Filling the Bracket: The Roth Conversion Window Before Age 73
June 29, 2026
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Show Notes
Eddie and Betty's Conversation
Welcome back to The American Retirement Advisor. I'm Betty, and today we are getting into something that I think is genuinely one of the most practical things we've talked about in a long time. We're continuing a series based on a piece written by Ian Schaeffer, our company's COO, called The Gap Years. Last time we talked about what that window actually is, that stretch between your last paycheck and age 73 when your taxable income is often the lowest it's ever been. Today we're getting into what Ian calls the single most useful thing you can do with that window. And Eddie, it has a name that makes a lot of people's eyes glaze over immediately.
The Roth conversion. Yeah, I know. The name does not help it. It sounds like something you need a finance degree to understand, and I think that scares people off before they even give it a chance.
It really does. But Ian actually says something I loved in the piece. He says once you see the idea behind it, you cannot unsee it. And I felt that when I read through this. So let's start at the beginning. What is a Roth conversion, in plain English?
So think about it this way. A traditional IRA is money that has never been taxed. You put it in before taxes, it grew without taxes, but at some point the IRS is going to want their cut. A Roth IRA is the opposite. The money inside a Roth has already been taxed, and from that point on it grows completely tax-free and comes out tax-free. A Roth conversion is just the act of moving money from the traditional bucket into the Roth bucket.
And you pay the tax when you move it.
Exactly. In the year you do the conversion, that amount gets added to your income and you pay ordinary income tax on it. That's the transaction. You're essentially settling up with the IRS now, in exchange for never dealing with them on that money again.
So why does the gap years window matter so much for this? Why not just do it anytime?
Because when you pay that tax matters enormously. And this is the insight that I think Ian captures really well. During the gap years, your income is temporarily low. You're not working, maybe Social Security hasn't started yet, maybe you're not taking required withdrawals yet. So your tax rate is lower than it's probably been in years and lower than it may be again. If you wait until 73, the IRS starts forcing money out of your traditional IRA through required minimum distributions. And those distributions stack on top of Social Security and anything else you've got coming in. Your rate goes up. You're paying more on every dollar.
So it's not about avoiding the tax entirely. You're going to pay it one way or another.
Right. Ian puts it perfectly. You're not avoiding the tax. You're paying it at the best possible price. And then you never pay on the growth. That's the whole thing. You pay a lower rate today instead of a higher rate later, and everything that grows from that point on is yours, tax-free.
Okay so let's get into what Ian calls filling the bracket, because I think this is the part that actually makes the strategy make sense mechanically. Walk me through it.
So the tax system is built in layers. Each layer of your income is taxed at its own rate, and those rates go up as you climb higher. Ian uses 2026 numbers in the piece. For a married couple filing jointly, the 12 percent layer goes up to about 100,800 dollars of taxable income. Then the 22 percent layer goes from there up to about 211,400 dollars. And above that you're in the 24 percent layer.
And in retirement, especially in those early years before required distributions start, a lot of people are sitting somewhere down in one of those lower layers.
Exactly. So let's say your income between Social Security, a small pension, whatever it is, lands you at, let's call it 60,000 dollars of taxable income in a given year. You're in the 12 percent bracket, and the top of that bracket is about 100,800. That means there's roughly 40,000 dollars worth of empty space between where you landed and the ceiling of that bracket.
And that empty space is the opportunity.
That is the opportunity. You can convert up to about 40,000 dollars from your traditional IRA into the Roth, every single dollar of that conversion gets taxed at 12 percent, and then you stop. You don't go a dollar over the ceiling, because once you spill into the next bracket those dollars get taxed at 22 percent instead.
So it's very intentional. You're not just doing a big conversion all at once and hoping for the best.
Not at all. That's actually a mistake people make. They hear Roth conversion and think, okay I'll just move everything. But that could push you into a much higher bracket and you end up paying more than you needed to. The whole point is precision. You convert the right amount, on purpose, each year that window stays open.
And the window can stay open for a while. We're talking about potentially years between retirement and 73.
It can. If you retire at 62 or 65, you could have years to work with. Each year you look at where your income is landing, you look at the ceiling of your current bracket, and you fill the space. It's an annual exercise, not a one-time move.
I love that framing. Okay so let's talk about why the math actually favors doing it now versus waiting, because I want to make sure people really feel the weight of this. Ian lays out three reasons.
He does. The first one is the rate itself. Paying 12 or 22 percent during the gap years can genuinely beat paying 24 percent or more once required distributions start stacking on top of Social Security. That is just math. Same dollar, different price tag depending on when it comes out.
And it's not that 24 percent sounds catastrophic on its own, but when you add it up over potentially hundreds of thousands of dollars in an IRA, the difference is real money.
It adds up fast. The second reason is what happens inside the Roth once you've done the conversion. A Roth IRA has no required minimum distributions during the original owner's lifetime. That's a significant deal. Every dollar you move into a Roth is a dollar the government can never force you to take out. So instead of required distributions pushing your income up every year at 73 and beyond, you have money sitting in an account, growing, completely on your schedule.
Which also keeps your taxable income lower in those later years, which has its own ripple effects.
It really does. More control, quieter income, fewer surprises. And then the third reason is what happens to the growth and to the people you leave it to. Everything inside the Roth grows tax-free from the moment of conversion. And if it eventually passes to your kids, they generally inherit it income-tax-free as well.
Now Ian does note something there about heirs and a ten-year rule. Can you explain that a little?
Right, so Ian's careful to mention that under current law, non-spouse heirs are typically required to distribute inherited Roth funds within ten years. So they can't just let that Roth sit untouched for decades. They do need to take the money out within that window. But here's the key thing. Even though they have to distribute it, that distribution is still income-tax-free. So the tax advantage isn't lost, there's just a timeframe on when it has to come out.
Right, and tax-free money in your kids' hands within ten years is still a tremendous gift compared to handing them a fully taxable traditional IRA that they have to take out and pay income tax on.
Completely different outcome. You've already paid the tax at a low rate. They get the money, they just have to take it out over ten years rather than letting it sit forever.
Okay so this all sounds incredible. And I know there's a but coming, because Ian specifically says this is not a free lunch and he wants to be honest about the trade-offs. So let's go through them, because I think this is actually where a lot of people get into trouble. They hear the upside and they just go do it without understanding the catches.
And Ian names several, which I appreciate because they are real. The first one is how you pay the tax bill. If you do a conversion and then you pay the taxes from inside the IRA, you are shrinking the very thing you are trying to grow. You're converting less than you think because part of it is going straight to the IRS.
So ideally you want to pay the tax from money you already have outside the IRA.
If you possibly can, yes. Ian makes that point clearly. Pay from outside funds. That way the full conversion amount gets into the Roth and starts growing tax-free. It's a much cleaner outcome.
What's the second catch?
This one has a name that sounds very technical but it's worth understanding. It's called the pro-rata rule. So basically, if you have traditional IRAs that hold a mix of pre-tax and after-tax money, when you do a conversion the IRS doesn't let you just pick and choose which dollars you're converting. The taxable share of the conversion is calculated proportionally across all your traditional IRA balances. Not just the account you're pulling from.
So you can't just say oh I'll only convert my after-tax dollars and avoid the tax.
Right, the IRS looks at the total picture of all your traditional IRAs. The exact mechanics of how that calculation works, I'd honestly point anyone listening to sit down with our team at American Retirement Advisors, because it's one of those things that sounds simple until you get into the specifics of your own accounts.
That's a good flag. Okay what's the third catch?
This one surprises people. When you do a Roth conversion, you're intentionally adding income to that year. And income has ripple effects that reach into other parts of your retirement picture. Ian specifically mentions Medicare premiums. If that extra income pushes you over certain thresholds, you could see higher Medicare premiums two years later. There's a surcharge system that looks back at your income from two years prior.
So you might do a conversion in one year, feel great about it, and then get a surprise two years later when your Medicare bill goes up.
If you're not watching the thresholds, yes. Ian actually says this is so significant that part three of this series is dedicated entirely to that topic. He even gives it a name at the end of the piece: don't let Irma visit. We'll get into that next time. But the point here is just to flag that a conversion isn't only a tax bracket question. You have to look at the Medicare picture too.
And Ian also mentions something about a senior deduction. Can you explain that one?
Yeah, so Ian mentions a temporary senior deduction available to people 65 and older, and it's available through 2028. But it starts to phase out above certain income levels. He gives the specific numbers in the piece: roughly 75,000 dollars for single filers and 150,000 dollars for married couples filing jointly. So if a conversion bumps your income past those thresholds, you could lose some or all of that deduction.
So the conversion has to be sized carefully, not just to stay in the right tax bracket, but to avoid triggering these other consequences.
Exactly. And that's why Ian says all of these catches are not reasons not to do it. They're reasons to size it carefully. You want to model it for your specific accounts before you act.
Which brings up something I want to make sure we say clearly. What is Ian's fourth catch? The one about the door.
This might be the most important one to internalize before you do anything. A Roth conversion is a one-way door. There used to be a way to undo a conversion, called recharacterization. That is no longer permitted under current tax law. Once you've converted, you've converted. You cannot change your mind in April when you see your tax bill and wish you'd done less.
That is so important. So the amount you convert and the timing of when you do it genuinely matter, because there's no going back.
None. And that's exactly why Ian says this is the kind of thing worth modeling with someone before you pull the trigger, rather than guessing. The upside is real, but so is the permanence of the decision.
Okay, I want to come back to a question I know a lot of our listeners are thinking right now, because we have a lot of people who are already past 60, already retired, and they might be sitting there wondering whether this ship has sailed for them. Is there an age limit on doing a Roth conversion?
No, and Ian is very direct about this. Unlike contributing to a Roth IRA, which has income limits and some other restrictions, converting to a Roth has no income limit and no age limit. Being retired and in your sixties is not a barrier at all. In fact, Ian says the early retirement years are often the best time to do it, for exactly the reason we've been talking about. Your income and therefore your tax rate tends to be at its lowest.
So if someone's 63 and just retired and they're listening to this thinking, well that sounds great but I probably missed the window, they haven't.
They have not. They might actually be sitting right in the sweet spot. Whether it makes sense, and how much makes sense given their full picture, that's a conversation for an advisor. But the door is not closed just because you're retired.
So let's talk about the how much question, because I think that's the practical thing people want to anchor to. Somebody hears all of this and they say okay I'm in, how much do I convert in a year?
And Ian's answer is honest: it depends. The common approach, the one we described with filling the bracket, is to convert only up to the top of your current tax bracket. So every converted dollar is taxed at today's lower rate and none of it spills into the next bracket up. But the right number for you personally depends on your other income, your Medicare situation, your goals, and it can change year to year as the window stays open.
So it's not a one-size-fits-all answer.
Not even close. Two people who both retired at 65 with similar IRA balances could have very different right answers depending on whether they have Social Security starting, whether they have a pension, what their Medicare situation looks like, what their legacy goals are. All of it goes into the picture.
And the moving parts interact, which is a phrase Ian uses that I thought was really apt. It's not like you can look at one piece of this in isolation.
Right. The conversion affects your income, your income affects your Medicare premiums, your Medicare premiums affect your cash flow, your cash flow affects how much you can afford to pay in taxes from outside the IRA. It all connects. Which is why Ian explicitly says this is the kind of figure worth modeling with someone before you pull the trigger, rather than guessing.
And I'll just say, I think this is one of those cases where even smart, financially capable people shouldn't go it alone, not because they couldn't figure it out, but because the stakes of getting it wrong are real and the window is limited.
Completely agree. The gap years don't last forever. And because the conversion is a one-way door, you really want to go into it with clear eyes about what the outcome is going to be.
Let's do a quick gut-check recap before we close out, because I want to make sure people can hold onto the shape of this whole idea. If someone asks you to summarize the case for Roth conversions during the gap years in a few sentences, what do you say?
You have a window when your income is at its lowest. Your tax rate is lower now than it probably will be at 73 when the IRS starts forcing money out of your traditional IRA. So you can choose to pay the tax now, at a lower rate, on your terms, fill the available space in your bracket without spilling into a higher one, move that money into a Roth where it grows tax-free with no required distributions ever, and ultimately either use it yourself with full control or pass it to your family income-tax-free. That's the case.
And the catches are real but manageable. Pay the tax from outside the IRA if you can. Watch the pro-rata rule. Be aware of the Medicare premium ripple effect. Watch out for that senior deduction phase-out. And remember it cannot be undone, so size it carefully.
That's exactly it. Ian says it well at the end of the piece. This is the biggest lever the gap years offer. Used thoughtfully, filling the bracket can shrink the tax bill waiting for you at 73 and leave you with a pool of money that grows and passes on tax-free.
And the word thoughtfully is doing a lot of work there. This is not a strategy you want to just execute from a podcast episode or an article. You want to actually sit down with someone who can look at your brackets, your accounts, your full retirement income picture.
Ian actually closes the piece by pointing directly to that. He says if you want to look at your own brackets and what a sensible conversion plan might look like for you, you can reach the team at American Retirement Advisors. The number is 602-281-3898. And I think that's the right call to action here. This isn't the kind of thing where you do math on a napkin. You want someone who can actually model it.
And there's no risk in that conversation. You sit down, you bring your information, you see what the numbers actually look like for your situation, and then you decide. That's a very low-stakes way to find out whether this could be a significant advantage for you.
And for a lot of people in that gap years window right now, it genuinely could be. The combination of low income, low tax rates, no required distributions from the Roth, and tax-free growth and inheritance, that's a pretty powerful set of advantages to have available to you.
One more thing I want to name before we close, because I think it gets lost in the mechanics. There's something emotionally significant about this strategy that I felt reading Ian's piece. The idea of paying tax on your terms, at a time and rate you have some control over, rather than having the IRS force money out of your accounts on their schedule. That's a form of financial dignity in retirement.
That's a beautiful way to put it. And I think for people who spent decades building an IRA, watching it grow, doing the right things, it can feel deflating to know that at 73 you're going to be forced to take money out whether you need it or not and pay whatever the rate happens to be. The Roth conversion, done during the gap years, gives you a chance to take some of that control back.
Exactly. You built that money. You should have some say in when and how it gets taxed.
And increasingly, with tax rates being what they are and the uncertain direction things could go in the future, locking in a known rate today on your terms has a kind of security to it that I think a lot of people undervalue.
Alright. Next episode we are getting into part three of Ian Schaeffer's Gap Years series, and we're going to be talking about that Medicare surcharge, the one with what Ian calls an unfriendly name and a two-year memory. The teaser at the end of his piece says don't let Irma visit, and I am very curious to unpack that.
It's a good one. The Medicare piece is something I think a lot of people don't see coming when they plan Roth conversions, and understanding it ahead of time can save you from a genuinely unpleasant surprise.
So come back for that. And in the meantime, if anything we talked about today sparked a question about your own situation, please do reach out to the team at American Retirement Advisors. The number Eddie mentioned is 602-281-3898. You can also find us online. These gap years don't stay open forever, and the sooner you understand your picture, the more of that window you can actually use.
Well said. Thanks everybody for being here today.
We'll see you next time on The American Retirement Advisor.