By Christian Hudspeth, CFP®
This year, newly retired John and Mary lived on $100,000 of portfolio withdrawals while paying a 0% income tax rate on those withdrawals.
They also moved $140,000 from their pre-tax IRAs into Roth IRAs this year. Through this Roth IRA conversion, they paid an average tax rate of just 8%.
Inside the Roth IRAs, their money will compound tax-free for decades into a small fortune that can be withdrawn from without income taxes for the two of them later.
If they don’t end up using the Roth IRAs, they’ll leave a sizable tax-free inheritance for their kids. A win-win.
No, they didn’t use secret loopholes reserved for the rich and famous. Just some smart financial planning that can be repeated by anyone.
Today we’ll show you how you can do it too in three simple steps.
Step 1: Build Up Your “After-Tax” Savings
While working, John and Mary contributed just enough to their tax-advantaged 401k plans to set up a comfortable retirement in their 60s.
Along the way, they also accumulated some extra savings:
- Mary inherited her late mothers’ $200,000 home, which Mary sold soon afterward (with no taxes due thanks to the step-up in basis tax break) and saved the sales proceeds in an account.
- After the kids graduated, John and Mary decided to downsize. So they sold their $1,000,000 home, bought a $700,000 town home, and saved the remaining $300,000 in an account. They paid minimal taxes on the sale thanks to a primary residence tax exclusion. (Read more: Selling Your Home? How to Minimize Capital Gains Taxes).
- John’s employer laid him off at age 64 and gave him a severance pay of $100,000 after taxes, which was also saved into an account.
The three events above granted them with $600,000 in “after-tax” savings – i.e. money that had already been taxed:
- when originally earned,
- when an ancestor paid the taxes, or
- when taxes were waived by government tax breaks (via step up in basis and exclusions).
With after-tax savings in hand, and with being involuntarily freed from his employer, John was ready to look at his retirement options with us.
Step 2: Take advantage of the “low tax club” years
After building a financial plan together, we showed John and Mary how they could use their after-tax savings to live on $100,000 per year for the next six years while paying a 0% tax rate on the withdrawals.
We call this period of time between retiring and Social Security claiming age the “low tax club” years.
Low tax club years offer excellent Roth IRA conversion opportunities.
With a well-timed Roth IRA conversion, the idea is to
- draw pre-tax dollars out of your traditional 401ks and IRAs,
- pay income tax at very low tax rates on that money, and then
- put those now-after-tax dollars into a Roth IRA where they can grow tax free for a lifetime.
At age 65, John and Mary were able to convert up to $143,650 from their pre-tax accounts to their Roth IRAs in 2025, paying 0% tax on any taxable income up to $46,700 using the new deductions from the OBBBA tax law, then paying 10% to 12% on the next $96,950 of taxable income.
All told, they paid just $11,000 in taxes (a tax rate of less than 8%) to move more than $140,000 into a tax-free Roth IRA.
Step 3: Delay taking Social Security if possible
Since their financial plan showed they could live off their portfolio for several more years, John and Mary could hold off on taking Social Security.
Waiting to age 70 to claim Social Security benefits instead of age 67 not only boosted their benefits by 24%, it also gave way for more “low tax club” years and the ability to convert hundreds of thousands of dollars more from their pre-tax IRAs into their tax-free Roth IRAs for their future selves or their heirs.
The lifetime tax savings and extra lifetime Social Security benefits ensured their money would last years longer in retirement and leave a potentially larger inheritance.
Your Next Step
As John and Mary’s story shows, the key to successful financial planning and minimizing taxes over your lifetime is finding the balance where you’re paying a lower tax rate on your conversion dollars today than you expect to be paying on your income later in retirement.
If you convert too much in one tax year, you may be forced into higher tax brackets that could cost you thousands of dollars in unnecessary income taxes.
On the other hand, if you don’t convert some of your IRA and other pre-tax dollars before you turn age 75, you may be forced to take oversized RMDs that could also push you into higher-than-necessary tax brackets during your later retirement years.
One valuable service we provide to our clients each year is IRA Distribution Planning, a form of income tax planning designed to minimize their lifetime taxation.
Usually performed near the end of the year, we look at each client’s financial situation by:
- Analyzing every source of income they made during the year
- Comparing the client’s current tax bracket with their future tax bracket according to their financial plan and/or other sources
- Recommending the optimal amount of Roth IRA conversion to avoid being pushed into higher tax brackets and paying thousands of dollars in unnecessary taxes and Medicare Part B & D surcharges
Our goal is to advise clients on a good amount to execute Roth IRA conversions at the right time — when their plan suggests the move can save them taxes over the long term.
By working with a trusted tax professional and/or financial planner, you can get the assurance you need if there’s an opportunity to save a substantial amount of tax dollars now and during your retirement years.
Ready to get started? Reach out to the author (and CERTIFIED FINANCIAL PLANNER™) at chudspeth@fmpwa.com.
*The information presented here is not specific to any individual’s personal circumstances. FMP Wealth Advisers is not providing investment, tax, legal, or retirement advice or recommendations in this article.
**To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
***These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
