For many executives and professionals approaching retirement, the idea of doing a little consulting sounds like the perfect transition.

You get to stay engaged, put your experience to work, and earn some additional income without the demands of a full-time career.

And financially, it seems like a pretty good deal. Every dollar you earn is another dollar you don’t have to take from your retirement savings.

But there’s a cost to that arrangement that often gets overlooked.

The income you earn during phased retirement can take up the very tax brackets you were planning to use for Roth conversions.

To be sure, those first few years after leaving full-time employment can be particularly valuable for retirement tax planning. So then, by continuing to earn income, you may be trading away some of that opportunity without realizing it.

That doesn’t mean consulting is a bad decision. In fact, it could strengthen your retirement plan.

However, the question is whether the additional income today is worth what you’re giving up in future tax savings.

How Consulting Income Changes Your Roth Conversion Strategy

For many successful professionals, the years immediately following retirement represent a significant shift in their tax situation.

Your salary and bonuses disappear.

Social Security and required minimum distributions (RMDs) haven’t started yet.

And for the first time in decades, you have greater control over how much taxable income shows up on your return.

I discussed this opportunity in The Retirement Tax Window Most People Miss. It’s the period between your working-income years and the years when retirement income sources begin filling your tax return.

For someone with substantial savings in a traditional 401(k) or IRA, that window creates an opportunity to move money into Roth accounts at deliberately chosen tax rates before RMDs begin. The IRS outlines the applicable distribution requirements, which depend on birth year and account type.

Now consider what happens when you accept a consulting engagement.

Suppose you’ve determined that converting $100,000 from a traditional IRA would make sense given your projected income and tax situation.

Then you accept a consulting arrangement that produces another $100,000 in taxable income.

Suddenly, much of the tax-bracket capacity you intended to use for conversions is gone. You can still convert, but doing so at the same amount could push more income into a higher marginal tax bracket.

To be sure, the relationship isn’t necessarily dollar-for-dollar. Business expenses, deductions, retirement contributions, and other household income all affect the calculation.

But the tradeoff remains. The more taxable income you earn during your conversion years, the less room you have to recognize additional income at your preferred tax rate.

And the consequences can extend well beyond those first few years.

Research by Edward McQuarrie, published in the September 2024 Journal of Financial Planning, examines the economics of Roth conversions intended to reduce future RMDs. His analysis emphasizes that conversion decisions involve an upfront tax cost in exchange for uncertain future tax savings that can take decades to materialize.

That’s an important distinction.

That’s because the objective isn’t simply to convert more money.

It’s to determine whether using today’s tax brackets improves your long-term after-tax financial position.

Why Working Longer Can Still Strengthen Your Retirement Plan

Of course, focusing exclusively on lost conversion opportunities would miss the other side of the decision.

Continuing to earn income has real financial advantages, particularly when it reduces the need to withdraw money from your investments early in retirement.

That’s because the first few years of retirement are especially sensitive to the order in which investment returns occur.

As I discussed in Why the First Five Years of Retirement Decide the Next Twenty-Five, withdrawing money during an early market decline can leave a portfolio with less capital to participate in the subsequent recovery.

Consulting income gives you another source of money to cover expenses without relying as heavily on portfolio withdrawals.

And that additional income can also make it easier to delay Social Security. For individuals born in 1943 or later, delayed retirement credits increase benefits by 8% annually beyond full retirement age, up to age 70.

And if you’re genuinely self-employed, you have another planning opportunity through a solo 401(k).

Traditional contributions can reduce current taxable income, although they also add to retirement savings subject to future RMDs. Roth solo 401(k) employee contributions, if permitted by the plan, don’t provide that immediate deduction, but aren’t subject to lifetime RMDs.

On the other hand, independent consulting income ordinarily carries self-employment tax in addition to income tax.

So, while consulting provides additional cash flow and retirement savings opportunities, it can also reduce your flexibility to manage taxes later.

The question then becomes whether those benefits outweigh the opportunity cost of delaying Roth conversions.

A Retirement Planning Example: Three More Years of Consulting

To see how those pieces interact in practice, consider a hypothetical 62-year-old executive in Philadelphia we’ll call Craig.

Craig is preparing to retire after a successful corporate career.

Most of his retirement savings are held in traditional retirement accounts. And Craig also also has taxable investments and sufficient cash reserves to support the transition away from full-time employment.

By many measures, Craig is financially prepared to retire.

But as he starts thinking about what he’ll do next, a former colleague offers him a three-year consulting arrangement.

The work is interesting.

The hours are manageable.

And the income would cover a substantial portion of his living expenses.

At first glance, accepting the arrangement seems like an easy decision. But before making that commitment, I would want to compare two different retirement paths.

Path A: Retire Fully at 62

Under the first scenario, Craig stops working entirely.

He funds his living expenses from available cash and taxable investments while preserving flexibility over when to withdraw from his traditional retirement accounts.

With employment income eliminated, he has an opportunity to execute Roth conversions within deliberately selected tax brackets during the years before Social Security and RMDs begin.

The drawback is that Craig will need to rely on his investments sooner, exposing more of his portfolio to early-retirement withdrawal risk. He’ll also need sufficient assets outside his retirement accounts to cover both living expenses and conversion taxes.

And because he’s retiring before Medicare eligibility, I would evaluate how conversion income affects his health insurance costs.

For someone purchasing coverage through the Marketplace, Roth conversion income counts toward the income used to determine premium tax credits, so a larger conversion can mean a larger premium bill.

Path B: Consult for Three Years

Under the second scenario, Craig accepts the consulting arrangement.

The additional income covers his household expenses, allowing him to preserve more of his investment portfolio. Depending on how the arrangement is structured, he could also make additional retirement contributions.

From a cash-flow perspective, that’s attractive.

But now Craig has considerably less room for Roth conversions during those same three years.

And if he’s buying Marketplace coverage until 65, the consulting income counts toward his premium tax credit calculation too.

To illustrate, suppose his tax projections show $120,000 of available room for conversions within a chosen marginal tax bracket.

If the consulting arrangement adds $80,000 to his taxable income after applicable deductions and adjustments, that room falls to approximately $40,000. That’s $80,000 less that he can convert within his targeted bracket that year, and over three years, the cumulative difference becomes substantial.

Those conversions aren’t necessarily lost forever.

Craig can revisit them after consulting ends.

But the delay leaves more money in tax-deferred accounts, increasing their exposure to future RMDs and potentially requiring conversions at less favorable tax rates.

So, neither path automatically produces the better outcome. The more important question is what happens when we compare their projected results over the next twenty or thirty years, rather than focusing exclusively on the three years he’s consulting.

This example is hypothetical and illustrates the planning tradeoffs rather than an actual client’s financial results. The conversion figures are simplified and do not represent a tax recommendation.

How I Evaluate Phased Retirement Decisions With Clients

Which brings us to how I actually work through a decision like his. One thing I’ve found in retirement planning conversations is that the prospect of consulting tends to get evaluated first as a cash-flow benefit.

The thinking is straightforward.

If you earn another $80,000 a year, that’s $80,000 you don’t have to withdraw from your savings.

And that’s a reasonable starting point.

But it isn’t where I want the analysis to end, because the same income changes the tax-planning opportunities available during those years.

This is why I separate the final working years from the years that follow when building retirement income plans.

In a recent client planning engagement, for example, I modeled a couple’s remaining two years of employment separately from their full retirement years.

That required distinguishing their actual and projected household spending during the working period, identifying when employment income would end, and adjusting the cash-flow assumptions once retirement began.

The distinction matters because income and withdrawal strategies that make sense during the final working years aren’t necessarily appropriate after the paychecks stop.

I apply that same discipline when evaluating consulting arrangements.

First, I establish a retirement baseline without consulting income, including the sources of portfolio withdrawals, Social Security timing, and projected Roth conversions.

Then I introduce the consulting income. Think back to our executive, Craig.

On paper, his $80,000 looks like pure upside. But once I recalculate the tax picture, I can see how it changes the conversion schedule, the taxes paid during the consulting years, and the balances remaining in tax-deferred accounts as RMDs approach.

But I also want to know what happens to the investment portfolio.

Why?

Because the same income that crowds out conversions also means less money coming out of his investments during the first three years.

So, I look at whether preserving those investments improves the plan’s ability to withstand an unfavorable sequence of market returns, and whether that benefit is worth the additional tax exposure later.

Finally, I look at Medicare, because the income-related monthly adjustment amount, or IRMAA, generally uses income from two years earlier to determine whether higher-income beneficiaries pay additional Part B and Part D premiums.

That means consulting income earned at age 63 can affect Medicare premiums at age 65. While work reduction or stoppage can qualify for an IRMAA redetermination, I don’t assume that relief will offset the projected premium impact.

Once those moving pieces are incorporated, the decision becomes more interesting.

Maybe the better arrangement is to consult for two years instead of three.

Maybe it’s to work fewer hours and preserve some conversion room.

Or perhaps the income is worth accepting, with larger Roth conversions scheduled after the engagement ends.

There may also be a case for accepting the higher tax cost if consulting meaningfully reduces portfolio withdrawals during an unfavorable market environment.

That’s a legitimate outcome, too.

The point here isn’t to convince someone to stop working.

It’s to understand what continuing to work actually means for the retirement they’ve spent decades preparing for.

Before You Accept the Consulting Offer, Run Both Scenarios

Still, none of that analysis captures why most people say yes to consulting in the first place. For many, phased retirement is as much an identity decision as a financial one.

After spending thirty or forty years building a career, it’s understandable to want to remain professionally engaged. Consulting can provide structure, purpose, and a gradual transition into retirement.

I’ve written about that challenge in The First Monday With Nowhere to Be, where I explored how the loss of a working routine can influence retirement spending and financial decisions.

But a decision that makes sense personally still deserves to be evaluated financially.

Here’s the bottom line: Phased retirement has a price tag.

Read it before you sign.

Before committing to another two or three years of work, compare what your retirement looks like with and without that income.

Look beyond the immediate paycheck.

Evaluate the taxes you’ll pay today, the withdrawals you’ll avoid, the Roth conversions you’ll defer, and the impact on your financial position over the coming decades.

That way, your retirement identity and your retirement tax plan get decided together.

At Franklin Madison Private Wealth, I help individuals approaching retirement work through how decisions involving income, taxes, investments, and retirement timing fit together.

If you’re considering a consulting arrangement or a gradual transition into retirement, I invite you to schedule an introductory conversation.

Schedule here ==> https://franklinmadisonadvisors.com/schedule-now/

Sources

Edward F. McQuarrie, “Net Present Value Analysis of Roth Conversions,” Journal of Financial Planning, September 2024.
https://www.financialplanningassociation.org/learning/publications/journal/SEP24-net-present-value-analysis-roth-conversions-OPEN

Internal Revenue Service, “Retirement Plan and IRA Required Minimum Distributions FAQs.”
https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Internal Revenue Service, “Topic No. 554, Self-Employment Tax.”
https://www.irs.gov/taxtopics/tc554

Internal Revenue Service, “One-Participant 401(k) Plans.”
https://www.irs.gov/retirement-plans/one-participant-401k-plans

Internal Revenue Service, “Retirement Plans FAQs on Designated Roth Accounts.”
https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts

Social Security Administration, “Delayed Retirement Credits.”
https://www.ssa.gov/benefits/retirement/planner/delayret.html

Social Security Administration, “Medicare Premiums: Rules for Higher-Income Beneficiaries.”
https://www.ssa.gov/benefits/medicare/medicare-premiums.html

Social Security Administration, “Request to Lower an Income-Related Monthly Adjustment Amount (IRMAA).”
https://www.ssa.gov/medicare/lower-irmaa

HealthCare.gov, “What’s Included as Income.”
https://www.healthcare.gov/income-and-household-information/income/