Retirement doesn’t always mean lower taxes. In fact, you could face the biggest tax bills in your 70s when Social Security benefits and Required Minimum Distributions (RMDs) take effect.
However, there is a small, often overlooked window that can dramatically reduce those future taxes. You can take advantage of this limited period to move your money from a traditional retirement account to a Roth account to save on taxes.
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The year you retire and before Social Security begins is the window that many retirees miss. This is the time when your taxable income is lowest and you have a lot of flexibility to do Roth conversions. But many retirees realize this when it is too late.
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“Roth conversions provide a great opportunity to pay taxes when it can be done at the lowest possible rates. The best window for this is for people who retire at age 60 and delay claiming their Social Security benefits until around age 70,” said Wade Pfau, founder of Retirement Researcher. “This can create years of low taxable income, opening up the opportunity to participate in Roth conversions and be better prepared for when RMDs kick in later in your 70s.”
According to Matt Hylland, a financial planner at Arnold and Mote Wealth Management, you can optimize Roth conversions by timing them with a year in which you live off cash savings. “Many retirees retire with a lot of cash. Those who are comfortable spending their cash may be in a position to have little or no income as far as the IRS is concerned and will have ample room in lower tax brackets to do Roth conversions,” he said.
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This article originally appeared on GOBankingRates.com: The (Surprisingly Narrow) Roth Conversion Window Most Retirees Miss to Save on Taxes