10-year rule and New Jersey inheritance tax classes.

The outcome is a written plan that shows which account to draw from, how much, and in which year, before the tax year closes.

Frequently asked questions

Is it better to withdraw from a traditional IRA or a brokerage account first?
For most New Jersey retirees, the answer is a mix set each year, not a fixed order. Draw IRA income up to the nearest planned line, and fund the rest from brokerage and savings.

Does New Jersey tax Roth conversions?
Yes, except for contributions New Jersey already taxed. Money rolled over from a 401(k) is fully taxable to New Jersey when converted. For retirees 62 and older, the pension exclusion can shelter a conversion when total income stays within the limits.

Does New Jersey tax Social Security?
No. Benefits are also left out of New Jersey’s income tests for the pension exclusion.

Does a QCD reduce New Jersey tax?
No. New Jersey treats a QCD as a regular IRA withdrawal. The benefit is federal.

Does the new senior deduction mean Social Security is tax-free?
No. It is a separate $6,000-per-person deduction for 2025 through 2028. It phases out above $150,000 (joint) or $75,000 (single) of modified AGI.

This article provides general information based on federal and New Jersey law as of September 2026. It is not advice for any individual situation.

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Sources

1. IRS — 2026 inflation adjustments, IR-2025-103
2. IRS — Revenue Procedure 2025-32
3. IRS — Tax deductions for working Americans and seniors
4. IRS — Social Security benefits may be taxable
5. IRS — Retirement plan and IRA RMD FAQs
6. IRS — Publication 590-B, Distributions from IRAs
7. CMS — 2026 Medicare Parts A & B premiums and deductibles
8. NJ Division of Taxation — Retirement Income Exclusions
9. NJ Division of Taxation — Roth IRAs
10. NJ Division of Taxation — GIT-1 & 2, Retirement Income
11. NJ Division of Taxation — Inheritance tax rates
12. NJ Division of Taxation — Inheritance tax beneficiary classes