Retired but Not Yet 73? Here’s One Smart Move to Cut Future Taxes

If you’ve retired but haven’t yet reached the age when required minimum distributions (RMDs) must start, you’re in a powerful window for tax planning. The years between retirement and age 73 often provide an ideal time to convert some or all of your traditional IRA or 401(k) into a Roth IRA—potentially reducing future taxes and giving you more flexibility later in retirement.

Why a Roth Conversion Can Be Smart

The most compelling benefit of a Roth conversion is tax diversification. Money in a Roth IRA grows tax-free and qualified withdrawals are not taxed. By converting during years when taxable income is relatively low, often before Social Security, pensions, and RMDs start, you may pay tax at a lower marginal rate than you would later in life.

Another major advantage is RMD control. Roth IRAs do not require distributions during the owner’s lifetime. Converting reduces the size of your traditional IRA, which in turn lowers future RMDs and can help prevent being pushed into higher tax brackets later.

This can also reduce the taxation of Social Security benefits and limit Medicare premium surcharges (IRMAA), both of which are driven by income. In addition, Roth IRAs are highly attractive to heirs. Beneficiaries can receive distributions tax-free, making Roth accounts one of the most efficient vehicles for legacy planning.

The Drawbacks

The primary drawback is the upfront tax cost. When you convert, the amount converted is treated as ordinary income. A large conversion could push you into a higher tax bracket or trigger Medicare surcharges two years later. If you do not have non-retirement funds available to pay the tax, using IRA assets to cover the bill undermines much of the benefit.

There is also investment timing risk. If markets fall after a conversion, you will have paid tax on money that is reduced in value. Unlike the past, conversions can no longer be “recharacterized,” so that tax is permanent.

Finally, Roth conversions may reduce liquidity. Money converted to a Roth is generally locked up for five years before it can be withdrawn without penalty if you are under 59½, which may be a concern for some retirees.

Bottom Line

Converting to a Roth IRA before RMDs begin can reduce taxes over the long run and give you more flexibility with your retirement income. The key is to convert gradually, one year at a time, staying within manageable tax brackets. A financial planner can run projections to help you decide how much to convert and when, so your retirement plan works efficiently for you and your family.

Stephen Zorko

Stephen Zorko, a 30-year resident of Loveland, is owner and CFP at Integrity Wealth Management, a SEC-registered investment advisor located in Loveland, Ohio. The firm offers a full suite of financial planning services and serves clients nationwide.

Contact: info@iwmcfp.net or (513) 633-8370.