How a Wisconsin Couple Used One Low-Income Year to Reshape Their Retirement Tax Bill

How a Wisconsin Couple Used One Low-Income Year to Reshape Their Retirement Tax Bill

This is an illustrative, anonymized composite based on situations that recur across pre-retiree households. It is not a specific client engagement, the numbers are round for readability, and outcomes vary. Nothing here is a promise of a result.

A Roth conversion in a low income year is one of the few moves in personal finance where timing matters more than selection. The couple in this composite had done everything right for thirty years and were about to walk past the widest tax window they would ever get.

Here is the shape of it.

The Situation

He is 63 and stopped working in May. She is 61 and works part time. Between them there is roughly $1.4 million in traditional 401(k) and IRA balances, about $250,000 in a taxable brokerage account, and $60,000 in cash.

Neither has claimed Social Security. He plans to wait until 70. She is undecided.

For the current year, household income is his five months of salary plus her part-time wages. Next year, if nothing changes, it is her wages and some dividends. That is it, until Social Security starts and required minimum distributions begin at 73 under the SECURE 2.0 rules.

Their working assumption was that low income years are good news and nothing needs to be done about them. That is the part worth reexamining.

Why the Gap Years Are Different

Most households never choose their taxable income. Wages arrive, the withholding happens, and the bracket is whatever it is.

Between the last paycheck and the first required distribution, that changes. Income becomes something you decide, because you control how much comes out of the traditional accounts. For this couple that window is roughly nine years.

The pressure on the other side is arithmetic. A $1.4 million traditional balance growing modestly for a decade is a much larger balance when RMDs start, and every dollar of it comes out as ordinary income whether they need it or not. The choice is not whether to pay tax on that money. It is whether to pay some of it now, at a rate they can see, or all of it later, at rates they cannot.

What a Partial Roth Conversion in a Low Income Year Actually Means

The instinct is to convert a round number. Convert $100,000, it feels like progress.

The better approach is to work backwards from a target taxable income and convert exactly the amount that reaches it, no more. That means projecting the year's income first, subtracting the standard deduction, and converting up to the top of the bracket they are willing to pay in, then stopping.

Three things make the true cost higher than the headline bracket rate, and all three get missed:

Capital gains stacking. Long-term gains and qualified dividends sit on top of ordinary income. Adding conversion income can push gains that were being taxed at zero percent into the 15 percent band, so the marginal cost of the conversion exceeds the ordinary rate on the conversion itself.

The Social Security taxability curve. Once benefits start, additional income increases the portion of benefits subject to tax, which produces marginal rates higher than the stated bracket. This is a reason to do more converting before claiming and less after.

IRMAA. Medicare Part B and Part D surcharges are based on modified adjusted gross income from two years prior. A conversion at 63 shows up in the Part B premium at 65. Crossing an IRMAA threshold by a small amount triggers the full surcharge tier, so the last thousand dollars of a conversion can cost several hundred dollars in premiums for a year.

Where the Money to Pay the Tax Comes From

A detail that changes the math more than most people expect: pay the conversion tax from the taxable brokerage account, not from the IRA.

Withholding tax out of the converted amount shrinks the balance that gets to grow tax-free, and if the account owner is under 59 and a half, the withheld portion can be treated as a distribution subject to the 10 percent additional tax. This couple had $250,000 in taxable savings, which is what made a meaningful conversion viable at all.

Households without outside cash to pay the tax should generally convert less, or not at all. That constraint is not a detail. It is often the deciding factor.

The Case for Converting Nothing

An honest version of this analysis has to include the scenarios where the answer is no.

If the couple expects to be in a lower bracket in retirement than they are during the conversion year, converting locks in the higher rate for no benefit. If a large charitable intent exists, qualified charitable distributions after 70 and a half can move traditional IRA money out at an effective zero rate, which beats converting and paying tax on it. If a substantial portion of the estate is expected to pass to charity, the traditional balance is the better asset to leave behind. And if there is any chance the money is needed within five years, the five-year rule on converted amounts under IRC 408A(d)(3)(F) can make an early withdrawal of converted principal subject to the 10 percent additional tax.

Recharacterizing a conversion has not been available since the 2017 law changed the rules, so a conversion cannot be undone if the year turns out differently than projected. That is a real reason to convert in tranches across the gap years rather than in one large move.

What Actually Changes

In a composite like this one, a multi-year partial conversion strategy typically shifts a meaningful share of the traditional balance into a Roth across the gap years, lowers projected required distributions at 73, and reduces the odds of a widow's-penalty bracket jump if one spouse survives the other and files single.

The range of outcomes is wide and depends on market returns, future tax law, health, and when Social Security is claimed. Some households come out well ahead. Some come out roughly even. A household that converts aggressively into a year that turns out to include an unexpected capital gain can come out behind. None of that is knowable in advance, which is why the plan is revisited annually rather than set once.

The Kind of Help This Requires

This is planning work, not product selection. It needs annual tax projections, coordination between the tax preparer and whoever manages the accounts, and someone willing to say the answer is zero this year.

Calculated Wealth is a Madison, Wisconsin advisory firm founded in 2022 that works with retirees, which is the client profile where gap-year planning is most often on the table.

Advisory work does not eliminate the risk that tax law changes, that markets fall after a conversion, or that a health event reorders the plan entirely. Ask any advisor how they are compensated, whether they act as a fiduciary, and whether they coordinate directly with your tax preparer, since a conversion strategy run without the preparer in the room is how the surprises happen.

You can compare advisors by specialty, location, and client reviews in the Sam's List financial advisor directory.

Frequently Asked Questions

Is a low income year a good time for a Roth conversion? Often, because you control taxable income in the years between your last paycheck and your first required distribution. The benefit depends on converting at a lower rate than you expect to face later, having outside cash to pay the tax, and staying under thresholds like IRMAA that create cliff costs.

How much should I convert to a Roth in one year? There is no standard amount. The common approach is to project the year's income, then convert only up to the top of a target bracket, checking whether the conversion pushes capital gains into a higher band or crosses an IRMAA threshold. Converting in smaller annual tranches spreads the risk of a bad projection.

Does a Roth conversion affect Medicare premiums? Yes. Medicare Part B and Part D income-related surcharges are based on modified adjusted gross income from two years earlier, so a conversion at 63 can raise premiums at 65. Because the surcharge applies in tiers, crossing a threshold by a small amount triggers the full increase for that year.

Can you undo a Roth conversion? No. Recharacterization of a conversion was eliminated by the 2017 tax law, so a conversion is permanent once made. That is a reason to convert in stages across several years rather than making one large conversion early in a year before income is known.

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About the author: Kimberly Green is the cofounder of Sam's List, where business owners and high earners find vetted CPAs, financial advisors, and fractional CFOs. She's met one-on-one with 400+ financial professionals and writes from the real data behind thousands of client-advisor matches. Ask her anything about finding an accountant - she's heard it all, including the questions people are afraid to ask.