Strategic Roth conversions before age 75 may prevent large 401(k) and IRA holders from facing steep tax bracket jumps in retirement.
Couples with substantial traditional 401(k) and IRA balances risk a sharp tax increase at age 75 when Required Minimum Distributions (RMDs) begin. A financial planner highlighted a scenario where a couple could jump from a 12% to a 32% marginal tax bracket, creating a $1.3 million tax liability over time.
Strategic Roth conversions between retirement and age 75 can mitigate this by converting assets at today’s lower tax rates. The approach, combined with tax-loss harvesting, may also add $3.5 million in lifetime assets by avoiding forced withdrawals at higher future tax rates.
The strategy hinges on forecasting future tax brackets and executing conversions during lower-income years to optimize tax efficiency.