Using Your Lower-Income Years to Convert IRAs and Reduce Lifetime Taxes (120)

The years between your last paycheck and your first Social Security or RMD can be the most valuable tax planning window of your life. We call it the Golden Window, and it’s when your income is low, your tax brackets are flexible, and your choices can reshape your entire retirement. In this conversation I lay out the strategy that helped one couple save $180,000 in lifetime taxes without sacrificing lifestyle or taking more risk.

We unpack how to use low-income years to your advantage: converting pre-tax IRAs to Roth at favorable rates, harvesting long-term capital gains at 0% in some cases, and rebalancing or simplifying portfolios with minimal tax impact. Why delaying Social Security and pensions can open room to “fill” the 12% or 22% bracket with Roth conversions today to avoid 24% to 32% later. You’ll learn how proactive moves now can shrink future RMDs, reduce IRMAA surcharges on Medicare premiums, and lower the portion of Social Security that gets taxed.

You’ll also hear a step-by-step case study of Mark and Linda, both retired at 62 with most of their savings in IRAs. By living from cash and brokerage for five years and converting $60,000 to $100,000 annually before age 67, they moved $380,000 into Roth accounts, cut projected RMDs from $78,000 to $32,000, avoided IRMAA, and kept more of every benefit. Common pitfalls to avoid—claiming Social Security too early, turning on pensions immediately, skipping conversions, and ignoring bracket math—and a clear framework to plan year by year.

If you’re looking to build a smarter retirement tax plan and stop tipping the IRS, this breakdown gives you the blueprint. Subscribe, share with someone planning to retire soon, and leave a review with the question you want answered next.

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Thanks for Listening!

Jonathan

Chapters

• 0:00 The Golden Window Explained
• 0:53 Why Low Income Years Matter
• 2:43 RMDs, IRMAA, And Tax Pitfalls
• 5:29 Case Study: Mark And Linda
• 9:05 Results And Biggest Mistakes

Transcript

SPEAKER_00: 0:00

Most retirees miss one of the biggest tax planning and tax saving opportunities of their entire lives. It's a period of time, if used correctly, that can save you tens or hundreds of thousands of dollars. And if you miss it, there's no going back. It's called the Golden Window. And today I'm going to show you exactly how to use it, where it applies, when it applies, the biggest mistakes I see people make. And I'll walk you through a real case study of how clients saved$180,000 in their lifetime taxes simply by using this strategy. Let's jump in. I'm Jonathan Bedner, certified financial planner, co-owner of Paradigm Wealth Partners here in Knoxville, Tennessee. And today we're going to talk about tax planning and how you can use this golden window for your retirement plan. What is the golden window? The golden window is a period of time after you retire, but before pension and social security begins. For many retirees, this is a two to 10 year period. And during this time, your income drops dramatically, your tax bracket falls, and you now have the ability to control your taxable income like never before. Most retirees don't even realize this window exists because they're so used to living off a paycheck. But the IRS sees you differently. When your income is low, the tax code opens up massive opportunities. Roth conversions, capital gains harvesting, selling rental properties with minimal taxes, rebalancing a portfolio without a tax hit, cleaning up messy accounts sometimes that you know just kind of get scattered or positions kind of get wonky, shifting money out of IRA tax traps. There's a plethora of options you can utilize with some smart tax planning. This window slams shut once Social Security begins, once you are forced to take RMDs, if your pension starts, you take on a part-time income. Those things drive up your income tax bracket. And so it reduces or starts to close this golden window that strategic people are using for their retirement and financial planning tools. Why is this window so powerful? Let me explain. Lower income means lower taxes and lower tax brackets. If you say retire at 62 and Social Security doesn't start till 67, you may spend five years with no taxable income. You're living on savings or cash or non-retirement investments. That means you're able to keep that income, that tax bracket low, and you might be in the 10 or 12% tax bracket. I've seen people in 0% capital gains tax brackets doing some strategic tax planning to determine how they're going to live in this window. You even could go all the way up to the 22% bracket and still be relatively low compared to what it might be in the future. This is when we start to strategically fill those brackets up and potentially start doing Roth conversions. This is a huge win for retirees. During your working years, your tax typically at higher rates, maybe the 24% rate or the 32 or the 35% or the 37. And, you know, those higher rates eat a lot of your cash flow. In retirement, if you do this correctly, your tax bracket might drop to 10 or 12%. And converting IRA dollars at 12% to avoid 32% later is a huge delta that goes right to your bottom line. It's not just smart, it's one of the biggest financial and tax planning strategies you can implement in your financial plan today. However, there's a limited window where we can do this. You see, at 73, the IRS requires you to start taking what's something that's called an RMD, a required minimum distribution. And if you haven't done proper planning, these RMDs can easily push you into higher tax brackets, increase whole securities, trigger Medicare IRMA surcharges, which are increased Medicare premiums. That's very painful and frustrating for clients, in my experience, as we've worked through this, who don't do the proper planning and they end up paying more for Medicare, they get really frustrated. And so when this happens and you're not strategic, these RMDs become a little bit of a tax bomb in your plan. They drive your tax brackets up, causing you to pay more taxes. If executed correctly, Roth conversions during the golden year will shrink your RMD requirements, and that reduces future tax liabilities going forward. Social Security can also become more tax efficient. Strategic planning for Social Security starts to reduce how much of your benefit is taxed. Traditionally, up to 85% of your Social Security could be taxed. However, with proper tax planning, some retirees keep 50 to 100% of their benefits just by having some tax planning in their retirement plan. Let's walk you through a case study of a couple who use this golden window to benefit their retirement plan. Meet Mark and Linda. They're retired at 62, and Mark had a small pension starting at 67, and Social Security was planning to be turned on at 67 as well. They had$950,000 in IRAs,$120,000 in a brokerage account,$40,000 in cash, and they needed about$70,000 a year to live on. Very modest income, didn't require a lot, just covering kind of their basic expenses. So they needed about$70,000 a year. When we first met, they planned to take Social Security immediately, turn Mark's pension on at 67, and would draw the rest of their income needs from their IRAs. On paper, the plan worked. You know, they had a comfortable retirement. It looked like they could, you know, live comfortably to and through the rest of their days, but it wasn't tax-wise. It wasn't strategic from a tax planning perspective. And they were ending up giving up way more money in taxes than was necessary. It's turned out to be a little bit of a disaster. So here's the problem. If they took no action by age 73, they would be forced to withdraw nearly$78,000 per year just in RMDs. That would push them into a higher bracket, trigger IRMA penalties, and cause them to have more cost than necessary just to pay uh pay the Piper, if you will, pay Medicare penalties or surcharges, pay more tax liability. And so it was less cash flow that they kept, even though their income looked higher. Their second problem was the golden window was wide open from 62 to 67, and you miss it. Their income would be close to zero if they executed it correctly. So this was the perfect time to do this. Luckily, when we met, our plan and our recommendation for them was to delay Social Security at 67, delay the pension until 67, and use the cash and brokerage accounts to cover living expenses. They had a couple of CDs, you know, they had some savings that they could utilize. And so we could use that money to live on, keep their taxable income low, and complete those Roth conversions of$60,000 to$100,000 a year over that five-year period until pension started at 67. We could even continue to do it even when pension started because we still didn't have RMDs until 73. But the real sweet spot is doing this when you have no income at all, not from Social Security, not from pension, no from not from RMDs. Um, because that's when you have your lowest tax brackets as a retiree. When they executed our plan, here were the results. They moved$380,000 from IRAs to Roth accounts. That money now grows tax-free from now on for them to use later on in life or for their kids to inherit tax-free. Their future RMDs dropped from$78,000 down to$32,000. They avoided Irma surcharges. They reduced the taxation of their Social Security, and their lifetime tax bill fell$180,000. Five very impactful benefits just by having a little bit of strategy. That's money they keep now in their pockets, not having to tip the IRS. Most retirees fall into one of these traps. They take Social Security too long, excuse me, they take Social Security too early. They take a pension immediately because it's there, because they can get to it. They ignore Roth conversions. They don't understand IRMA and IRMA surcharges. They don't understand tax brackets. They're not planning ahead for RDs. They're really just treating their retirement plan, their income plan, their strategy as, you know, set it and forget it. Turn the paychecks on and don't worry about it. And, you know, often there's better ways to create and build these retirement plans. And the golden window is a once-in-a-lifetime strategy. You don't want to miss it. If you have questions about this and how we can help, we're happy to have a discussion with you. You can schedule some time at my link in the about us section. My calendar link is there. You're welcome to schedule some time. If you haven't already liked and subscribed to this channel, please like and subscribe. Share it with someone you may know. You know, our goal is to help you live with confidence and clarity in your retirement. Be confident in your retirement. Have a wonderful day.