Roth conversions at 12% now beat 32% later for retirement

The instinct to defer taxes today often leads to paying significantly more over 20 to 30 years of retirement, as clients who draw first from Roth and taxable brokerage accounts to avoid IRA withdrawals end up stacking taxable income into higher brackets later.

"When you model it out over 20 or 30 years of retirement, that approach often increases the cumulative tax burden," said Nick Bare, CFP, principal and wealth adviser at Linscomb Wealth.

Roth conversions executed during the five-to-10-year low-income window before Social Security and required minimum distributions begin can shift withdrawals from the 32 percent bracket or higher down to the 12 percent or 22 percent bracket. Under the SECURE Act, inherited IRA beneficiaries face a 10-year depletion window, and timing those distributions into lower-tax years can meaningfully reduce the burden.

The total taxes paid over a lifetime of retirement are not fixed — they are shaped by decisions made years in advance, at the right income levels, in the right accounts, in the right sequence.

Four strategies that require years, not months

When tax planning happens only in the fourth quarter, or in the final days of December, it limits available strategies. Custodians cannot guarantee that transactions such as qualified charitable distributions, donor-advised fund contributions or Roth conversions will settle before year-end if initiated at the last minute. A missed deadline is not a tax strategy — it is a penalty.

Timing flexibility is also lost. Gifting appreciated shares to charity is far more impactful when a stock has just jumped on an earnings report than when scrambling in December. The difference between gifting 10 shares at $80 versus $88 per share — a 10 percent move that translates directly into a larger charitable deduction — is an opportunity only captured by watching for it throughout the year.

Roth conversions in the low-income window. For clients who retire before claiming Social Security, there is often a five-to-10-year window when taxable income drops considerably. Converting IRA or 401(k) funds to a Roth account during this window, at the 12 percent or 22 percent bracket rather than the 32 percent or higher rate that may apply once Social Security and RMDs kick in, may produce meaningful lifetime tax savings, depending on individual income levels, bracket projections and future tax law changes.

Coordinated charitable giving. Bunching charitable deductions into a high-income year — such as one marked by a significant portfolio rebalance or a large Roth conversion — can be far more effective than spreading gifts evenly. When income spikes irregularly, charitable giving becomes a natural offset. Planning this in advance, rather than reacting after the income event has occurred, separates intentional strategy from coincidence.

Inherited IRA management under the SECURE Act. The old "stretch" provision that allowed distributions over a lifetime is largely gone. Most beneficiaries now have a 10-year window to deplete the account. A client who inherits an IRA two years before retirement and is still earning a full income may benefit from delaying withdrawals until after they stop working, shifting distributions into meaningfully lower tax years while staying within the depletion period.

Portfolio transitions with embedded gains. Triggering all capital gains on highly appreciated securities in year one is rarely the right answer. Recognizing those gains gradually over two, three or more tax years spreads the burden while moving toward a better-diversified portfolio.

Paying capital gains taxes is not inherently bad — it means investments have grown. The risk of staying in a concentrated position that may no longer outperform can be far greater than the tax cost of diversifying. Strategies such as tax-loss harvesting, asset location and direct indexing work best as optimizations on top of a sound plan, not as substitutes for one.

Three steps before the next tax season

First, pull out the most recent tax return and look for surprises — large distributions that were not anticipated, a higher bracket than expected, or tax-advantaged accounts that could receive more contributions. Second, identify irregular income on the horizon: equity compensation, a business sale, a liquidity event, or a large one-time expense. Each is a planning opportunity, and modeling the tax implications early preserves options. Once income has already hit a return, many of the best strategies are off the table. Third, get organized before tax season arrives — prior returns, IRS PINs, cost basis records and charitable contribution receipts in one reference document reduce stress and make time-sensitive strategies easier to execute.

Tax rates and rules referenced here reflect current federal tax law as of the publication date; readers should verify against the latest official IRS guidance.

This article is for informational purposes only and does not constitute investment advice.