Michael, Executive With a Roth Plan

The people in these stories are composites. The planning is real, built from work I’ve actually done, but names and details are blended so no client is identifiable. Michael is one of those composites.

Michael retired at 63 from a senior role at a large company. Big career, bigger 401(k), well into seven figures, almost all of it tax-deferred. When we first sat down he told me the smart tax planning was behind him. No more salary, so lower taxes, and he wanted to just let the IRA sit and grow. I told him the opposite was true. The few years in front of him were the most valuable tax planning window he’d ever have, and it was already closing.

The gap years almost nobody uses

For the stretch between Michael’s last paycheck and the year his guaranteed income switches on, his taxable income is going to be the lowest it will be for the rest of his life. No salary yet. Social Security not yet claimed. Required withdrawals from the IRA not yet started.

That gap is a gift, and most people waste it by doing nothing. This is the prime season for a Roth conversion, where you move money from the tax-deferred IRA into a Roth, pay the income tax on it now, on purpose, and never pay tax on that money or its growth again.

Why volunteer to pay tax? Because Michael’s choice was never “pay tax or don’t.” It was “pay tax now, in a low bracket I control, or pay it later, in a high bracket the IRS controls.” Those are the only two doors.

The bill he could see coming

Here’s the door Michael was walking toward without looking. That seven-figure IRA doesn’t sit quietly forever. Once he hits his start age, the IRS forces money out every year as a required minimum distribution, taxed as ordinary income whether he needs it or not. On a balance that large, those forced withdrawals are big, and they land right on top of Social Security.

So the man who thought his high-tax years were over was about to manufacture a brand-new high-tax decade in his seventies. A large untouched IRA is a deferred tax bill that grows with the account. Deferral isn’t avoidance. It’s a loan from the IRS, and the balance compounds.

By converting steadily through his sixties, Michael shrinks the IRA that gets force-fed back to him later. Smaller forced withdrawals, lower taxable income in his seventies, and a pot of Roth money that never gets taxed again and never triggers a required distribution at all. We built it as a multi-year conversion ladder, not a single big move.

The trap inside the strategy

There’s a catch, and it’s the reason this needs a plan instead of a hunch. Convert too much in one year and you spike your income, which can push you into a higher bracket and quietly raise your Medicare premiums two years down the road through the surcharge called IRMAA.

So the real skill isn’t converting. It’s converting the right amount each year, filling up a tax bracket without tipping over the edge, doing conversions without triggering IRMAA. We sized each year’s conversion to a target, watched the bracket and the Medicare thresholds, and stopped before the line.

Michael spent his gap years paying tax he chose, at rates he controlled, to defuse a bill that was coming whether he looked at it or not. The conversions weren’t about dodging tax this year. They were about who sets the rate on the largest account he owns. He decided it should be him.