For many retirees, the first few years after leaving work bring something unexpected: a lower tax bill.
The paycheck is gone. Social Security may not have started yet. Required distributions are still years away.
It can feel like a quiet stretch. But from a planning perspective, it may be one of the most valuable windows of your entire retirement.
Used well, these lower-income years can create an opportunity to reshape how much of your future income will be taxed. Left alone, that opportunity can pass by without anyone noticing.
What Is a Roth Conversion?
A Roth conversion moves money from a traditional IRA or similar tax-deferred account into a Roth IRA.
The tradeoff is simple:
- You pay income tax now on the amount you convert.
- Qualified withdrawals later can be tax-free, including any growth on the converted dollars.
Roth IRAs also aren’t subject to required minimum distributions during the original owner’s lifetime, which can give you more control over when and how you draw income.
In other words, a conversion is a decision about when to pay tax on your retirement savings. The question is whether paying some of it now, on your terms, could cost less than paying it later on someone else’s.
Why the Years Before RMDs Can Be a Window
For many people, taxable income follows a predictable pattern across retirement:
- Working years: income is high, so converting is often expensive.
- Early retirement: the paycheck stops, and taxable income may drop sharply.
- Later retirement: Social Security, pensions, and required minimum distributions begin stacking on top of each other, pushing income back up.
That middle stretch is the window.
Required minimum distributions are based on the size of your tax-deferred accounts. The larger those balances grow, the larger the required withdrawals, and the more taxable income you may be forced to take each year, whether you need it or not.
Converting a portion of those savings during lower-income years can help shrink future required distributions, smooth out your taxable income over time, and create a pool of tax-free money to draw from later. That is why tax planning and retirement income planning work best when they’re built together.
What to Weigh Before Converting
A Roth conversion isn’t automatically a good idea. It depends on how it fits into the rest of your plan. Some of the key factors include:
Your Tax Bracket Today vs. Later
Conversions generally make the most sense when you expect your tax rate now to be the same as or lower than it will be in the future. Many retirees convert just enough each year to “fill up” a lower bracket without spilling into a higher one.
Medicare Premiums
Medicare Part B and Part D premiums can increase for people with higher income. Because those surcharges are based on income from prior years, a large conversion today could affect what you pay for Medicare down the road.
Social Security Taxation
The portion of Social Security benefits that is taxable depends on your other income. Converting before benefits begin, or coordinating conversions with your claiming decision, can help manage that interaction.
How You Pay the Tax
Paying the conversion tax from savings outside the IRA generally preserves more money growing tax-free inside the Roth. Using the IRA itself to pay the tax reduces the benefit.
Your Heirs
Roth assets can be a more tax-efficient inheritance for many beneficiaries than traditional IRA assets, which typically pass along a future tax bill. For families focused on estate and legacy planning, that can be a meaningful consideration.
Common Mistakes to Avoid
- Waiting too long. Once Social Security and required distributions begin, the low-income window often closes.
- Converting too much at once. A single large conversion can push you into a higher bracket and trigger Medicare surcharges.
- Treating it as a one-time event. For many retirees, a multi-year conversion plan works better than a single decision.
- Ignoring the bigger picture. Conversions affect taxes, healthcare costs, Social Security, and legacy goals all at once. When those pieces aren’t coordinated, it can lead to the silent breakdown in many retirement income plans.
How Mark R. Scherer, ChFC Can Help
Roth conversion strategy is a core part of the planning Mark provides to retirees and pre-retirees in Omaha and beyond. That planning often brings together:
- Roth conversion strategies
- Tax planning
- Retirement income planning
- Investment management
- IRA and 401(k) rollovers
- Estate and legacy planning
You can explore Mark R. Scherer’s financial services here: https://www.markrscherer.com/services/
Or schedule a meeting here: https://www.markrscherer.com/schedule-a-meeting/
Final Thought: The Window Doesn’t Stay Open Forever
Most retirement tax decisions get made by default. Withdrawals happen when they’re needed, distributions start when they’re required, and taxes follow wherever the income lands.
A Roth conversion strategy is one of the few ways to take a more active role in that process.
The retirees who benefit most usually aren’t the ones who made one big move. They’re the ones who recognized the window early and used it deliberately, year by year.
Is a Roth Conversion Right for You?
If you’ve recently retired, or plan to in the next few years, now may be the right time to explore whether a conversion strategy fits your plan. You can also register for an upcoming event to learn more.
Schedule a meeting with Mark R. Scherer, ChFC or call (402) 504-9500 to review your options.