Pre-retirees' tax strategy

Pre-retirees with large 401(k)s often say they'll wait until retirement to pay taxes as income drops.

“We'll wait until we retire. Our income will drop, and we'll be in a lower bracket.”

The $2 million threshold

For households with $2 million or more in pre-tax savings, focusing on future tax rates is more useful than waiting until retirement.

Tax impact of pre-tax savings

Pre-tax savings grow with investments but eventually become taxable income, increasing the tax bill over time.

Required minimum distributions

RMDs begin at age 73 or 75 for those born in 1960 or later, adding taxable income regardless of need.

Social Security tax risks

Higher income can make up to 85% of Social Security benefits taxable and trigger Medicare IRMAA surcharges.

Inherited tax burden

Children inherit tax bills from pre-tax accounts, often during their peak earning years, increasing lifetime tax costs.

Roth conversion benefits

Roth conversions provide more control over withdrawals and avoid increasing taxable Social Security or Medicare premiums.

Roth conversion costs

Conversions raise current tax bills, push into higher brackets, and trigger Medicare premiums two years later.

Testing conversion timing

To test if waiting saves taxes, sort savings by tax treatment and project income across both spouses' lifetimes.

Step-by-step testing

Convert in pieces, line up tax payments first, and run projections for both spouses and heirs to find the optimal timing.

The real decision

The best time to convert depends on individual circumstances, not a one-size-fits-all approach to retirement tax planning.