The Tax Trap in Your Retirement Accounts (And a Way to Disarm It)

You’ve saved diligently and invested wisely. You’re on the glide path to a comfortable retirement – or so you think!

Unbeknownst to you, there’s a trap quietly nestled in those IRAs and 401(k)s. It’s not market risk. It’s not inflation. It’s taxes. And if you don’t have a strategy in place, this tax liability could create a sizable headache with your retirement income.

Here’s what’s happening, and more importantly, how to disarm it.

The tax trap

Traditional retirement accounts like IRAs and 401(k)s are tax-deferred. This means every dollar you contribute is not taxed on the way in, but when you take the money out of the account.

Starting at age 73 (or 75 if you were born in 1960 or later), the IRS forces you to take required minimum distributions (RMDs). They’re mandatory withdrawals that grow each year, and fully taxable as ordinary income.

This can trigger unwanted consequences:

  • Higher tax brackets that tax your withdrawals at higher tax rates

  • Increases in Medicare premiums

  • Taxation of Social Security benefits

  • Loss of key deductions and credits due to income phaseouts

  • A diminished estate left to heirs

Even worse, the longer you wait to act, the harder this gets to fix.

Roth conversions: One tool for disarming the trap

Enter the Roth conversion, a strategy that lets you voluntarily pay tax now in exchange for tax-free growth later. You convert a portion of your traditional IRA into a Roth IRA, pay tax on the amount at today’s rates, and from then on, that money grows and comes out tax-free. No RMDs.

But here’s the catch: timing and precision matter. You don’t want to convert so much that you spike into higher tax brackets. And you don’t want to wait too long and let RMDs corner you.

Roth conversion strategies

If you’re in your 50s or early 60s and not yet taking Social Security, you’re in a planning sweet spot. Here's an approach to consider:

  1. Bracket fill strategy. Each year, convert just enough to fill up a lower tax bracket without spilling into the next.

  2. Use dips in the market. Convert during a market downturn, as lower asset values mean lower tax bills on the same number of shares. Then ride the recovery in a Roth, tax-free.

  3. Coordinate with other income sources. Avoid stacking conversions on top of high-income years. Time them between your career wind-down and starting Social Security to reduce the cumulative tax load.

  4. Fund taxes from brokerage accounts. If you have a taxable investment account, use this to pay the tax bill from the conversion. This keeps more in your Roth working for the long haul.

Lowering your retirement tax burden isn’t about tricking the system. With intelligent Roth conversions and a forward-looking RMD strategy, you can keep more for retirement.

Quent Capital, LLC