Your First Years of Retirement Could Be Your Best Opportunity to Cut Future Taxes
Updated: 1 day ago
đź’ˇ Did you know the years between your last paycheck and your first required withdrawal can be the cheapest years of your life to move money into a Roth?
Miss that window, and required withdrawals can push you into higher tax brackets for the rest of your retirement.
The good news:Â With a year-by-year plan, you decide how much to convert and when, instead of letting required withdrawals decide for you.
🗓️ When does the IRS start requiring you to take money out?
Once you reach a certain age, the IRS requires you to start taking money out of most traditional IRAs and other pre-tax retirement accounts. These are called Required Minimum Distributions, or RMDs.
Here's when they begin:
Age 73:Â If you were born between 1951 and 1959.
Age 75:Â If you were born in 1960 or later.
These withdrawals are generally taxable as ordinary income, whether you need the money or not.
Here's an important difference: Roth IRAs don't require withdrawals during your lifetime.
That's one reason moving some money from a traditional IRA into a Roth IRA before RMDs begin can be worth considering.
đź’° What will a Roth conversion actually cost me?
When you convert money from a traditional IRA to a Roth IRA, the taxable amount is added to your income for that year.
That means you could pay more in taxes today in exchange for potentially reducing taxes on that money in the future.
The key is not to convert everything at once.
Many couples spread conversions over several years, choosing an amount that fits within their desired tax bracket. Ideally, they pay the conversion tax using savings outside their retirement accounts.
The goal is to pay taxes strategically, rather than create a much larger tax bill than necessary.
⚠️ A Roth conversion can affect more than your income taxes
This is where planning becomes especially important. A conversion doesn't just affect your federal income tax bracket. It can influence several other parts of your retirement finances.
Three things to keep in mind:
Medicare premiums:Â Medicare Part B and Part D premiums are generally based on your income from two years earlier. A large conversion today could mean higher Medicare premiums down the road.
Social Security:Â Higher income can cause more of your Social Security benefits to become taxable.
The additional senior deduction:Â Through 2028, eligible taxpayers age 65 and older may qualify for an additional deduction of up to $6,000 per person. For married couples filing jointly, the deduction begins to phase out when modified adjusted gross income exceeds $150,000.
This is why the right conversion amount matters. You want to look beyond this year's tax bracket and understand how a conversion could affect your overall retirement picture.
🏡 What if I have a pension?
A pension changes the equation because it already provides taxable income each year.
For example, if you and your spouse receive pension income, that income may already use up much of the room in your lower tax brackets. Adding a Roth conversion on top of it could push you into a higher bracket.
That doesn't mean a Roth conversion isn't worthwhile. It means the amount you convert and the timing of that conversion become even more important.
Your pension, Social Security start dates, retirement account withdrawals, and potential Roth conversions should all be considered together.
There's also a New York State tax benefit worth knowing about.
If you're a New York resident age 59½ or older, you may be able to exclude up to $20,000 per year of eligible retirement income from New York State income tax. Certain Roth conversions may qualify, subject to the applicable rules.
New York and federal government pensions are already exempt from New York State income tax, so that $20,000 exclusion may still be available for other eligible retirement income.
đź“… When do I have to complete a Roth conversion?
If you want a Roth conversion to count for a particular tax year, it must be completed by December 31Â of that year.
Unlike IRA contributions, Roth conversions cannot be made retroactively by the April tax-filing deadline.
And once a conversion is completed, you generally cannot undo it.
That's another reason to calculate the numbers before making a decision, rather than rushing to convert money at the end of the year.
🤝 How I help couples make the most of this opportunity
This is where a little planning can make a big difference.
At my Chittenango office, I work with couples to build a year-by-year retirement tax projection that brings everything together:
Pension income
Social Security benefits and timing
Traditional IRA withdrawals
Potential Roth conversions
Federal and New York State taxes
Instead of guessing how much to convert, we can look at different scenarios and see what each decision could mean for your taxes today and in the years ahead.
You see the numbers. You understand the trade-offs. And you decide what makes sense for you.
If you're approaching retirement or have recently retired, bring your most recent tax return. It's a good place to start.
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Jessica Champion, RICP® is a fee-only fiduciary financial advisor in Chittenango, NY. Advisory services are offered through Champion Method LLC, an investment adviser registered with the State of New York.
This article is for educational purposes only and is not intended to provide tax, legal, or investment advice. Individual circumstances vary. Consult your tax professional regarding your specific situation.
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