Filling Low Tax Brackets Before RMDs: Roth Conversions in Gap Years

Retire at 62. Claim Social Security at 70. Start RMDs at 75. In between sit eight years with no salary, no Social Security check and no forced withdrawals, which often makes them the lowest-income years of an adult life, and the tax return for each of them can show little more than dividends, interest and whatever you choose to withdraw.

Those are the gap years. They don’t come back. The earlier lessons showed what happens later: benefits dragged into tax by the Social Security tax torpedo, RMDs sized by an IRS table, Medicare premiums raised by income from two years back. The gap years are where you can do something about each of them.

Fill the bracket

The move is simple. Each gap year, convert enough of a traditional IRA to a Roth IRA to use up the room left in a low tax bracket. You pay tax now, at a low rate. The converted money then grows tax-free and never shows up in a future RMD.

Bracket thresholds change every year and depend on filing status. The IRS publishes them each autumn for the year ahead. The figure below is hypothetical.

Is $7,200 cheap? It depends on the rate that money would otherwise meet. Left in the IRA, the same $60,000 comes out later as RMDs, stacked on Social Security, a pension and the RMDs from the rest of the account, and if that stack puts it in a hypothetical 22% bracket, it would cost $13,200 in tax, or far more inside the torpedo.

Why it helps

Each dollar converted in the gap years does several jobs:

• It shrinks the traditional balance, so every future RMD is smaller.
• It keeps later income lower, so less of your Social Security becomes taxable.
• It lowers the odds that an RMD year pushes you over an IRMAA threshold.
• It leaves heirs Roth money, which they can generally withdraw without income tax.

Roth withdrawals themselves also add nothing to provisional income, which gives you a tax-free source to draw on in any year when a traditional IRA withdrawal would land badly.

Harvesting gains at 0%

A related move uses the same quiet years. Long-term capital gains are taxed at 0% while your taxable income, gains included, stays inside the lowest capital gains bracket. The thresholds change yearly. In a gap year you can sell appreciated holdings in a taxable account, pay no federal tax on the gain, and buy them back to reset the cost basis higher.

Conversions and harvesting compete for the same room. Gains stack on top of ordinary income, and conversion income is ordinary income. Converting first can push gains out of the 0% range. Pick which one the year is for, or split it deliberately.

Check these before converting

IRMAA needs the same care. Medicare looks back two years, so conversions from age 63 onward feed the premiums you pay from 65, as the lesson on Medicare IRMAA surcharges sets out. Size a late-gap-year conversion to stop short of a tier line.

Pay the conversion tax from savings outside the IRA if you can, so the full amount lands in the Roth. And under 59½, each conversion starts its own five-year clock for penalty-free access to the converted money; the course on growing money in Roth and HSA accounts covers those clocks.

One plan for the gap years

The landmines all point one way. Before RMDs and Social Security start, use the low years to move money from traditional accounts to Roth accounts at low rates. Do it every year. Look up the current thresholds before each move, since they change yearly, and treat the hypothetical sums as a way to see the shape of the problem. Situations differ. A tax professional can run the actual return, state taxes included. The guide to choosing a Roth or traditional IRA is a good place to test the same logic on money you are still saving.