One of the biggest and most preventable tax mistakes high-net-worth retirees make is waiting too long to address the growing tax liability in their pre-tax retirement accounts.
Sure, you may have done everything right, like saving diligently and building a sizable nest egg so you can enter retirement with confidence.
But now, your IRA or 401(k) sits like a tax time bomb, waiting to trigger Required Minimum Distributions (RMDs) and inflate your taxable income well into your 70s and beyond.
Indeed, what many investors don’t realize is that the years between age 59½ and when you begin taking Social Security represent a golden opportunity to defuse that tax burden.
That’s because, with no 10% early withdrawal penalty, reduced earned income, and RMDs still a few years away, you’re in a low-tax window, but one that won’t last for too long.
And that’s where Roth conversions come in.
That’s because converting your pre-tax account during this window gives you more control over how and when you pay your taxes.
In fact, it allows you to strategically move money from tax-deferred to tax-free accounts, locking in today’s rates and reducing tomorrow’s surprises.
With that said, the key here is recognizing that this isn’t just a planning opportunity; it’s a problem-solving moment. One that can dramatically improve your long-term tax picture if handled wisely.
Why Timing Matters
Now, if you’ve just retired, the years between when you stop working and begin claiming Social Security is strategic.
That’s because, more often than not, your income is temporarily low.
We call this the income tax valley.
You’re no longer working, you haven’t started taking Social Security, and Required Minimum Distributions haven’t kicked in.
In fact, for many high-net-worth retirees, this is the lowest tax bracket they’ll be in for the rest of their lives.
That’s what makes Roth conversions so powerful in this window.
You can move money from tax-deferred accounts, like IRAs and 401(k)s, into a Roth IRA and pay taxes at a rate you choose, not one the IRS forces on you later.
What this means is that every dollar you convert now is one less dollar subject to RMDs down the road. That means lower future taxes, fewer Medicare surcharges, and more flexibility in how you take income later.
Ultimately, when it comes to tax planning in the income tax valley, you’re either proactive now, or you’ll be forced to be reactive later.
Even so, this is your chance to get ahead.
How This Works in Practice
So, what does this kind of planning look like in practice?
Well, let me tell you about my friend, Susan.
Susan is 62 years old, recently retired, and sitting on about $3.2 million in retirement savings, mostly in her traditional IRA and 401(k).
She’s healthy and financially secure and plans to delay Social Security until age 70 to lock in the maximum benefit.
At first, Susan figured she didn’t need to do much until her benefits started. But when she sat down with her advisor, she saw the bigger picture.
Her income during this income tax valley was low, around $50,000 a year, including capital gains distributions from a taxable account and some small dividends.
That gave her a unique opportunity to convert $100,000 a year from her IRA to a Roth and allowed her to stay within a lower tax bracket and avoid triggering higher Medicare premiums.
In fact, over the next eight years, Susan moved $800,000 into a Roth IRA.
More importantly, she paid the taxes on these conversions on her terms.
In fact, she reduced her future RMDs by nearly $30,000 a year. And in doing so, she built a tax-free pool of money for later retirement and legacy planning.
Same accounts. Same retirement. It’s just a smarter sequence, with a major long-term impact.
Why Roth Conversions Before Social Security Can Be Advantageous
So then, when it comes down to it, the window between age 59½ and claiming Social Security isn’t just a quiet phase of retirement, it’s one of the most powerful tax planning opportunities you’ll ever have.
That’s because Roth conversions during this time can reduce future RMDs, minimize your lifetime tax liability, avoid Medicare premium surcharges, and give you more control over how your retirement income is taxed.
And for high-net-worth individuals like yourself, the cost of inaction isn’t small; it means tax savings that are compounded over decades.
If you don’t take action now, it can mean bigger RMDs, potentially putting you in higher tax brackets, offering less flexibility, and allowing more of your retirement savings to go to the IRS instead of your family.
With that said, with the right strategy, this window of opportunity, your income tax valley, becomes a moment of leverage. It becomes a chance to take control, preserve more wealth, and shape a smarter financial legacy on your own terms.
At the end of the day, tax planning isn’t about reacting to the past; it’s about anticipating and being proactive about the future. And the retirees who plan ahead are the ones who spend with confidence and leave more behind.