We are rewinding the tape ALL the way back to the very beginning! Here, I’ll break down the common Tax Traps of traditional 401ks and IRAs. This was episode #2, so there’s a good chance you haven’t heard this one! I hope you find it useful and drop a comment with your thoughts. How do you navigate these tax traps in retirement?
Happy New Year!
-Kevin
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
Do you ever wish you could get inside the minds of existing retirees to ask them what their experience has been? Or, ask them what they wish they would have known before they quit their day job? This episode is for you!
In this episode of the Planning for Retirement podcast, I’ll share 50 truths that retirees wish they knew before they quit their day jobs. Some of these are straight from the horse’s mouth, some are my observations in serving retirees for more than a decade, and some are research-based that I uncovered during this process. I’ll cover a range of topics including finding purpose in retirement, the misconception of retirement expenses going down, the importance of exercise and brain stimulation, the high costs of healthcare in retirement, tax traps, and much more.
Thanks for tuning in!
~Kevin
Links Referenced in Episode:
50 Truths Retirees Wish They Knew Before They Quit Their Day Job
Purpose and Successful Retirement Transition Questionnaire
Shocks and the Unexpected: An Important Factor in Retirement
The life expectancy of older couples and surviving spouses
How to plan for rising healthcare costs
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
This week I’ve got a Q&A session focused on current hot topics and debates including: ~ Underspending in Retirement ~ How to Position an Annuity ~ Pre-Tax vs. Roth Debate
I hope you enjoy this episode and find some nuggets of information that you can use.
Wishing you all a wonderful holiday season and Happy New Year!
– Kevin
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
I recently met with two clients who completely changed how I think about retirement planning. Both were retiring much earlier than they had anticipated, and both situations were related to unexpected health issues. One client is now on disability, though thankfully, his wife is still working for a few more years, and he does have a disability policy in place. The other received a cancer diagnosis and is potentially retiring much earlier than planned as well.
These conversations took me back to my days studying for the RICP (Retirement Income Certified Professional) designation. There was a statistic that really resonated with me. After reviewing my coursework and notes, I found it: 51% of retirees retired earlier than anticipated. That’s right! There’s a better than 50% chance that whatever age you think you’re going to retire, you’re going to retire earlier.
The number one reason? Health issues. This reality made me realize something important. We need to stop planning for a “normal” retirement age in our assumptions, even if we end up working until 70 or 65.
The Reality of Uncontrollable Retirement Factors
Let me share another example. I’m working with a client right now who’s 62. He plans to work at least until 65, when he becomes eligible for Medicare. During the pandemic, he moved from New York to Florida. The plan was to work remotely, feel good, and coast into retirement while continuing to build his assets.
Unfortunately, the company is bringing everyone back to the office. He has two choices.
Move back to New York
Pick a random satellite location in Florida to work in
Neither of these is convenient based on where he now resides. So, he might retire this year.
My point is that things outside our control often lead people to retire earlier than planned. The inputs you give your financial advisor, including “I want to work until 70,” significantly impact the calculations on:
How much you need to save for retirement
How much risk you need to take
How long your portfolio needs to last while you’re spending it down
I don’t think it’s prudent to build those optimistic assumptions into your plan.
I recommend assuming you’ll retire at 62, 63, or 64, even if you love what you do, and genuinely want to work until 70. Then control what you can control.
Understanding Why People Retire Early
The research shows us exactly why 51% of people retire earlier than expected. Here’s the breakdown:
46% cited health reasons – This is the largest category and completely uncontrollable. Whether it’s a sudden diagnosis, chronic condition, or physical limitations, health issues force many people out of the workforce earlier than planned.
30% were laid off or offered an early retirement package – Again, this is largely uncontrollable. Company restructuring, economic downturns, or industry changes can force your hand regardless of your personal timeline.
11% needed to care for a loved one – Caring for aging parents, a sick spouse, or other family members is another uncontrollable factor that can derail retirement plans.
When you add these three categories together, that’s 87% of early retirees who left work due to circumstances beyond their control. This is why early retirement planning makes sense for everyone, not just those dreaming of early retirement.
What Changes When You Plan for Early Retirement
If you’re 55 and had been planning to work until 70, you probably had a pretty nice-looking financial plan. You’d get maximum Social Security benefits at 70, which would line up perfectly with when you start portfolio withdrawals, creating no income gap. But what happens when you plan to retire at 60 or 62 instead? Several things change, and you need to prepare for them.
1. You Need to Save More and Invest More
This one’s pretty straightforward. A good saver typically saves about 10-15% of their gross income. But if you’re planning for early retirement – even if you don’t actually retire early – I’d argue you need to save closer to 20-25% of your gross income.
I’m personally planning to have financial independence before I turn 55. Now, I love what I do and don’t see myself at 60 doing nothing. I’m having more fun in my career today than I ever have. But by planning for retirement significantly earlier, I’m building the option to quit if I want to or sell my business if I want to. That’s the power of early retirement planning – it gives you choices.
2. Healthcare Before Medicare
Medicare eligibility starts at 65, and many people work until then specifically because they’re afraid of what they’ll do for health insurance if they retire at 60, 61, or 62. But here’s what most people don’t realize: buying private health insurance or through the Affordable Care Act isn’t that complicated.
I do it with my family. It’s not cheap, but if you’re retired, your taxable income is going to be pretty low. You might have some interest income from bonds or high-yield savings accounts, maybe dividends from stocks or ETFs, perhaps Social Security or a pension. But generally, folks who retire at 60-62 have relatively low taxable income.
This low income often qualifies you for ACA subsidies. If your income is relatively low, your health insurance costs could be next to nothing – possibly less expensive than what you were paying when you were working. Don’t let healthcare force you into a job you hate until 65 just because everyone else talks about working until Medicare kicks in.
3. Stay Aggressive with Your Investment Strategy Longer
This is a mistake I see repeatedly. People preparing for retirement think, “I need this money in one, two, three, or four years, so I need to dial back my risk.” Or worse, they pick a target-date fund for 2025 because they want to retire in 2025, and these funds force you into being super conservative.
By doing this, you’re bringing inflation and longevity risk into the picture more than necessary. When I say stay aggressive, I’m not talking about putting 100% in stocks or betting everything on high-risk investments. I’m talking about maintaining a higher equity allocation than traditional retirement advice suggests.
If the benchmark portfolio for retirees is 60% equities and 40% fixed income, maybe you stay at 75% or 80% equities for the first phase of retirement. This helps you capture returns early on (assuming the market cooperates), continue building your portfolio, and protect against inflation and longevity risks that come with retiring earlier.
4. Plan for Longevity
If you retire at 60 and have longevity in your genes or excellent health, there’s a possibility you or your spouse may live 30-35 years in retirement. This goes hand in hand with staying aggressive longer – you may need to maintain a fairly aggressive investment approach throughout your retirement years to protect against inflation and longevity risks.
You also need a sound Social Security strategy to maximize survivor benefits should one spouse pass away before the other. That Social Security benefit will be one of the best inflation hedges in your retirement income plan, so you’d better maximize it if you plan to live a long life.
5. Develop a Sound Income Distribution Plan
If you plan to delay Social Security until 70 to get maximum benefits but retire at 60, that’s a potential 10-year gap where you’ll have no Social Security income. You need to replace that income with portfolio withdrawals and distributions.
Preparing your portfolio for income distributions is critical. You need a disciplined, unemotional, repeatable process to generate cash flow monthly or quarterly. We’ve all heard about buying low and selling high. When you’re accumulating wealth and saving in your 401(k) or IRA, it’s all buying – you’re purchasing shares of investments.
But in the distribution phase, you’re not just buying anymore. You’re turning the portfolio on for income. Some will come from cash flows such as interest and dividends, but others will come from selling investments each month, quarter, or year. Having a disciplined process so you’re not selling the wrong thing at the wrong time is critical for maintaining portfolio longevity when retiring early.
What Happens If You Plan Early But Don’t Retire Early?
Let’s say you do all these things and prepare to retire early, but you don’t actually retire early. What’s the impact? Nothing really negative that I can think of.
The main drawback is that you might need to tighten your belt more. If you’re struggling to save 10-15% and early retirement planning calls for 20-25%, that might be tough without working a second job or getting a significant pay raise. But if you have the capacity to save and invest more, there are only benefits.
You could potentially spend or gift more in retirement. Maybe you could build your dream home or have a vacation home free and clear. You might have better opportunities to leave a financial legacy for your children and grandchildren. You could have different risk capacity – maybe you’ve saved more than enough for retirement, which allows you to take on more investment risk to build an even larger legacy for the next generation or for charitable goals.
Maybe this also allows you to set aside funds for self-funding long-term care. Long-term care risk is one of the top risks for any retiree today – those healthcare costs at the end of life and the potential burden on loved ones. If you’ve saved more than you need for your own retirement, you can potentially self-fund long-term care.
The Benefits of Early Retirement Planning for Everyone
The beauty of early retirement planning is that it benefits everyone, regardless of when you actually retire. It’s about building financial security and creating options in your life.
When you follow early retirement planning principles, you’re essentially stress-testing your financial plan. Instead of assuming everything will go perfectly – that you’ll work until 70, stay healthy, never get laid off, and never need to care for family members – you’re planning for reality.
This approach gives you financial flexibility. If you do face unexpected health issues, job loss, or family caregiving responsibilities, you’ll have options. You won’t be forced into desperate financial decisions because you’ll have built a solid foundation.
Even if none of these challenges arise and you work until your planned retirement age, you’ll be in a much stronger financial position. You’ll have more saved, better investment strategies, and multiple backup plans. That’s not a bad problem to have.
Taking Control of What You Can Control
The key insight from all of this is focusing on what you can control versus what you can’t.
You can’t control whether you’ll have health issues, whether your company will downsize, or whether you’ll need to care for aging parents. But you can control your savings rate, your investment strategy, your distribution process, and your ability to manage risk before and during retirement.
Let’s control what we can and plan for the worst while hoping for the best. That’s what smart early retirement planning is really about – not necessarily retiring early, but being prepared for whatever life throws your way.
And if you want help planning for your retirement, we’d love to help you. At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal, or investment advice.
If you are retiring before you turn 65, the healthcare gap is probably top of mind. In today’s episode, I’ll talk about 6 paths to healthcare coverage to bridge the gap until you are eligible for Medicare. I hope it helps.
FYI, I am NOT a health insurance expert! This episode was made possible because my current premium was skyrocketing 70% next year, so I decided to shop it. However, each state will have its own complexities and nuances. Nonetheless, I hope this gets you started in the right direction.
Kevin
Resources:
• Roth Conversion Trap on ACA Premium Tax Credits (video)
• Don’t fall off the cliff. Explaining the cliff for ACA premium tax credits in 2026 and beyond (video)
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
Vanguard, the King of NO fees, puts out an annual study where they attempt to quantify the value of a comprehensive financial advisor. I can attest to many of the services mentioned, but it is very difficult, if not impossible, to determine the exact % of additional value added those services can provide. In any event, I think Vanguard actually misses the mark on a few of these, particularly because of WHO you are (PFR Nation).
I also believe Vanguard fails to include one of the MOST important factors when considering the value of a financial advisor. And yes, I acknowledge that I am a VERY biased source on this topic. However, you might find it surprising where I land on some of the points Vanguard makes.
I hope you find it useful!
Kevin
Resources:
Vanguard Advisor’s Alpha
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
The One Big Beautiful Bill Act (OBBBA) has fundamentally changed the retirement planning landscape, creating new opportunities and hidden dangers for anyone considering a Roth conversion. While the legislation offers some attractive benefits like increased SALT deductions and new senior tax breaks, it has also created a minefield of potential Roth Conversion Tax Traps that could cost you thousands of dollars if you’re not careful.
Understanding these Roth Conversion Tax Traps can save you thousands in unexpected taxes and help you make smarter decisions about your retirement planning. The most dangerous Roth Conversion Tax Traps often catch even experienced investors off guard, particularly with the complex interactions between OBBBA’s new provisions and existing tax rules.
If you’re considering an IRA Conversion to Roth in this new tax environment, you need to understand exactly what you’re getting into. The stakes are higher than ever, and the margin for error has shrunk considerably. Let’s dive into the eight most critical traps you need to avoid.
Understanding IRA Conversion to Roth Under New Tax Laws
Before we explore the specific traps, it’s essential to understand how the OBBBA has changed the conversion landscape. The timing of your IRA Conversion to Roth can significantly impact your tax bill, especially with the new deductions and rate structures in play.
The legislation permanently extends lower federal income tax rates, which might seem like good news for conversions. However, this stability comes with a catch – the window for optimal conversion strategies has narrowed, and the penalties for mistakes have grown steeper.
Many people rush into an IRA Conversion to Roth without considering all implications, particularly how the new law’s provisions interact with existing tax rules. This rush often leads directly into the first major trap.
Tax Trap #1: The Senior Bonus Deduction
This one is brand-new for 2025, and it’s a big deal for retirees.
If you turn at least 65 in 2025, you’re now eligible for an additional “Senior Bonus Deduction” on top of your standard deduction. After OBBBA, the standard deduction bumps to $31,500 for married filing jointly and $15,750 for singles. You still get the regular senior deduction if 65+ which is $1,600 per spouse for MFJ or $2,000 for singles.
But here’s the bombshell: The Senior Bonus Deduction adds another $6,000 per qualifying person. For a married couple where both spouses are 65+, that’s $12,000 extra.
So, in theory, a married filing jointly couple, both turning 65 in 2025, can claim up to $46,700 as their standard deduction. No itemizing required. No shoe boxes of receipts. And yes, this is exactly why so few taxpayers itemize, and that trend will likely continue.
Why This Matters for Roth Conversions
That massive deduction means the Roth conversion “window” just got wider. More deductions = more room to realize income before it climbs the tax brackets.
We ran a projection yesterday for a couple we work with who both qualify for the senior bonus deduction. Last year, they converted $51,000 to Roth. This year, if they converted the same $51k, they’d pay $2,000 less in taxes for 2025!
But here’s the trap… The Senior Bonus Deduction phases out.
Singles: begins phasing out at $75,000 AGI, fully gone by $175,000
MFJ: begins phasing out at $150,000 AGI, fully gone by $250,000
Every dollar above the first threshold reduces your Senior Bonus. Meaning a Roth conversion can unintentionally shrink (or completely eliminate) the very deduction you were planning to rely on.
And remember: this senior bonus deduction is only through 2028, then it’s set to expire.
The Bottom Line
Yes, this new deduction makes it tempting to get aggressive with Roth conversions, but you must weigh each conversion against the potential phaseout of the Senior Bonus Deduction. Big opportunity… but also a sneaky trap if you’re not careful.
How to Avoid this Trap
First, determine how important Roth Conversions are. Then, weigh the cost of those conversions, particularly if you are 65 or older in 2025!
Tax Trap #2: State Income Tax Arbitrage
Many pre-retirees living in high-tax states plan to retire to a low or no-state-income-tax state in the future. Additionally, there might be a period after retirement when you are technically in the “Roth Conversion Window” but still paying state income taxes. Once you move to your new low or no-income tax state, those state income taxes might go down or be eliminated completely. This provides a unique opportunity to perhaps PAUSE or reduce conversions UNTIL you move to that new, more tax-favorable environment. This could save thousands of dollars in state income taxes on those future conversions.
How to Avoid this Trap
Calculate the state tax impact of your conversion before proceeding. Consider the total tax cost (federal plus state) rather than just the federal impact. In some cases, it might make sense to establish residency in a no-tax state before doing large conversions.
Tax Trap #3: Medicare IRMAA Surcharge Surprises
One of the most overlooked Roth Conversion Tax Issues involves Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) surcharges. These surcharges kick in when your modified adjusted gross income exceeds certain thresholds, and Roth conversions count as income for IRMAA purposes.
The IRMAA thresholds for 2025 start at $103,000 for single filers and $206,000 for married couples filing jointly. But here’s what makes this trap particularly nasty – IRMAA is based on your tax return from two years prior. So a large conversion you do in 2025 could increase your Medicare premiums in 2027.
Example:
Let’s say you’re 67 years old and typically have $90,000 in annual income. You decide to do a $50,000 Roth conversion, pushing your income to $140,000. Two years later, you’ll face IRMAA surcharges that could add $2,000 or more to your annual Medicare premiums – and those higher premiums continue until your income drops back down.
The trap gets worse if you do multiple conversions or have other income spikes. Some retirees find themselves paying IRMAA surcharges for years because they didn’t coordinate their conversion timing properly.
These hidden Roth Conversion Tax Consequences could derail your retirement strategy if you’re not prepared for the ongoing premium increases. Understanding proper Roth Conversion Tax Treatment helps optimize your strategy and avoid these costly surprises.
How to Avoid this Trap
Model your income for the next several years, including planned conversions. Consider spreading conversions across multiple years to stay below IRMAA thresholds. If you’re approaching Medicare age, be especially careful about conversion timing in the years before you enroll.
Tax Trap #4: The Social Security Tax Spike
Despite what some headlines have claimed over the last six months, Social Security did not become tax-free after OBBBA. Social Security benefits are still taxable, and the amount that shows up in your taxable income depends entirely on your provisional income. That formula looks like this: your AGI (not including Social Security) + any “tax-free income” like foreign earned income or muni bond interest + 50% of your Social Security benefits. That total becomes your combined income, which determines how much of your Social Security becomes taxable.
So let’s go back to the couple converting $51,000. Before the conversion, their provisional income was low enough that they were paying only a very small tax on their Social Security. But once they converted that $51k, their taxable income jumped by $84,000. Why? Because the higher provisional income triggered the Social Security Tax Torpedo, pulling more of their benefits into taxation.
How to Avoid this Trap
A Roth conversion increases your provisional income, which means (1) you may trigger taxes and (2) each dollar converted can pull more of your Social Security into taxation. You might consider delaying Social Security during this more aggressive Roth Conversion phase in order to maximize the tax efficiency of those conversions. Watch the full YouTube video I posted here: ($51k Roth Conversion Resulted in $84k of taxable income).
Tax Trap #5: Timing Mistakes That Multiply Tax Costs
Timing is everything with Roth conversions, and OBBBA has created new timing considerations that can make or break your strategy. The most common timing mistake is doing conversions during high-income years instead of waiting for lower-income periods.
The new law provides several opportunities for strategic timing, but many people miss them entirely. For example, the senior deduction of $6,000 is only available through 2028. If you’re approaching 65, you have a limited window to take advantage of this deduction while doing conversions.
But here’s the trap – everyone knows about this deadline, which means many people are rushing to convert in the same timeframe, potentially pushing themselves into higher brackets unnecessarily.
Another timing trap involves market conditions. Some people do conversions when their account values are high, paying taxes on inflated asset values. Others wait for market downturns, but then panic and convert at the worst possible time from a tax perspective.
Changes to Roth Conversion Tax Treatment affect conversion timing decisions in ways that aren’t immediately obvious. The interaction between OBBBA’s provisions and your personal tax situation creates unique timing windows that require careful analysis.
How to Avoid this Trap
Create a multi-year conversion plan that takes advantage of low-income years, market downturns, and temporary tax benefits. Don’t rush to convert just because rates are scheduled to increase – make sure the timing works for your specific situation. Consider converting during early retirement years before Social Security and RMDs begin.
Tax Trap #6: ACA Premium Tax Credits
Healthcare is a huge point of stress for early retirees. What do you do before Medicare kicks in? And yes, the ACA premium situation is getting crazy. I just ran my projected 2026 premium assuming the exact same plan… 60%+ increase. Seriously!?
But here’s the real issue for early retirees: the ACA subsidy cliff returns in 2026. From 2021 to 2025, the subsidy was more of a gradual slope. You could earn above 400% of the Federal Poverty Level and still receive a premium tax credit. In 2026, that slope disappears. It’s back to a hard cliff. That means earn $1 over the 400% FPL threshold, and your premium tax credit is gone completely.
So, depending on your situation, this might actually tempt you to do heavier Roth conversions in 2025 while the rules are still flexible. Once 2026 hits, those conversions could cost you thousands in lost subsidies.
How to Avoid this Trap
Be conservative with your income estimates, as this is a tax credit ADVANCE! Yes, you can elect to not receive reduced healthcare premiums and true up your taxes the next filing season, but this might result in you paying thousands of unnecessary dollars for healthcare coverage that you did not need to pay!
Tax Trap #7: Capital Gains Triggers
One of the best features of a taxable brokerage account, or what I like to call a non-qualified account. Unlike a 401(k) or IRA, it has the preferential long-term capital gains treatment when you hold investments for at least a year. Instead of being taxed like ordinary income, your gains fall into one of three brackets: 0%, 15%, or 20%.
Additionally, qualified dividends earned are also taxed at long-term capital gains rates! Not to mention the benefit of the step-up in cost basis at death.
Here’s Where the Trap Comes In:
If your taxable income crosses certain thresholds, it can push your capital gains into a higher bracket, and in some cases, even trigger the Net Investment Income Tax (NIIT)—an extra 3.8% surcharge on top.
That means before a Roth conversion, you might be able to harvest gains at 0% tax. But after the conversion? Suddenly, you’re looking at 15% capital gains, or worse, you’re now over the NIIT threshold and owe an additional 3.8%.
How to Avoid this Trap
Run tax projections on your capital gains before and after a conversion. It might make sense to limit conversions if you are enjoying 0% long-term capital gains treatment.
Tax Trap #8: FOMO
Ok people… Roth conversion FOMO is real. The hype over the last seven-ish years has been nonstop, and it can make you feel like you have to convert your IRA or you’re somehow missing out. But before you panic-convert everything, pause for a second. Think about why a Roth conversion strategy might make sense for you. And just as importantly, why it might not.
In fact, I did an entire episode breaking down “7 reasons NOT to convert your IRA to a Roth,” and it’s worth a listen (click here). Not every tax strategy is universally good, and Roth conversions are no different. The smartest planning comes from knowing when to act and when to pump the brakes.
How to Avoid this Trap
Get out your crystal ball and tell us what your lifetime taxes will be with conversions and without conversions. That’ll give you the answer! In all seriousness, listen to that podcast episode, and you make the call!
New Roth Conversion Tax Treatment Rules: What You Need to Know
Understanding proper Roth Conversion Tax Treatment helps optimize your strategy in the post-OBBBA environment. The new law doesn’t change the basic mechanics of Roth conversions, but it does change the tax environment in which those conversions occur.
The key changes include higher standard deductions, new targeted deductions for seniors and certain types of income, and extended lower tax brackets. These changes create both opportunities and traps, depending on how you navigate them.
The most important principle is that every conversion decision must be evaluated in the context of your complete tax picture, including federal taxes, state taxes, Medicare premiums, and other income sources. The days of simple conversion calculations are over – the new tax environment requires sophisticated planning.
Avoiding These Eight Roth Conversion Tax Traps: Your Action Plan
Avoiding these Roth Conversion Tax Traps requires careful planning and timing, but the effort can save you thousands of dollars and help you build a more tax-efficient retirement strategy. Here’s your action plan:
Never do a large conversion without modeling the complete tax impact, including federal taxes, state taxes, Medicare premiums, and the loss of deductions or credits. The true cost of a conversion is often much higher than the obvious federal income tax.
Consider spreading conversions over multiple years to manage tax brackets and avoid triggering various phase-outs and surcharges. The OBBBA provisions create a window of opportunity through 2028, but that doesn’t mean you should rush to convert everything immediately.
Coordinate your conversion strategy with other aspects of your financial plan, including state residency changes, Social Security claiming strategies, and investment portfolio management. Roth conversions don’t exist in isolation – they affect and are affected by every other aspect of your tax situation.
Keep detailed records and work with qualified professionals who understand the complexities of the new tax law. The interaction between OBBBA provisions and existing tax rules can create scenarios that even experienced taxpayers may miss.
Remember that tax laws change, and what makes sense today might not make sense tomorrow. Build flexibility into your conversion strategy and be prepared to adjust as circumstances change.
Final Thoughts
The One Big Beautiful Bill Act has created both opportunities and dangers for Roth conversion strategies. By understanding and avoiding these eight critical tax traps, you can take advantage of the opportunities while protecting yourself from the dangers. The key is careful planning, thorough analysis, and professional guidance when needed.
Your retirement security depends on making smart decisions about Roth conversions in this new tax environment. Don’t let these traps derail your retirement plans – take the time to understand them and plan accordingly.
At Imagine Financial Security, we help individuals over 50 with at least a million dollars saved navigate these complex retirement decisions. If you are looking to
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal, or investment advice.
I hope you all had a wonderful Thanksgiving holiday! It’s been a while since we did a Whiteboard Retirement Plan breakdown, so lets get this back in the rotation!
In this scenario, we are looking at a baseline scenario for Jack and Barbara, who have saved $2.3million for retirement, mostly in tax-deferred accounts. They would like to retire at 61 (2026), but they are very concerned about financial legacy for their two adult children. In fact, not only do they want to protect and preserve their assets, but they also want to do so on an inflation-adjusted basis! Let’s see how they are tracking with the baseline plan, and let’s see what levers they need to pull in order to achieve their retirement AND legacy objectives.
And I’d love to hear from you all. What levers would YOU pull if you were Jack and Barbara?
Thanks for tuning in and please make sure to leave us a nice review if you are finding value in the content!
-Kevin
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website so we can learn more about how we can help in your journey to and through retirement.
In all seriousness, Happy Thanksgiving all of you! Wishing you a wonderful start to the holiday season.
Roth Conversions are a hot topic in our business at the end of the year, so I thought I’d do a video about some common tax traps every day retirees run in to as they are converting assets to Roth. I hope you find it useful!
Let me know if there are any other tax traps you can think of.
Also, drop a comment…do you plan to convert your IRA to Roth during your Roth Conversion window?! I would love to hear from you.
-Kevin
Resources mentioned:
The ACA Premium Tax Credits Are Changing in 2026 (video)
7 Reasons NOT to convert your IRA to Roth (episode)
Are you interested in working with me 1 on 1?
You can start with our Retirement Readiness Questionnaire linked on our website, so we can learn more about how we can help in your journey to and through retirement.
Happy Thanksgiving! As we approach the final stretch of 2025, it’s the perfect time to focus on what could save you thousands of dollars: end-of-year tax planning. If you’re in that sweet spot of being 50-60+ years old with substantial savings (we’re talking seven figures or more), this guide is specifically for you.
The difference between tax planning and tax preparation is huge.
Tax preparation is reactive. You collect your 1099s in January, hand them to your CPA, and ask how to minimize your taxes from last year. Unfortunately, there’s not much you can do at that point.
Tax planning, on the other hand, is proactive. It’s about looking at your complete financial picture and figuring out how to minimize your lifetime tax burden, not just this year’s bill.
Understanding 401(k) Contribution Limits 2025 and Deadlines
Let’s start with the low-hanging fruit: contribution limits. These are opportunities you absolutely don’t want to miss, especially with some exciting changes coming in 2025.
Employee Contribution Deadlines
For 401(k) contributions, the employee deferral deadline is December 31st. There are no extensions to this deadline. For 2025, the employee contribution limit is $23,500, plus a $7,500 catch-up contribution if you’re over 50. That means you can contribute up to $31,000 through payroll deductions, but only if you act before year-end. If you are behind, consider using end of year bonus income, or even deferring most (if not all) of your final few paychecks. This assumes you have some cash on the sideline to use for the holidays!
The total contribution limit for 2025 is $70,000, including employer matching and profit-sharing. The catch-up contribution is the same at $7,500. If you are using Mega-Backdoor Roth 401k contributions or perhaps you are self employed using Solo 401k or SEP IRA, you can really juice up your savings over and above the employee deferral limits.
IRA Contributions: More Flexibility
Unlike 401(k) employee contributions, IRA contributions can be made up to the tax filing deadline. For 2025, you can contribute $7,000 to a traditional or Roth IRA. Note: That’s a combined limit, not per account, plus $1,000 catch-up if you’re over 50.
This flexibility is valuable when you’re not sure about your modified adjusted gross income or whether you’ll need to do a backdoor Roth conversion. Your modified adjusted gross income will determine whether or not that IRA contribution is deductible for you and whether you are eligible to contribute to a Roth IRA.
Solo 401(k) vs SEP IRA: Self-Employed individuals
If you’re self-employed, you have some powerful options. A SEP IRA allows contributions of 25% of earnings up to $70,000 for 2025, and you can delay opening the account until your filing deadline.
However, I’m seeing more clients choose Solo 401(k)s these days. The real advantage is that you’re not limited by the 25% of earnings rule for the employee portion.
With a solo 401(k), you can contribute the full $23,500 employee contribution regardless of your income level, then add employer matching and profit-sharing to reach that $70,000 maximum. Plus, many solo 401(k)s offer the mega backdoor Roth option, allowing after-tax contributions that can be converted to a Roth immediately. You must enroll in the Solo 401(k) before the calendar year is over, but you can delay funding the account until you file your tax return.
The Super Catch-Up: A Game-Changer for 2025
Here’s something exciting: if you’re turning 60, 61, 62, or 63 in 2025, you qualify for a “super catch-up” contribution. This adds an extra $3,750 to your regular catch-up, bringing your total catch-up to $11,250.
That means if you’re in this age range, you can contribute $34,750 to your 401(k) in 2025 ($23,500 regular + $11,250 super catch-up). No surprise, the IRS decided to make this complicated, and this benefit disappears when you turn 64.
Smart Tax Bracket Management Strategies
Effective tax planning starts with understanding your current and future tax brackets. This is where the real strategy comes in.
Legislative Changes
It’s official, OBBBA (One Big Beautiful Bill Act) was passed in July, making the current TCJA tax brackets permanent! This means you probably don’t need to panic about converting everything to Roth before 2025 is up. With that said, some key considerations directly impact all of you, whether you are planning for or already in retirement.
Tax Brackets are Permanent
Sure, nothing is ever set in stone. However, it will now require NEW legislation to change the current tax brackets. Originally, the 2017 Tax Cuts were set to expire after 2025.
Friendly reminder: Never implement planning strategies based on what you THINK policy makers will do to the tax code. Regardless, you can now rest easy knowing that the tax brackets are set at:
0%
10%
12%
22%
24%
32%
35%
37%
Standard Deduction Inflated
There was a slight uptick in the original 2025 standard deduction amounts. For singles, you are eligible for a $15,750 standard deduction. For married filing jointly, you are eligible for a $31,500 standard deduction.
Senior Bonus Deduction
If you turn 65 or older before year’s end, you are now eligible for an additional $6k as a BONUS deduction. This is in ADDITION to the standard deduction, but also IN ADDITION to the current bonus deduction of $2k for singles and $1,600 each for married filing jointly. Therefore, a married couple could theoretically receive a tax deduction up to $46,700 for 2025! With that said, the new bonus deduction is NOT permanent. After 2028, this goes away. Additionally, there are income phaseouts, so if you earn too much, you might not receive any or all of that senior bonus deduction.
Charitable Giving Incentives
Currently, if you do not itemize your deductions, giving to charity does NOT provide you with any tax incentive. Of course, if you do give to charity, reducing your taxes is probably not the ONLY reason you do so. However, starting in 2026, for those taking the standard deduction, you can still take a $1k tax deduction for singles and $2k for married filing jointly for making charitable donations. Therefore, if you are making some smaller donations and typically don’t itemize, make sure to keep those receipts for 2026 and beyond so you can take advantage of this tax deduction.
Healthcare Tax Credits
Prior to 2021, only those taxpayers whose Modified Adjusted Gross Income was between 100% and 400% of the Federal Poverty Line could be eligible for tax credits when purchasing a health insurance policy on the exchange. However, in 2021, COVID relief enhanced those tax credits even if your income exceeded 400% of the Federal Poverty Line. Starting in 2026, we will revert to the old rule, making it that much more important for “early retirees” to dial in their modified adjusted gross income before becoming Medicare eligible. Here is a video on my YouTube channel that highlights how these tax credits work for early retirees. I do assume a scenario for 2025 with the “gradual phase out” of the credits, but it still may be helpful to understand how it is calculated. 👇 Will I Receive Tax Credits for (ACA) Health Insurance?
Smart Roth Conversion Strategies for Long-Term Savings
Roth conversion strategies can be incredibly powerful, but they’re not right for everyone. In my practice, it’s about a 50-50 split on whether conversions make sense.
The Sweet Spot for Conversions
The best time for Roth conversion strategies is typically in early retirement, after you’ve stopped working but before required minimum distributions begin at age 73 or 75 (depending on your birth year). And even better, before Social Security begins. This gives you a window of potentially 5-10 years+ to fill up lower tax brackets through conversions. I call this the Roth Conversion Window.
Required Minimum Distributions: Plan Ahead
Once required minimum distributions kick in, it becomes much harder to manage your tax brackets. You might find yourself pushed into the 24% or 32% bracket immediately, with little room for strategic conversions.
This is why many of my clients in their late 60s to mid-70s say, “I wish I had started these conversions earlier in retirement.” The key is planning well before you hit that RMD age.
Current vs. Future Tax Brackets
If you’re currently in the 22% or 24% bracket but expect to drop to the 10% or 12% bracket in early retirement, that’s a strong argument for pre-tax contributions now. You can then do Roth conversions during the Roth Conversion Window when your tax bracket drops.
Conversely, if you expect to stay in similar tax brackets throughout retirement (maybe you have a pension or significant investment income), you might consider a smoother Roth Conversion schedule, if that makes sense for your long-term plan.
Your Long-term Plan is the Key
In my humble opinion, Roth Conversions have almost become a little TOO mainstream. When this happens, you might be led to believe that they’re right for you, when in fact they are NOT. The key is asking yourself, who am I planning for beyond me?
If it’s just you, you probably don’t care as much about who pays how much in taxes when you die. If you’re goal is to leave a significant legacy to your adult children who are financially successful in their own right, you might care more about the tax impact of that legacy.
And what about spouses? If your spouse is likely to outlive you by 10-15 years, how would switching to single filing status impact their tax situation? Are you charitably inclined?
So yes, reducing your lifetime tax bill is important. However, who else are you planning for? That will be at the center of the Roth Conversion decision.
Qualified Charitable Distributions (QCDs)
If you’re over 70½, you can donate up to $108,000 directly from your IRA to qualified charities in 2025 (increasing to $115k in 2026). This distribution isn’t included in your taxable income and reduces your required minimum distributions dollar for dollar.
Here’s a practical example: Let’s say your Required Minimum Distribution (RMD) is $50,000 and you typically donate $10,000 to charity. Instead of taking the full RMD and donating cash, do a $10,000 QCD. Now your taxable RMD is only $40,000, potentially saving you $2,000-$3,000 in taxes.
Donor Advised Funds: Bunching Strategy
If your charitable donations don’t usually get you over the standard deduction threshold, consider “bunching” multiple years of donations into a donor-advised fund (DAF). You can contribute multiple years’ worth of donations in one year, potentially unlocking itemized deductions, then distribute the money to charities over time. There is no set deadline for when the money needs to come out of the DAF.
The money in the donor-advised fund grows tax-free, and you can even name a successor to continue the charitable giving after you’re gone.
Donating Appreciated Securities
Instead of donating cash, consider donating appreciated stocks or other securities. You can deduct the full fair market value (up to 30% of your adjusted gross income) while avoiding capital gains taxes on the appreciation.
Advanced Strategies: IRMAA and ACA Considerations
Managing Medicare Surcharges
Your 2024 tax return will determine your Medicare Part B and Part D premiums for 2026. These Income-Related Monthly Adjustment Amounts (IRMAA) can add hundreds of dollars monthly to your Medicare costs.
Review the IRMAA brackets for your filing status and see where your income falls. Sometimes a small Roth conversion can push you into a higher IRMAA bracket, or a charitable deduction can keep you in a lower bracket, saving significant money on Medicare premiums. Of course, when we are closing out 2025, you are thinking about IRMAA for 2027. We currently do not have the brackets set for 2027. However, using some conservative inflation assumptions could be a decent benchmarking tool. I would still provide yourself a buffer if you are cutting it close to the next IRMAA tier.
Asset Location: What Goes Where
For real estate, it’s about LOCATION, LOCATION, LOCATION! For your investment portfolio, Asset Location is about owning the right investments in the right accounts. In taxable accounts, hold tax-efficient investments like index funds or individual stocks you plan to hold long-term. In tax-deferred accounts (401ks, traditional IRAs), hold tax-inefficient investments like REITs, bonds, or actively managed funds that generate significant distributions. Be careful with sitting on TOO MUCH cash in a high-yield savings or money market account. Taxable interest could be your worst enemy.
Proper Asset Location can help reduce your current taxable income while maximizing the tax-deferred growth in your retirement accounts.
Annual Gifting and Estate Planning
Don’t forget about the annual gift tax exclusion: $19,000 per recipient for 2025. This is per donor, so married couples can give $36,000 to each recipient without filing any gift tax returns.
This strategy removes assets (and their future growth) from your estate while providing immediate benefits to your beneficiaries. Will your beneficiaries find more utility in their ultimate inheritance today? Or when they are 65?
Health Savings Accounts: The Triple Tax Advantage
If you have access to an HSA, the contribution limits are $4,300 for self-only coverage and $8,550 for family coverage in 2025, with an additional $1,000 catch-up if you’re over 55.
HSAs offer a triple tax advantage: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. And even after age 65, you can withdraw for any purpose (paying ordinary income tax, like a traditional IRA). However, the best bang for your buck is to reimburse yourself tax-free for medical-related expenses.
Taking Action: Your Next Steps
Effective end-of-year tax planning requires looking at your complete financial picture. Project your 2025 tax bracket and compare it to what you expect in 2026 and beyond. Consider your retirement timeline, expected income sources, and long-term goals.
Remember, tax planning is personal. What works for your neighbor might not work for you. The strategies that make sense depend on your income, tax brackets, retirement timeline, and overall financial goals.
As we head into 2025, take advantage of the opportunities available now.
Max out those contribution limits before December 31st
Consider strategic Roth conversions if you’re in a low-income year
Don’t forget about charitable strategies if you’re charitably inclined.
The key to successful tax planning strategies is taking action before the year ends. These strategies can help set the stage to drastically reduce your lifetime tax bill, putting thousands of dollars back in your pocket during retirement.
At Imagine Financial Security, we help individuals over 50 with at least $1 million in savings navigate complex retirement decisions. If you are looking to
Not quite ready to take the questionnaire, but want helpful tips and resources? Sign up for our monthly newsletter and/or subscribe to our YouTube channel.
This is for general education purposes only and should not be considered as tax, legal, or investment advice.
