It’s not uncommon during the early years of retirement to be in a low income tax bracket. There is little to no work income and much of your Social Security benefits may only be partially taxable. This creates a unique opportunity to use Roth IRA conversions.
Money that is converted from a traditional IRA to a Roth IRA is taxable in the year of conversion. But if you are in a low income tax bracket for that year, you may be able to pay extremely low historical rates on these Roth conversions. Until current tax law sunsets at the end of 2026, a couple filing jointly can have taxable income of up to $80,250 and not cross the 12% federal tax bracket. That means that you could pay as little as 12% tax on these Roth IRA conversions!
Keep in mind that taxable income over a marginal tax bracket does not trigger all of the previous income into that higher bracket. It is just the dollars that go over the bracket that are taxed at a higher bracket. For example if a couple made $80,251 of taxable income ($1 over the 12% tax bracket threshold), only the $1 over the 12% federal bracket would be taxed at the next highest bracket.
There can be a unique time period between retirement and age 70 that could be strategic to complete Roth conversions. In addition to paying historically low tax rates on the conversions, it will reduce subsequent required minimum distributions after the age of 70. Lower required minimum distributions after age 70 will keep more Social Security benefits from being subject to income tax.
Keep in mind that dollars converted to a Roth IRA require a five year waiting period after the Roth conversion before the gains are considered tax-free for withdrawal. Make sure to consult your tax advisor for specifics.
If you have any questions please feel free to contact me.