When most people think about tax planning, they focus on one thing: how to pay less this year. But if you’re retired—or getting close to it—this short-term approach can end up costing you more over time. That’s why, at Cardinal Advisors, we help clients take a step back and look at the full picture: How do we minimize taxes not just this year, but over your entire retirement?

Why Your Effective Tax Rate May Be Misleading

We frequently meet with clients who say, “I’m paying 12%, maybe 22% in taxes—I must be doing pretty well.” And that may be true today. But what happens when your Required Minimum Distributions (RMDs) kick in at age 73 or 75? What if your income pushes you into IRMAA territory, where Medicare costs increase? Or what if one spouse passes away, and the surviving spouse is left filing taxes as a single person with fewer deductions and higher brackets?

These scenarios are more common than you might think—and they often lead to much higher tax bills later in life.

The Power of Roth Conversions

One of the most effective tools for long-term tax planning is the Roth conversion. This strategy involves transferring money from a pre-tax account like a traditional IRA or 401(k) into a Roth IRA and paying the taxes now—at today’s known rates. Once in the Roth, that money grows tax-free, and future withdrawals are also tax-free.

At first glance, this may seem counterintuitive—why would I want to raise my tax bill now? The answer: to reduce your taxes later, when your income (from RMDs or Social Security) may push you into higher brackets or increase your Medicare premiums.

But What About IRMAA?

IRMAA (Income-Related Monthly Adjustment Amount) is an additional charge on your Medicare premiums if your income exceeds certain thresholds. This is one reason many people hesitate to do Roth conversions—they don’t want to trigger IRMAA.

But here’s the thing: IRMAA only lasts one year at a time, and we’ve found that for many clients, the long-term tax savings from Roth conversions can far outweigh one year of slightly higher Medicare costs. We even help clients appeal their IRMAA charges in certain situations—like retiring or experiencing a drop in income.

Example

Let’s say you’re a married couple earning $150,000 per year in retirement income. On the surface, you might think you’re firmly in the middle of the tax brackets—and you’d be right. But with RMDs looming, your taxable income could jump significantly in a few years, especially if you haven’t touched your large IRA or 401(k) balances.

By strategically converting portions of your IRA each year while staying within the 22% or 24% tax bracket, you can reduce future RMDs, lower your overall tax burden, and potentially protect your surviving spouse from steep taxes later on.

Widows and Single Filers: A Tax Trap to Avoid

We also see what we call the “widow’s tax.” When one spouse dies, the survivor often ends up in a higher tax bracket—even though their expenses haven’t been cut in half. A well-timed Roth conversion plan can help reduce this risk by removing money from taxable accounts and placing it into tax-free Roth accounts while both spouses are alive and filing jointly.

When Roth Conversions Don’t Make Sense

There are situations where Roth conversions may not be the right move. For example:

• If you don’t have cash available to pay the taxes on the conversion
• If converting pushes you into a very high bracket (like 32% or above)
• If you’re moving to a lower-tax state in a few years and can wait
• If you need the money soon and won’t benefit from years of tax-free growth

As with all things in financial planning, it depends on your specific goals, assets, income, and health.

Don’t Wait—The Tax Window May Be Closing

The current tax rates under the Tax Cuts and Jobs Act are scheduled to sunset after 2025. If Congress does nothing, tax brackets will go up in 2026. That means 2024 and 2025 could be your best opportunity to take advantage of historically low rates for Roth conversions and other income planning strategies.

Final Thoughts

Good tax planning isn’t about reacting to what happened last year. It’s about proactively shaping your future. By taking the time now to analyze your income sources, bracket thresholds, RMDs, and Medicare costs, you can create a more predictable—and potentially more favorable—retirement tax outcome.