Tax Planning Between Retirement and Required Distributions
A change in income after retirement can create opportunities for tax planning. Review them alongside future distributions, health coverage, and the income you already receive.
October 12, 2026
If you retire before required distributions begin, your taxable income may fall for a time. That creates an opportunity to review how much income to recognize from traditional retirement accounts. The opportunity depends on what replaces your paycheck and what other income appears on your return.
A pension, rental income, consulting work, or a business sale may keep income substantial. Start with your own projection before assuming that early retirement will be a low-tax period.
Estimate This Year's Income and the Years Ahead
Gather your latest return and estimates for the current year. Include investment income, expected sales, retirement withdrawals, and Social Security if you have claimed it.
Ask your tax preparer to compare the current year with a reasonable range of future circumstances. Required distributions may add income later. A surviving spouse may eventually file under a different tax status. Tax law and personal circumstances can also change.
These comparisons are estimates. Their value is in showing the assumptions behind a decision and how the result changes when those assumptions change.
Size a Roth Conversion to the Household
A conversion transfers eligible retirement assets to a Roth account. The taxable portion is included in income for the conversion year. Qualified future Roth distributions are tax-free, subject to the relevant rules.
The amount to convert should reflect your available cash for taxes and the effect on the rest of the return. Nondeductible IRA contributions and other IRA balances can complicate the calculation; converting a particular account does not necessarily isolate its after-tax money.
A conversion cannot be reversed through recharacterization. You can consider converting in portions, checking the updated income estimate before each transaction. Taking an RMD and making a conversion are separate steps: an amount required to be distributed is not eligible for conversion.
Review Investment Sales at the Same Time
Selling appreciated investments also changes taxable income. A year with lower ordinary income may offer an opportunity to realize gains at a different federal rate.
The interaction matters. A conversion can affect the rate applying to a planned investment sale, and the sale can affect the tax cost of the conversion. Compare the combined transactions. State taxes and investment considerations belong in the review as well.
Do not sell a holding solely because a tax rate looks attractive. Consider its role in the portfolio and the cost of replacing it.
Account for Health Coverage and Medicare
Additional income can affect costs beyond income tax. Income-related Medicare premiums for Part B and prescription-drug coverage generally rely on tax information from two years earlier. A conversion can therefore affect premiums in a later year.
People using income-based health-insurance assistance before Medicare may face a different calculation. Review the applicable program before recognizing additional income.
A reduction in work income may qualify for a Medicare premium reconsideration in some circumstances. That does not mean every conversion-related increase can be appealed away. Ask the relevant program or your professional advisor about your situation.
Choose a Manageable Review Schedule
Coordinate the timing with your advisor, tax preparer, and account custodian. Allow time to confirm estimates, obtain instructions, and complete any transaction before its deadline.
Keep a record of what was converted or withdrawn and any tax payments made. Revisit the plan if a property sells, a pension starts, or another significant event changes income. Choosing to make no conversion can also be reasonable after the alternatives have been reviewed.
What This Means For You
- Verify whether your own retirement income is lower before assuming there is room for a conversion.
- Compare conversions and investment sales together.
- Include health-coverage costs and state taxes in the estimate.
- Confirm the amount with your tax preparer before transferring funds.
Thiesen Dueker's tax planning services consider the relationship between investments and taxes. Your advisor can work with your tax professional to discuss how a proposed transaction fits your retirement needs.
If you are preparing for this period, bring your recent return and expected income changes to your next planning conversation.
To speak with Thiesen Dueker, visit thiesendueker.com or call (559) 448-8190.
Frequently Asked Questions
What are the gap years in retirement?
The phrase describes a period after work ends and before required distributions begin. Income may be lower during this period, although pensions, investments, and other income can change that.
Can I undo a Roth conversion?
A completed Roth conversion cannot be recharacterized back to a traditional IRA. Review the amount and tax cost before proceeding.
Can a conversion affect Medicare premiums?
Yes. Income-related Medicare premiums generally use tax information from two years earlier, so additional conversion income may affect a later premium year.
Sources
Important Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
This material was prepared for Thiesen Dueker's use.
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