If you have a net worth of $2 million or more but find yourself in the 12% tax bracket during retirement, congratulations—you’re officially “poor on paper.” This might sound like a contradiction. Actually, it’s one of the most powerful positions you can be in for tax planning. When you’re high net worth but have low taxable income, you unlock planning opportunities that can save you tens of thousands of dollars in taxes and healthcare costs.

The concept of being “poor on paper” came from one of my clients, who recently retired with a net worth of multiple seven figures. He went from a higher income bracket during his working years to the 12% bracket in retirement. His net worth continues to grow, but his tax bracket has dropped dramatically. “Wow, I’m poor on paper now,” he told me, and that phrase perfectly captures this unique planning window.

This situation typically occurs when you’re in early retirement. The time after your W-2 income stops but before you’re required to take Social Security or required minimum distributions from your retirement accounts.

Understanding the “Poor on Paper” Concept

Financial planning for high-net-worth individuals requires a completely different approach than traditional retirement advice. When you have substantial assets but low current income, you have unique levers to pull that most retirees don’t.

The key is having assets in what I call the “non-qualified bucket.”

• Taxable brokerage accounts
• Money market accounts
• CDs
• Savings accounts that you’ve built up outside of your 401(k) or IRA.

If all your money is locked in tax-deferred accounts, you’re somewhat stuck because every withdrawal creates ordinary income.

When you have diversified assets across different account types, you can strategically control your modified adjusted gross income (MAGI) and ultimately your taxable income. This control becomes the foundation for all the strategies we’ll discuss.

Strategy 1: Maximizing ACA Premium Tax Credits for Healthcare Savings

One of the biggest concerns I hear from early retirees is healthcare costs. If you’re retiring before 65 and not yet eligible for Medicare, you’ll need to figure out health insurance on your own. The Affordable Care Act (ACA) marketplace often becomes the solution, and here’s where being poor on paper creates massive opportunities.

ACA premium tax credits are based on your modified adjusted gross income, not your assets. Even with a $3 million portfolio, if you keep your MAGI between 100% and 400% of the federal poverty line, you can receive substantial tax credits. Sometimes $3,000 per month or more, depending on your state.

I recently worked with a client with $3 million in net worth who is receiving free healthcare through ACA premium tax credits. The key is managing your income sources strategically. Instead of taking large distributions from tax-deferred accounts, you might use cash savings for year one of retirement. Taking money from your savings account isn’t a taxable event—it’s just a return of your basis.

For your brokerage accounts, you can target assets with low to no capital gains, or even assets that are temporarily down in value. Selling at a loss allows you to offset other gains. This keeps your taxable income low while still generating the cash flow you need.

The strategy works best when you have multiple income sources to choose from. Maybe you take $50,000 from cash savings and only need to withdraw $55,000 from your IRA to net $50,000 after taxes. A $55,000 adjusted gross income can still allow you to qualify for significant premium tax credits, potentially saving thousands monthly on healthcare premiums.

Strategy 2: The Roth Conversion Window and 401 (k) Withdrawals and Taxes

Understanding 401 (k) withdrawals and taxes becomes crucial during what I call the “Roth Conversion Window.” This is the period after retirement but before required minimum distributions kick in at age 73 or 75, depending on your birth year.

During your working years, Roth accounts might not make sense because you’re already in high tax brackets. You may prefer deferring taxes (Traditional 401(k)s and IRAs).  But in retirement, when you’re poor on paper, you have an opportunity to move money from tax-deferred accounts to Roth accounts at historically low tax rates.  This is known as a “Roth Conversion.” 

Here’s the Challenge

Every Roth conversion adds to your modified adjusted gross income, which can impact your ACA premium tax credits. You need to weigh the long-term benefits of the conversion against the immediate cost of reduced healthcare subsidies.  However, if you completely ignore this Roth Conversion Window, those Required Minimum Distributions (RMDs) can really hurt later in retirement. 

I have clients right now who are in what I call the “RMD tax trap” because they didn’t do conversions earlier. When required minimum distributions begin, you can’t reverse the process. Some of my clients are taking six-figure RMDs. They tell me they wish they had converted some of those assets to a Roth before reaching RMD age.

The key is coordination. You might decide to do modest conversions that fill up the 10% or 12% tax brackets, even if it reduces some ACA tax credits. The long-term tax savings from avoiding massive RMDs later often outweigh the short-term cost of higher healthcare premiums.

One client I’ve been working with for four years started this process at age 61. She’s been chipping away at her tax-deferred accounts through strategic conversions while supplementing her income with IRA withdrawals. When she turns 70 and starts Social Security, most of her tax-deferred money will have been converted to Roth. This will dramatically reduce her future RMD burden.

Strategy 3: Optimizing Social Security Taxation Through Income Management

Social Security taxation is one of the most misunderstood aspects of retirement planning. You paid into the system during your working years. However, up to 85% of your benefits can still be taxable under a concept called “provisional income.”

When you’re poor on paper, you have the opportunity to keep your provisional income low enough that much of your Social Security remains tax-free. There are three tiers: 0% taxable, 50% taxable, and 85% taxable.

The strategy involves coordinating the timing of your Social Security benefits with your other income sources. If you’re doing Roth conversions during your early retirement years and plan to delay Social Security until age 70, you might be able to structure things so that when Social Security begins, your other income sources are low enough to keep most of your benefits tax-efficient.

I’m working with a client whose husband is already taking Social Security. She hasn’t started hers yet because her benefit is higher. We’ve been doing conversions during her Roth conversion window. When she starts Social Security at 70, the combination of her and his Social Security and her small pension won’t require large IRA withdrawals. This could allow most, if not all, of your Social Security benefits to remain tax advantaged. 

The timing coordination is crucial. Taking Social Security early might make sense in some situations, but it can also add to your provisional income calculation, potentially making more of your benefits taxable and reducing the effectiveness of other strategies.

Strategy 4: Capital Gains Harvesting to Minimize Taxes in Retirement

Capital gains harvesting helps minimize taxes in retirement while providing another tool for managing your taxable income. Depending on your filing status, you’ll pay either 0%, 15%, or 20% on long-term capital gains. Most retirees won’t hit the 20% bracket, but the difference between 0% and 15% is significant.

When you’re poor on paper and in the 0% capital gains threshold, you can sell appreciated investments and pay 0% federal tax on the gains. This strategy essentially resets your cost basis to current market values, reducing future tax obligations when you eventually need to sell for income.

The key is coordination with your other strategies. Every time you harvest gains, you’re adding to your adjusted gross income, which affects:

• Social Security taxation
• ACA premium tax credits
• Your Roth conversion capacity.

If you’re planning to leave investments to your heirs, you might not want to harvest gains. Why? Because they’ll receive a stepped-up basis at your death. But if you’re concerned about concentration risk—like one of my clients who has over 13% of her net worth in Microsoft stock from her late husband’s employment—strategic harvesting combined with charitable giving can address both the tax and risk management issues.

For charitable giving, you can donate appreciated stock directly to a charity. The charity can sell it at their 0% tax rate. You get the deduction, and you reduce the concentration risk in your portfolio.

Strategy 5: How to Reduce Taxes in Retirement Through Coordinated Planning

The fifth strategy is really about coordination—understanding that all these approaches work together and not in silos. You can reduce taxes in retirement most effectively when you coordinate the timing of:

• Social Security
• The pace of Roth conversions
• Your healthcare subsidy optimization
• Your capital gains management

The early retirement phase, before required minimum distributions and potentially before Social Security, is when all these strategies overlap. This is your window to play the tax game on your terms rather than having the government dictate your tax burden through RMDs and taxation on your Social Security Income.

The biggest mistake I see is people coasting through these early retirement years without taking advantage of these planning opportunities. They’re either not working with an advisor who understands retirement taxes or not consuming educational content about these strategies. By the time RMD Tax Trap kicks in, it’s too late to reverse course.

The goal isn’t to avoid taxes forever—it’s about timing those taxes strategically. You want to pay taxes when you’re in low brackets and have control over the timing, rather than being forced into high brackets later when you have no choice.

Coordination Is Everything: Why These Retirement Tax Planning Strategies Must Work Together

These retirement tax planning strategies are most effective when implemented as a coordinated system. Each decision affects the others, which is why piecemeal planning often fails to deliver optimal results.

For example, if you focus solely on maximizing ACA premium tax credits, you might miss valuable years in your Roth conversion window. Conversely, if you’re aggressive with Roth conversions without considering the impact on healthcare subsidies, you might pay more in premiums than you save in future taxes.

The coordination becomes even more complex when you consider factors such as the senior bonus deduction available to those aged 65 or older. This additional $6,000 deduction per person phases out at relatively low income levels—$75,000 for singles and $150,000 for married filing jointly. Roth conversions can easily push you above these thresholds, eliminating the deduction.

I’ve had to convince many people not to do Roth conversions over the past few years, which is the opposite of what I was doing a decade ago. The popularity of Roth conversions has made them seem like a universal solution. But, they’re not right for everyone in every situation.

The key is working with someone who can:

1. Review your entire financial picture
2. Understand your goals
3. Coordinate these strategies appropriately.

Whether that’s working with my firm or finding another advisor who specializes in retirement tax planning, the important thing is getting professional guidance that considers all these moving pieces together.

Taking Action on Your Retirement Tax Planning Strategies

If you’re approaching retirement or have recently retired with 7 figures or more in assets but low current income, you’re in a unique position to implement these strategies. The window won’t last forever—once RMDs begin or if your income increases significantly, many of these opportunities disappear.

The most important step is understanding what you’re planning for and who you’re planning for. Are you focused on maximizing your own retirement security, leaving a legacy to children, or supporting charitable causes? Your goals should drive which strategies make the most sense and how aggressively to implement them.

Don’t assume that all of these strategies are right for your situation. Content like this is educational, but it can also be dangerous if you implement strategies without understanding how they fit into your overall plan. Every conversion triggers taxes. Gain harvests can affect your income. And each decision creates ripple effects across the rest of your financial plan.

If you’re interested in working with an advisor who specializes in these retirement tax planning strategies, make sure they’re a fiduciary who won’t try to sell you unnecessary products. Look for someone who can actually review your tax returns and coordinate with your tax preparer. Retirement tax planning isn’t just about investments—it’s about understanding the tax code and how to work within it strategically.

The early retirement years, when you’re poor on paper, represent one of the best opportunities for tax optimization you’ll ever have. Don’t let them pass by without taking advantage of the strategies that could save you thousands of dollars in taxes and healthcare costs over the course of your retirement.

How We Can Help

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

• Maximize your retirement spending
• Minimize your lifetime tax bill
• Worry less about money

You can start by taking our Retirement Readiness Questionnaire on our website at www.imaginefinancialsecurity.com, so we can learn more about how we can help you on your journey to and through retirement.

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.