The Retirement Tax Window: Why the Years Between Retirement and RMDs Are Valuable Planning Years

Oct 16

During your working years, your income is largely determined by your salary. You receive a paycheck, contribute to retirement accounts, pay taxes, and invest what remains.

Then retirement arrives, and you suddenly have much more control over your income.

Earned income falls when paychecks stop, Social Security may not have started, and Required minimum distributions may still be years away. However, significant wealth may sit inside your IRA and 401(k), where future distributions will generally be taxable as earned income.

This creates a valuable period of financial flexibility that we call the Retirement Tax Window. This is when your taxable income will temporarily be lower than it was during your working years, and potentially lower than it will be later in retirement.

For financially successful retirees, these years can be an important opportunity to coordinate cash flow, Roth conversions, capital-gain realization, Social Security, Medicare and future RMDs as part of one integrated strategy.

When we meet with someone who has recently retired, the conversation often begins with: “How much can I afford to withdraw from my retirement account every year?”

Another question that is just as important, is: “How should we create that income?”

If a married couple has $2M of retirement assets, they could withdraw 4-5% from their traditional IRA every year.

Or they could ask:

How much should come from the IRA?
How much should come from taxable investments?
Should we realize some capital gains?
Should we convert part of the IRA to Roth?
When should Social Security begin?
How large will our future RMDs be?
How will today's decisions affect Medicare premiums?
What assets do we ultimately want to leave to heirs?

The difference between making a fast decision using a quick calculation vs. a comprehensive cash flow and tax planning strategy can make a significant difference in taxes paid throughout retirement.

Consider a hypothetical married couple who retires in their early 60s.

Suppose they have:

$1.8 million in traditional IRAs
$400,000 in Roth IRAs
$500,000 in a taxable brokerage account
No pension
Social Security deferred until later
$90,000 of annual spending

Assume that, after deductions, they expect only $70,000 of taxable ordinary income in a particular year. Under the 2026 federal brackets, the next dollars of ordinary taxable income would remain within the 12% bracket until taxable income reaches $100,800.

That means, purely as an illustration, there could be approximately $30,800 of additional taxable income capacity within the federal 12% bracket. A Roth conversion could fill some (or all) of that space.

The couple would recognize additional taxable income today, pay the applicable tax, and move assets from the traditional IRA into a Roth IRA.

The potential benefit isn't that the tax disappears, because it doesn't. The benefit is tax-rate management over time.

You are effectively asking: “Would we rather recognize some income at today's marginal rate, or leave the money in the traditional IRA and potentially pay tax on it later when our taxable income is higher?”

That is a fundamentally different question from asking whether a Roth conversion creates a tax bill this year.

The Same Principle Applies to Appreciated Investments

Roth conversions aren't the only strategy worth examining.

Consider a retiree who bought a property for $250,000 that is now worth $900,000. They have a substantial unrealized gain.

The natural reaction might be: “I don't want to sell because I'll have to pay capital-gains tax.”

Following our theme, the better planning question is: “When would realizing the gain create the most favorable overall tax result?”

Capital gains interact with taxable income. Federal tax law provides preferential rates for long-term capital gains, including a potential 0% rate at low enough taxable-income levels. This means a low-income retirement year can create an opportunity to realize some gains at a lower federal rate than might apply in a higher-income year.

Of course, selling real estate introduces additional considerations like depreciation recapture, state taxes, transaction costs, and potentially the use of a 1031 exchange for qualifying investment property.

The timing of these sales can make a big difference in your overall tax bill.

The RMD Clock Is Already Ticking

For many retirees, one of the most important future events is the beginning of Required Minimum Distributions (RMDs).

The RMD age is currently 73 (for individuals who reach the applicable age before 2033), and will change to 75 in the next few years (for individuals who reach age 74 after 2032). Roth IRAs are not subject to RMDs (for the original owner).

That makes the years before RMDs especially interesting.

Imagine someone retiring at 62 with a $2M traditional IRA. They may have a decade or more before RMDs become mandatory, which gives them time to develop a cash flow plan.

Each year provides another opportunity to evaluate:

How much income do we need?
How much taxable income do we want?
How much should remain in the traditional IRA?
How much should be moved to Roth?
Should we realize capital gains?
Should we delay Social Security?
How will this decision affect future Medicare premiums and taxes?

A Multi-Year Retirement Cash Flow Plan

This is why we believe retirement income planning should be performed over multiple years rather than one tax return at a time.

A simplified planning framework might look like this:

Working Years: Focus on accumulation, retirement contributions, investment strategy and tax diversification.
Early Retirement: Evaluate Roth conversions, capital-gain realization, cash reserves and the timing of Social Security.
Medicare Years: Coordinate income planning with Medicare premiums and other tax-sensitive decisions.
Pre-RMD Years: Evaluate the size of traditional retirement accounts and whether additional Roth conversions make sense.
RMD Years: Coordinate required distributions with spending needs, Social Security, investment income and charitable strategies.

Understanding the tax impacts of decisions across these time periods is critical to the planning process.

The Bigger Picture: Tax Diversification

One of the most valuable outcomes of this type of planning may be tax diversification.

Imagine a retiree has:

Traditional accounts: Tax-deferred today, taxable when distributed.
Roth accounts: Generally tax-free qualified distributions.
Taxable accounts: Potentially subject to capital-gains and dividend taxation.
Cash: Liquid and predictable.

Each account has different tax characteristics.

That means diversification isn't just about stocks and bonds, it can also mean diversifying the tax treatment of your wealth.

A retiree with multiple sources of differently taxed assets has more flexibility when deciding how to fund future spending.

The Most Valuable Retirement Asset May Be Flexibility

Retirement planning is often presented as a question of how much money you have. But after retirement, another asset becomes extremely valuable: flexibility.

Flexibility to choose which account(s) to draw from, control your amount of taxable income, delay Social Security, realize gains strategically, perform Roth conversions, manage RMD exposure, respond to changes in tax law, and adjust spending during market downturns.

That can be worth more than simply maximizing the balance of one account.

Ready to Look Beyond the Retirement Date?

Our planning process looks at the years before and after retirement to help coordinate cash flow, investment withdrawals, Roth conversions, Social Security, tax planning and future RMDs.

If you're approaching retirement, or have recently retired, we can help you build a multi-year retirement income and tax plan designed around your specific circumstances.

The goal isn't to have enough money to retire, it's to make informed decisions about how that money works for you throughout retirement.

This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.