Quick Answer: Retirees should execute retirement planning tax strategies during their gap years, which are the temporary low-income window after you stop full-time work but before Social Security benefits and Required Minimum Distributions (RMDs) begin. This quiet period gives you control to leverage lower tax brackets through moves like multi-year Roth conversions and 0% capital gains harvesting before mandatory income rules kick in.
Key Takeaways
- One of the most valuable moments for retirement tax planning isn’t a milestone birthday, but the low-income gap years between leaving full-time work and starting Social Security or Required Minimum Distributions (RMDs).
- Lower income years give you control to execute proactive moves, like multi-year Roth conversions and 0% capital gains harvesting, at today’s low tax rates before forced IRS withdrawals begin.
- Proactive gap-year tax planning flattens your multi-decade tax bill while protecting your heirs and surviving spouse from expensive tax traps later in life.
Retirement planning gets divided up into milestone ages: 50, 59½, 62, 65, or 73.
Those numbers can tell you when you can access your accounts without penalties or when you’re forced to take distributions… but they can’t tell you when it makes financial sense to act.
And if you wait for a specific birthday to make tax moves, you risk letting a huge tax-discount window in between the milestones slip past you.
Let’s talk about when exactly that window opens up, and how to make the most of it.
What should you do with taxes between retirement and Social Security?
The window between leaving your full-time Colorado Springs job and claiming Social Security or taking Required Minimum Distributions (RMDs) is your retirement gap years. During this period, your taxable income naturally drops, giving you the most control to execute proactive strategies (like Roth conversions and capital gains harvesting) at your lowest tax rates.
What a lot of my Colorado Springs clients don’t realize right after handing in their resignation is that a sudden drop in income is one of the most valuable tax assets.
During your working years and your later RMD years, the government dictates your tax bill:
- In your peak earning years, your salary forces you into high tax brackets. You have very little control over your taxable total.
- In your RMD and Social Security years, the IRS forces you to withdraw fixed percentages from your traditional IRAs/401(k)s while taxing up to 85% of your Social Security benefits.
But when you step away from work and haven’t yet turned on mandatory income sources, you enter a temporary tax valley. Your reported taxable income drops to near zero.
Which means you decide how much income to pull onto your return each year, filling up lower brackets before mandatory income kicks in and pushes you into higher ones automatically.
What retirement planning tax strategies should you use in the gap years?
During your retirement gap years, you should execute proactive strategies that leverage your temporarily low income to permanently reduce your lifetime tax burden. The core strategies include systematic multi-year Roth conversions (filling up lower tax brackets), 0% long-term capital gains harvesting, sequence-of-withdrawal optimization (blending distributions across account types), and income smoothing to prevent future RMD, Medicare, and widow tax traps.
Let’s zoom in a little more on each of those strategies.
Strategy 1: Roth conversions
With a gap-year Roth conversion, we move money from your traditional IRA or 401(k) into a Roth IRA during years when your income is temporarily low. You pay income tax on the converted amount today at your low rates, so that money (and all its future growth) grows and gets withdrawn 100% tax-free for the rest of your life.
But don’t look at a Roth conversion as just a single transaction. Converting $500,000 in a single year will launch you right back into the top tax brackets.
Instead, we’ll use a multi-year staircase strategy:
- We determine your optimal tax ceiling.
- We measure the gap between your baseline income (e.g., dividends, interest) and the upper limit of that target bracket.
- Each December, you convert enough from your traditional IRA to fill up to the bracket line.
- You climb this staircase year after year throughout your gap window.
There’s a critical rule you have to follow to make this strategy work: You have to pay the taxes resulting from the conversion using outside taxable cash (like a high-yield savings account or a taxable brokerage account).
Because if you, for example, have $50,000 converted and have the custodian withhold $6,000 for taxes from the IRA, two bad things happen:
- You permanently reduce the amount of money compounding inside the tax-free Roth shelter.
- If you’re under age 59½, the $6,000 withheld for taxes is classified as an early IRA distribution, triggering a 10% IRS penalty on that amount.
So, before executing a gap-year Roth conversion staircase, you’ll need to have sufficient liquid cash on the sidelines to cover the tax bill come April.
Strategy 2: Strategic capital gains harvesting
During your gap years, low ordinary income lets you harvest long-term capital gains at a 0% federal tax rate. This allows you to rebalance your portfolio or raise cash tax-free, while keeping your income under the thresholds that trigger the 3.8% Net Investment Income Tax (NIIT).
But to execute this strategy, you have to understand how the IRS stacks your income on your tax return.
Ordinary income (like pensions, IRA withdrawals, and interest) fills up your standard deduction and lower tax brackets first. Then, long-term capital gains are placed on top.
Because capital gains sit on top, ordinary income pushes your gains higher up the tax ladder. If low ordinary income leaves room in the 0% bracket, your capital gains are federal-tax-free. But if high ordinary income fills up those lower brackets, your capital gains spill over into the 15% bracket.
How can I avoid Net Investment Income Tax in retirement?
Realizing gains during quiet years also protects you from the Net Investment Income Tax (NIIT). Which is an extra 3.8% surcharge on investment income when your Modified Adjusted Gross Income (MAGI) crosses $200,000 for single filers (or $250,000 for Married Filing Jointly).
Once Social Security and mandatory RMDs kick in later, your forced income can easily cross these limits. Spreading out gain realization across your gap years locks in investment growth at 0% and keeps your MAGI safely below the NIIT trigger line.
Strategy 3: Sequence of withdrawal control
Instead of draining your accounts one at a time, sequence-of-withdrawal control means we take a mix from all three tax buckets (taxable, tax-deferred, and tax-free). By blending withdrawals each year, you can get the cash you need for daily expenses while keeping your reported taxable income within lower tax brackets.
To build a tax-efficient withdrawal strategy, you have to treat your portfolio as three distinct tax environments:
| Tax Environment | Account Examples | Tax Treatment |
| Taxable | Checking, savings, brokerage | Principal withdrawals are tax-free; growth is taxed at long-term capital gains rates. |
| Tax-Deferred | Traditional IRA, Traditional 401(k) | Withdrawals are taxed 100% as ordinary income. |
| Tax-Free | Roth IRA, Roth 401(k), HSA | Qualified withdrawals are 100% income-tax-free with zero impact on Medicare or Social Security calculations. |
We use these buckets like dynamic volume knobs to engineer your annual taxable income:
Step 1: Fill your target bracket with tax-deferred funds.
We withdraw money from your Traditional IRA or 401(k) up to the top of your target tax bracket (for example, the 10% or 12% federal bracket).
Step 2: Bridge your living expenses with taxable funds.
If you need more income to live on than your target bracket allows, we pull the remaining cash from your savings or taxable brokerage account, keeping your marginal tax rate completely flat.
Step 3: Use your Roth bucket as a tax-free release valve.
Need an extra $20,000 for a trip or home upgrade? Pulling that cash from a traditional IRA would spike your taxable income into a higher bracket. Pulling it from your Roth IRA has no tax consequences.
Strategy 4: Income smoothing
With an income smoothing strategy, we can systematically spread out your taxable income across your gap years to flatten your lifetime tax curve. By shifting income into low-earning years today, you reduce future RMDs, shield your children from tax hits under the 10-Year Inherited IRA Rule, and protect a surviving spouse from the higher “Single” tax rates known as the widow’s tax trap.
If you leave pre-tax IRAs to compound untouched during your 60s, you create a compounding tax snowball. Once RMDs kick in, that snowball can roll over your tax return, not to mention spilling over to your heirs and impacting a surviving spouse.
Income smoothing during your gap years is how you attack that tax snowball.
How does inheriting your Traditional IRA affect your children’s taxes?
Most non-spouse beneficiaries (like adult children) who inherit a traditional IRA have to fully drain it within 10 years. Crucially, if you pass away on or after your Required Beginning Date (RBD), your child must also take mandatory annual RMDs in Years 1 through 9 before emptying the remaining balance in Year 10.
But children typically inherit IRAs in their 40s or 50s… the time when their own tax brackets are at their peak.
So forcing major distributions on top of their existing income can easily push them into 32% or 35% federal tax brackets.
By using your gap years to convert pre-tax IRA dollars into a Roth IRA at your lower rates, you pay the tax upfront at a discount. And your children inherit a tax-free Roth IRA.
What happens to your tax bracket if one spouse passes away?
When a spouse passes away, the surviving partner’s tax filing status switches from Married Filing Jointly to Single in the year following.
Which means for most taxpayers, their tax bracket shrinks by half while their income doesn’t always drop proportionally. Pensions, RMDs from joint wealth, and up to 85% of Social Security benefits continue flowing in.
A surviving spouse can easily find themselves paying much higher tax rates on nearly the same income stream.
By reducing the size of your traditional IRAs today, you lower the mandatory RMDs that a surviving spouse will eventually have to report as a single filer.
Final thoughts
You can really lock in significant tax savings if we take advantage of the gap when you’re controlling how much income shows up on your tax return…
Rather than waiting for forced age requirements to make those decisions for you.
So, if retirement is on your radar for the next few years (or it’s already here), reach out so we can make a plan while you still have flexibility.
FAQs
“What is the single best age to start executing retirement planning tax strategies?”
The best time is during your low-income gap years. This is the window between the day you step away from your full-time North Colorado Springs job and the day mandatory income sources, like Social Security or Required Minimum Distributions (RMDs), turn on (typically between ages 60 and 72).
“What is the widow’s tax trap?”
The widow’s tax trap happens when a surviving spouse’s tax filing status changes from Married Filing Jointly to Single, which cuts their tax bracket thresholds in half. Because household income (pensions, RMDs, Social Security) rarely drops by 50%, the surviving partner pays higher tax rates on nearly the same income. Systematic IRA withdrawals during early retirement reduce the size of future mandatory distributions for the surviving spouse.
“Should you drain your taxable brokerage account first in retirement?”
Draining taxable cash first while leaving traditional IRAs untouched causes pre-tax accounts to grow unchecked. This creates a future tax snowball, forcing massive Required Minimum Distributions (RMDs) later in life that can spike your tax bracket, make Social Security taxable, and trigger higher Medicare premiums.
“Should I convert my IRA to a Roth all at once or over several years?”
Converting over multiple years using a staircase approach is vastly superior to a single lump-sum conversion. Spreading conversions across several gap years allows you to systematically fill up the top of lower tax brackets (like 12% or 22%) without spiking your income into top-tier federal tax brackets.
“Should I delay taking Social Security in early retirement?”
Delaying Social Security keeps your baseline taxable income artificially low, leaving lower federal tax brackets completely open for strategic Roth conversions and 0% capital gains harvesting. At the same time, delaying benefits increases your future guaranteed Social Security payout by approximately 8% per year up to age 70.
“At what age do Required Minimum Distributions (RMDs) start?”
Under current law, RMDs begin at age 73 (and push to age 75 for individuals born in 1960 or later). Proactive tax planning in the gap years before RMD age reduces your overall pre-tax IRA balance, effectively shrinking your mandatory forced distributions later in life.