My Retire Years

Category: Retirement Accounts

  • Building My Roth Conversion Ladder: The ‘Fill the Bracket’ Approach

    Once I understood why converting traditional IRA money to a Roth IRA made sense in these lower-income years, the next question was harder: how much should I actually convert, and when? Converting too little wastes the opportunity. Converting too much in a single year can shove me into a higher bracket, trigger Medicare IRMAA surcharges two years down the line, or blow up an ACA subsidy I’m relying on during my pre-Medicare bridge years. The approach I landed on is usually called “filling the bracket,” and here’s how I’m actually running it.

    The core idea: each tax bracket has a ceiling. If my other taxable income for the year — Social Security, any part-time earnings, interest and dividends — lands below the top of, say, the 22% bracket, I can convert traditional IRA money up to that ceiling and pay only 22% on the converted amount, rather than waiting until RMDs force larger, less controllable withdrawals later at whatever bracket I happen to land in by then.

    Step one: project the year’s other income first. Before deciding a conversion amount, I total up everything else that’s going to show up as taxable income this year — my Social Security benefit (accounting for the fact that only a portion of it may be taxable, depending on my combined income), any interest or dividends from taxable accounts, and anything else on the radar. That total is my starting point, not zero.

    Step two: find the bracket ceiling I’m targeting. I’m not trying to fill all the way to the top of the highest bracket I could tolerate — I’m picking a ceiling deliberately below thresholds that matter beyond just the marginal rate: the IRMAA income tiers (which use income from two years prior and apply a cliff, not a gradual phase-in — cross the line by one dollar and the whole surcharge applies), and the ACA subsidy cliff-adjacent thresholds while I’m still on Marketplace coverage. A conversion that technically stays in a favorable tax bracket but trips an IRMAA tier can end up costing more overall than it saved.

    Step three: convert the difference between current income and the target ceiling. This is the actual “fill the bracket” math — target ceiling minus already-projected income equals this year’s conversion amount. I’m doing this in the fourth quarter of each year, once I have a much clearer picture of the year’s actual income than I would have had in January, which reduces the risk of an under- or over-estimate throwing off the target.

    Step four: pay the tax from money outside the IRA. I mentioned this in the previous post, but it bears repeating here specifically: I’m covering the tax bill on each conversion from my cash savings, not from the IRA itself, so the full converted amount actually lands in the Roth and keeps compounding tax-free from day one.

    Step five: repeat annually, adjusting the ceiling each year. As Social Security grows (small COLA adjustments) and as other income shifts, the room available for conversion below any given bracket ceiling changes too — usually shrinking gradually as other income rises, which is exactly why doing this early, while the window is widest, has the most impact.

    The honest caveat: this isn’t a “set it and calculate once” plan. It requires revisiting the numbers every year, ideally with a tax projection tool or a CPA’s help, because the ceilings I care about — tax brackets, IRMAA tiers, ACA subsidy thresholds — are all set independently and don’t move in sync. But the payoff, done consistently over several years before RMDs and full Social Security income are both in the picture, is a meaningfully larger pool of tax-free Roth money and a meaningfully smaller forced RMD later.

    I’m also keeping a simple running log of every conversion — the date, the amount, and the tax paid — separate from whatever my brokerage statement shows. Each conversion needs to be reported on Form 8606 for the year it happens, and having a clean personal record makes tax season considerably less stressful than trying to reconstruct several years of conversions from statements after the fact. It also matters if I ever need to verify converted amounts against the five-year rule for penalized early withdrawals, since each conversion technically starts its own five-year clock, and a single combined “I’ve been converting for years” recollection isn’t precise enough if that distinction ever actually matters.

    I’m not a tax advisor. This reflects my own planning process, not personalized advice — IRMAA and ACA subsidy thresholds change annually, and getting a conversion amount wrong can be costly. Work with a CPA on your actual numbers.

    Frequently Asked Questions

    What does ‘filling the bracket’ mean in a Roth conversion strategy?

    It means converting just enough traditional IRA money each year to use up the remaining room in a target tax bracket, based on your other income for that year, without spilling into a higher bracket.

    What income thresholds matter beyond the tax bracket when planning a conversion?

    IRMAA tiers (which affect Medicare premiums) and ACA subsidy cliffs both matter — a conversion that stays in a favorable tax bracket can still trigger a costly IRMAA surcharge or subsidy loss if it crosses one of those separate thresholds.

    Should I pay the tax on a Roth conversion from the IRA itself?

    No — paying the conversion tax from outside funds lets the full converted amount land in the Roth and keep compounding tax-free; paying it from the IRA shrinks the amount converted and can trigger an early withdrawal penalty if you’re under 59½.

  • What a Roth Conversion Actually Is (I Had This Wrong for Years)

    For years I assumed Roth conversions were a strategy for wealthy people trying to dodge future estate taxes — something for a different tax bracket than mine. Now that I’m actually retired and looking at my own accounts, I understand why that assumption was backwards. Roth conversions are arguably most valuable for exactly the situation a lot of new retirees find themselves in: a window of unusually *low* taxable income, sitting between a full-time paycheck and the start of Social Security and RMDs.

    Here’s the mechanic in plain terms. A Roth conversion means moving money from a traditional IRA (or similar pre-tax account) into a Roth IRA. You pay ordinary income tax on the converted amount in the year you convert — there’s no way around that part — but once it’s in the Roth, it grows tax-free and can be withdrawn tax-free in retirement, with no RMDs during your lifetime. You’re essentially choosing to pay tax on the money now, at today’s rate, in exchange for never owing tax on it — or its future growth — again.

    The reason this matters more in early retirement than while working is the size of the tax bill you’re choosing to trigger. Convert while you’re in the 32% bracket during your working years, and you’re paying a steep price to move that money. Convert during a year where your only income is modest and you haven’t started Social Security or RMDs yet, and you might be able to convert a meaningful chunk while staying in the 12% or 22% bracket instead — the exact same dollars, converted at a fraction of the tax cost, simply because of *when* you did it.

    I’m currently in exactly that window. My paycheck stopped in August. My Social Security doesn’t start until October, and even once it does, it’s a fraction of what my full working income was. Between now and whenever RMDs or a larger income stream kick back in, I have several years where my taxable income is naturally lower than it’s been in decades — and lower than it’s likely to be again once RMDs start pushing money out of my accounts whether I want it or not.

    A few things I’ve learned that aren’t obvious from a quick explanation:

    The tax is due in the year of conversion, and it has to be paid from funds outside the IRA if you want the conversion to actually work in your favor — paying the tax out of the converted amount itself just shrinks how much actually lands in the Roth, and if you’re under 59½, that withheld portion can even trigger a separate early withdrawal penalty on top of the income tax.

    Conversions are irreversible. The “recharacterization” option that used to let you undo a conversion was eliminated by the Tax Cuts and Jobs Act back in 2018. Once you convert, that decision is final for that tax year, which means getting the amount right matters more than it used to.

    A five-year clock starts on each conversion for penalty-free withdrawal of the converted principal if you’re under 59½ (a separate five-year rule applies to earnings and to your very first Roth account generally). At my age this is less of a live concern, but it’s a real trap for anyone converting earlier in life and assuming Roth funds are always penalty-free to touch.

    The strategy of doing this deliberately, year by year, in calculated amounts rather than all at once, is usually called a Roth conversion ladder — and that’s exactly what I’m building for myself, which I’ll walk through in the next post.

    One complication I had to research before converting anything: the pro-rata rule, which applies if you have any after-tax (non-deductible) contributions mixed into a traditional IRA alongside pre-tax money. The IRS doesn’t let you cherry-pick the after-tax portion to convert tax-free while leaving the pre-tax portion behind — any conversion is treated as coming proportionally from both pre-tax and after-tax dollars across all your traditional IRAs combined, based on IRS Form 8606 tracking. If you’ve ever made a non-deductible IRA contribution, or rolled over an account with an after-tax component, this rule directly affects how much of a given conversion is actually taxable, and it’s a detail that’s easy to get wrong without pulling your actual Form 8606 history first.

    I’m not a tax advisor. Roth conversion decisions depend heavily on your specific tax situation, and mistakes here are costly and irreversible — talk to a CPA before converting any meaningful amount.

    Frequently Asked Questions

    What is a Roth conversion?

    It’s moving money from a traditional IRA into a Roth IRA, paying ordinary income tax on the converted amount now in exchange for tax-free growth and tax-free withdrawals later, with no lifetime RMDs.

    Why convert to a Roth IRA in early retirement instead of while working?

    Early retirement often creates a window of unusually low taxable income before Social Security and RMDs begin, letting you convert at a lower tax rate than you’d pay during working years or once RMDs push you into a higher bracket.

    Can I undo a Roth conversion if I change my mind?

    No — the option to reverse a conversion (recharacterization) was eliminated by the Tax Cuts and Jobs Act in 2018, so conversions are final for that tax year.

  • Three Ways to Soften the RMD Tax Hit (Before You’re Forced Into It)

    Once you’re required to take an RMD, you can’t decide not to — skip it, or take less than required, and the penalty is steep: 25% of the amount you should have withdrawn (reduced to 10% if corrected within a defined window under SECURE 2.0). So the RMD itself isn’t optional. What *is* still in your control is how much of a tax bill that withdrawal actually creates. I’ve been mapping out three strategies, and I’m starting on one of them well before my first RMD is even due.

    1. Qualified Charitable Distributions (QCDs). If you’re 70½ or older, you can direct up to a set annual limit (currently $105,000 per person, indexed for inflation) straight from your IRA to a qualified charity, and that amount counts toward your RMD without being added to your taxable income at all. This is different from donating cash and taking a charitable deduction — a QCD reduces your income directly, which matters even if you don’t itemize deductions, and it can help keep you under IRMAA thresholds and reduce the taxable portion of your Social Security. For anyone already charitably inclined, this is close to a free lunch: the same giving you’d likely do anyway, structured in a way that lowers your tax bill instead of just itemizing a deduction you might not even qualify for.

    2. Roth conversions before RMDs start. I’ve written about this strategy in more depth separately, but the connection to RMDs specifically is this: every dollar moved to a Roth IRA before your RMDs begin is a dollar permanently removed from the pool of money that generates future required withdrawals. It’s the only strategy on this list that actually shrinks the RMD itself, rather than managing the tax consequences of an RMD you’re stuck taking.

    3. Timing withdrawals to manage tax bracket thresholds, not just RMD minimums. Even before RMDs are mandatory, taking voluntary withdrawals in lower-income years — filling up the lower brackets deliberately — spreads taxable income across more years instead of concentrating it into the RMD years when the required amounts, and correspondingly your tax bracket, tend to be higher. This only works if you have flexibility (other income sources, or a cash cushion) that lets you choose when to pull from tax-deferred accounts rather than needing to wait until RMDs force the issue.

    A detail I almost missed: the taxable-Social-Security interaction compounds all of this. Up to 85% of Social Security benefits become taxable once your “combined income” (adjusted gross income + nontaxable interest + half your Social Security benefit) crosses set thresholds. An RMD that pushes your combined income over that threshold doesn’t just get taxed itself — it can drag a larger share of your Social Security benefit into taxable territory at the same time, which is a second, less visible tax cost of an oversized RMD.

    None of these strategies eliminate the reality that tax-deferred accounts eventually generate a tax bill — that was the deal all along in exchange for the upfront deduction. But the size and timing of that bill is more within your control in the years before RMDs start than it is once they begin. I’m using the years between now and 73 specifically to shrink the balance that will drive that first required withdrawal, rather than waiting to react to whatever number the IRS table hands me.

    It’s also worth checking your state’s tax treatment separately from the federal picture, since the two don’t always match. Some states fully tax IRA and 401(k) withdrawals the same as federal law, some offer partial exemptions for retirement income above a certain age, and a handful don’t tax retirement account withdrawals at all. I hadn’t thought to check my own state’s specific treatment until I started planning conversions, and the answer changed how aggressively I’m willing to fill a given federal bracket, since a conversion that looks efficient federally can look different once the state tax layer is added on top.

    State residency itself is worth a second look for anyone weighing a future move as part of retirement, since it can matter more to your RMD-era tax bill than most of the strategies above combined. Moving from a state that taxes retirement withdrawals fully to one that doesn’t tax them at all, timed before RMDs begin in earnest, can outweigh the benefit of any single-year tax-bracket optimization. It’s not a reason to choose where to live on tax grounds alone, but it’s a factor worth having on the table alongside the more granular, year-by-year strategies above.

    I’m not a tax advisor. QCD limits, RMD ages, and taxation thresholds are all set by current law and can change — verify current figures with a CPA or IRS Publication 590-B before acting.

    Frequently Asked Questions

    What is a Qualified Charitable Distribution?

    A QCD lets you send up to a set annual limit directly from your IRA to a qualified charity once you’re 70½ or older, counting toward your RMD without adding to your taxable income at all.

    Can I avoid taxes on my RMD entirely?

    Not entirely — but strategies like QCDs, pre-RMD Roth conversions, and timing voluntary withdrawals in lower-income years can meaningfully reduce the tax impact compared to doing nothing.

    Does an RMD affect how much of my Social Security is taxed?

    Yes — an RMD that pushes your combined income over certain thresholds can make up to 85% of your Social Security benefit taxable, on top of the RMD’s own tax.

  • My First RMD Is Still Years Away — Here’s Why I’m Already Planning For It

    Required Minimum Distributions won’t touch my accounts for years — under current rules, RMDs start at age 73 (moving to 75 for people born in 1960 or later, under the SECURE 2.0 changes). So why am I calculating mine now, freshly retired and nowhere close to that age? Because the accounts that generate the RMD are growing every year between now and then, and the decisions I make in these earlier years directly shape how painful that first required withdrawal turns out to be.

    Here’s the mechanic, stripped down: your RMD is calculated by taking your retirement account balance as of December 31 of the prior year and dividing it by a life-expectancy factor from an IRS table (the Uniform Lifetime Table, for most people). The percentage this represents starts around 3.7% of your balance at age 73 and climbs every year after, since the divisor shrinks as you age. The withdrawal is added to your taxable income for the year, whether you need the cash or not — and if you have multiple traditional IRAs, you calculate the RMD separately for each but can withdraw the total from any combination of them (401(k)s work differently and generally require separate withdrawals from each plan).

    The number that actually got my attention: if a traditional IRA balance keeps growing between now and 73 — through market returns and any remaining contributions — the RMD isn’t calculated on today’s balance. It’s calculated on the balance at 72 (the year before your first RMD), which for most people is meaningfully larger than what’s sitting in the account today. A bigger balance means a bigger forced withdrawal, which means a bigger jump in taxable income in a single year, potentially pushing you into a higher tax bracket, triggering higher Medicare IRMAA surcharges two years later, and increasing the taxable portion of Social Security income you’re already receiving by then.

    This is exactly why I’m treating the years between retirement and 73 as the window to influence that future number, mainly through two levers:

    Roth conversions now, while my taxable income is lower than it was while working. Every dollar converted from a traditional IRA to a Roth IRA in these lower-income years is a dollar that won’t generate an RMD later — Roth IRAs have no RMDs during the original owner’s lifetime. I’m covering my specific conversion approach in a separate post, since it deserves its own space.

    Understanding which accounts are even subject to RMDs. Traditional IRAs, SEP IRAs, SIMPLE IRAs, and most employer plans (401(k), 403(b), 457(b)) are all subject to RMDs. Roth IRAs are not, for the original owner. Roth 401(k)s, as of 2024 rule changes, are also no longer subject to RMDs during the owner’s life. Knowing which of my own accounts fall into which bucket changed how I’m thinking about which ones to draw down first versus let grow.

    One practical note for anyone closer to 73 than I am: the deadline for your very first RMD has a quirk — you can delay it until April 1 of the year *after* you turn 73, but every RMD after that first one is due by December 31 of that year. Delaying the first one means you’d take two RMDs in the same calendar year, which can spike that year’s taxable income significantly. Most people are better off just taking the first one on the normal schedule instead of deferring it.

    I’ll be honest that RMDs felt like a “future me” problem when I started retirement planning. They’re not. The account balance driving that future required withdrawal is being shaped by decisions happening right now.

    There’s also a completely separate RMD regime for inherited IRAs that I had to learn wasn’t the same as my own future RMDs. If you inherit an IRA from someone other than a spouse, the SECURE Act generally requires the account to be fully depleted within 10 years of the original owner’s death, and recent IRS guidance has clarified that annual withdrawals may be required during that window in certain cases, not just a lump sum at the end. Spousal beneficiaries have more flexibility, including the option to treat an inherited IRA as their own. I mention this because it’s easy to lump “RMDs” into one mental bucket, when in practice the rules for your own future RMD and the rules for an account you’ve inherited from a parent are governed by different provisions entirely.

    I’m not a tax advisor. RMD rules have changed materially in recent years (SECURE Act, SECURE 2.0) and may change again — confirm current rules and your specific required beginning date with a tax professional or directly via IRS Publication 590-B.

    Frequently Asked Questions

    At what age do Required Minimum Distributions start?

    Under current rules, RMDs generally start at age 73, moving to 75 for people born in 1960 or later under SECURE 2.0.

    Do Roth IRAs have Required Minimum Distributions?

    No — Roth IRAs have no RMDs during the original owner’s lifetime, which is why converting traditional IRA funds to a Roth before RMDs begin can permanently shrink future required withdrawals.

    Why does my account balance today matter for a RMD years away?

    Your RMD is calculated on your account balance as of the prior year-end, so a larger balance by the time you turn 73 means a larger forced taxable withdrawal — decisions made well before then shape that eventual number.