RETIREMENT PLANNING

The Window Most Retirees Miss: What It Costs Them

The years right after you retire can be the lowest-income years of your adult life. In our tax system, that means one thing: opportunity. But only if you're set up to use it.

A few months back, Anthony Sandomierski a Wealth Advisor in our office wrote the Roth Conversion Playbook — well worth a read. This post builds on that with a real-world example, especially timely after tax season.

Why This Moment Matters

Before Social Security kicks in and before Required Minimum Distributions begin, many retirees are in the lowest tax bracket of their adult lives. The paycheck stops, fixed income hasn't started yet, and taxable income can drop from the 32% bracket all the way down to 10 or 12%. That gap — often five years or so — is the window.

 Every dollar converted there instead of at 22% saves 10 cents per dollar on what could be hundreds of thousands in IRA money.

If you have money in a Traditional IRA, it will eventually be taxed — on your terms or the IRS's. A Roth conversion lets you choose when, and at what rate.

One Requirement Before You Start

A Roth conversion is a taxable event. The amount you convert gets added to your income for the year, and you owe tax on it. That bill needs to come from somewhere outside the IRA.

In most cases, paying the conversion tax from non-retirement assets is the more efficient move. Pulling extra from the IRA shrinks the account you're trying to grow tax-free and can push you into a higher bracket in the same year. A taxable brokerage or cash savings may be a place to look first.

✓ GOOD CANDIDATE
Has a taxable brokerage or liquid savings. Can cover the tax bill without touching the IRA. Bracket is temporarily low.

✗ NOT A GOOD CANDIDATE
Tight cash flow. Savings are thin. Would need to pull from the IRA to cover the conversion tax — which defeats the purpose.

Tom and Mary: A Real-World Hypothetical Example

Tom and Mary retired at 65. They're on Medicare, delaying Social Security to maximize their benefit. Here's their setup:

Checking / savings — $60,000
After-tax brokerage (Fidelity) — $1,000,000
Traditional IRA (401k rollover) — $1,500,000
Annual living expenses — $80,000/year
Tom's Social Security (age 70) — $52,000/year
Mary's Social Security (age 67) — $25,000/year

The $60K handles emergencies. The $1M brokerage is what makes the strategy work, it funds their lifestyle and covers the conversion taxes, without touching the IRA.

They cover expenses with a blended draw: most from the taxable brokerage, a portion from the IRA. The IRA withdrawal is ordinary income, which counts toward filling the 12% bracket. Any remaining room in that bracket goes toward Roth conversions. Depending on deductions and other income, a meaningful amount can be converted each year at lower marginal rates before approaching the 22% line. Think of this as an illustrative framework — the exact amounts vary year to year.

When selling from the brokerage, the approach is deliberate. Tax-efficient lots go first: positions held long-term with modest gains, or positions that have appreciated the least. In some years, harvesting a loss can offset gains elsewhere. What to avoid: positions with large embedded capital gains. Selling those adds taxable income, eats into bracket room, and can push the total over an IRMAA or NIIT threshold, quietly raising the cost of the whole strategy.

Each dollar converted moves into the Roth, where qualified withdrawals are generally federal income tax-free. And every dollar moved now reduces future Required Minimum Distributions at the applicable RMD age, which can otherwise force large taxable withdrawals when the bracket is no longer in your favor.

These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.

The Five-Year Playbook

● NOW, AGE 65
Blended draw: cover expenses from brokerage and IRA, then use remaining bracket room for Roth conversions. Pay the conversion tax from the brokerage. Stay below the IRMAA threshold.

● MARKET PULLBACK YEARS
Convert more shares at a lower price — same tax cost, more growth potential locked into the Roth.

● AGE 67: MARY'S SS STARTS
Social Security income reduces bracket room. Conversion amounts are trimmed, but the strategy continues.

● AGE 70: TOM'S SS STARTS
Between two Social Security benefits, the standard deduction, and the additional deduction for couples over 65, they may not fully breach the 22% bracket. But the conversion room is largely gone. The work is already done.

These examples are hypothetical only, and do not represent the actual performance of any particular investments. Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and when sold or redeemed, you may receive more or less than originally invested.

Three Income Cliffs to Watch

The bracket ceiling isn't the only line that matters. Two others can quietly raise the cost of a poorly sized conversion:

● IRMAA: If income crosses certain Medicare thresholds, Part B and Part D premiums increase — sometimes significantly. The adjustment is based on income from two years prior and lasts only one year, so it's manageable with planning. We size conversions to stay below the relevant thresholds each fall.

● NIIT: The 3.8% Net Investment Income Tax applies to investment income once MAGI crosses $250,000 for married couples. Roth conversions themselves aren't subject to NIIT, but higher conversion income can push dividends, interest, and capital gains into NIIT territory.

● Bracket jump: IRA distributions, Roth conversions, and brokerage income all stack on top of each other. Any one of them alone looks manageable. The interaction is what needs to be mapped.

If done correctly, a Roth conversion strategy can shift the dollars from a tax-deferred account into a tax-free one — at the lowest rates you'll see in retirement. But it only works if the liquidity is there.

Why Not Just Leave the IRA Alone?

It's a fair question. A few reasons it's worth acting during this window:

● RMD risk: Required Minimum Distributions will eventually force withdrawals at your applicable RMD age whether you need the money or not. If the IRA has kept growing, those distributions can push you into a higher bracket every year.

● The widow's penalty: Married couples file jointly and get wider brackets. When one spouse passes, the survivor files single — at roughly half the bracket width. A pre-tax IRA that looked manageable for two can become a significant burden for one.

● Inherited IRA tax hit: Under current rules, most non-spouse beneficiaries must withdraw the entire account within 10 years. If your children are in their peak earning years, every dollar they pull out stacks on top of their income. Converting now, at your lower rate, is a gift to them.

● Future rate uncertainty: Current tax rates are not guaranteed. Converting at a known rate today is a hedge against whatever comes next.

Is This Right for You?

Not everyone is a candidate. It depends on your bracket, your asset mix, your cash flow, Social Security timing, estate goals, and Medicare exposure. The wrong move is converting a large IRA when cash is tight, paying taxes you can't comfortably afford at rates that may not even be favorable.

But if you have a meaningful IRA, liquid savings or a taxable account outside of it, and a gap between retirement and Social Security, it may be worth evaluating whether a conversion strategy makes sense for your situation.

Let's Look at Your Numbers

Every situation is different. If you're within five years of retirement — or you've just crossed that line — it's worth running the projections to see what a targeted conversion strategy could save your family. Reach out to schedule a conversation. No cost, no obligation. The window doesn't stay open forever.

The views stated in this letter are not necessarily the opinion of Cetera Wealth Services, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Mike Rytelewski - Wealth Advisor

Converting from a traditional IRA to a Roth IRA is a taxable event.

A Roth IRA offers tax free withdrawals on taxable contributions.
To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first-time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.