Retirement planning
For most of your career, conventional financial advice is straightforward: defer taxes as much as possible. You max out your traditional 401(k), funnel dollars into pre-tax IRAs, and take the immediate tax deduction.
It feels like a victory every April. But for many retirees, that tax deduction wasn’t an elimination of taxes. Pre-tax contributions generally defer taxation rather than eliminate it. Taxes are ordinarily recognized when those dollars are withdrawn.
When you step away from your career, you enter a potentially valuable planning period in personal finance: The Retirement Gap Years. Approaching this window with a multi-year strategy—rather than a year-by-year mindset—may help manage lifetime tax exposure and improve tax flexibility in retirement and estate planning.
The Illusion of “Lower Taxes in Retirement”
The standard retirement planning assumption is that your income will drop when you stop working, placing you in a lower tax bracket. While that may be true during the first few years, several factors can increase taxable income or other costs later in retirement:
Required Minimum Distributions (RMDs): Starting at age 73 or 75, the government mandates annual withdrawals from pre-tax accounts—whether you need the cash flow or not.
Social Security Taxation: Up to 85% of your Social Security benefits become taxable once provisional income passes relatively modest thresholds.
The Medicare Surcharge (IRMAA): Higher modified adjusted gross income (MAGI) can result in income-related surcharges on Medicare Parts B and D premiums.
The “Widow’s Penalty”: Following the death of a spouse, the surviving spouse may eventually transition from Married Filing Jointly to Single filing status, resulting in different tax brackets and income thresholds.
Under the SECURE Act, many non-spouse beneficiaries are generally required to distribute inherited retirement accounts within a 10-year period, although exceptions and additional distribution requirements may apply.
The “Gap Years” Sweet Spot
The window between your retirement date and the start of RMDs and Social Security is what wealth planners call the Retirement Sweet Spot. During this period, earned income may have declined substantially, RMDs may not yet have begun, and Social Security benefits may have been deferred. As a result, taxable income may temporarily be lower than it was during your working years or may be later in retirement. This can create an opportunity to evaluate whether recognizing additional taxable income through partial Roth conversions fits within a broader financial and tax plan.
Case Study: The Power of Multi-Year Bracket Optimization
Hypothetical Example for Illustrative Purposes*
Meet David and Sarah (both age 62). They recently retired with a $2.5 million portfolio:
- Traditional 401(k)/IRAs: $2,000,000
- Taxable Brokerage Account: $500,000
They plan to delay Social Security until age 70 and live off dividends, capital gains, and cash distributions from their taxable account, resulting in baseline taxable income of roughly $40,000/year.
Scenario A: The Status Quo (No Conversions)
David and Sarah pay minimal taxes in their 60s. However, by age 75, their $2M pre-tax account has grown (for illustration, assume a 6% annualized return) to over $3.5 million.
The Result in this Illustration: Their mandatory RMDs start at approximately $170,000+ per year, on top of $80,000+ in combined Social Security. This combination would put them into higher marginal federal tax brackets, increase exposure to Medicare IRMAA surcharges, and could result in greater ongoing tax exposure later in retirement.
Scenario B: Strategic Conversions Across the Gap Years
Between ages 62 and 70, David and Sarah systematically convert $130,000 each year from their traditional IRA to a Roth IRA, intentionally filling the 22% federal tax bracket. They pay the conversion tax using cash from their taxable brokerage account.
| Metric | Scenario A: Do Nothing | Scenario B: Strategic Conversions |
|---|---|---|
| Average Tax Rate in 60s | Very Low (~10% effective) | Moderate (~15–18% effective) |
| Tax Impact at Age 75+ | High (24%+ bracket creep + IRMAA) | Controllable (Lower RMDs, tax-free Roth flexibility) |
| RMD Exposure | $4M+ pre-tax base | ~$2.5M pre-tax base |
| Legacy to Heirs | Distributions generally taxable as ordinary income. | Qualified distributions generally income-tax-free. |
The Long-Term Impact: By paying taxes early at a known, controlled bracket, David and Sarah reduce future RMD tax obligations and exposure to Medicare surcharges, and position qualified distributions to be income tax free — for them and for their future heirs.
*This fictional example is intended solely to illustrate how Roth conversion planning can affect the timing of taxable income and future required minimum distributions. The investment return, tax, Social Security, Medicare and account-balance assumptions are illustrative only and are not projections of ACT Advisors’ investment performance or of any client’s actual results. Actual outcomes will vary based on investment returns, tax laws, Medicare rules and individual circumstances.
Lifetime Wealth vs. Single-Year Taxes
Most traditional tax preparation is inherently retrospective: looking back at the prior tax year and finding every deduction to pay as little as possible on April 15th.
Comprehensive wealth management looks through the opposite end of the telescope: How might today’s planning decisions affect taxes throughout retirement and potentially across generations?
Sometimes, managing lifetime taxes may involve choosing to recognize some taxable income today in an effort to reduce future pre-tax account balances and potential RMD exposure.
Because executing a multi-year Roth strategy requires tracking thresholds, estimated tax payments, and capital gain interplay, coordinating your long-term plan with your annual tax filing is key to keeping the strategy seamless.
Is a Roth Conversion Right for Your Retirement Window?
Every portfolio and retirement timeline has its own balance point. The right conversion amount depends on your asset mix, future pension or Social Security timing, and legacy priorities.
If you are approaching retirement or currently in your gap years, our team can help you model your future RMD exposure and determine if a multi-year Roth conversion plan makes sense for you.
Schedule a call with our advisory team to walk through your retirement tax strategy.
