By Nick Sondgeroth, CFP, Channel View Wealth Advisors of TSG Wealth Management
For many successful married couples, retirement in the early 60s can feel like the finish line. After decades of W-2 income, high tax brackets, maxed-out 401(k) contributions, and disciplined saving, the transition into retirement often brings a welcome change: little or no earned income.
For couples who have not yet started Social Security and are living from cash, taxable investment accounts, or other savings, the first few years of retirement may appear to be a low-tax paradise. On paper, taxable income may drop dramatically. That can feel like a reward after years of paying significant federal and state income taxes.
But that same low-income window can also create one of the most overlooked opportunities in retirement income strategy.
The question is not simply, “How little tax can we pay this year?”
A better question may be:
“Are we using today’s lower tax brackets intelligently, or are we allowing a larger tax problem to build in the future?”
The Problem with Letting Tax-Deferred Accounts Grow Untouched
Many successful retirees reach their early 60s with substantial balances in 401(k)s, traditional IRAs, 403(b)s, or other tax-deferred retirement accounts. That is usually the result of good behavior:
The issue is that tax deferral is not tax elimination.
Eventually, tax-deferred dollars generally must come out. Required minimum distributions, or RMDs, typically begin later in retirement and force annual withdrawals from traditional retirement accounts. Those withdrawals are generally taxed as ordinary income.
For retirees with large balances, the RMD years can become surprisingly tax-heavy. A couple that enjoyed very low taxable income in their early 60s may later find themselves pushed into higher brackets by a combination of:
The result can be frustrating: years of intentionally low taxable income early in retirement, followed by years of forced taxable income later.
Early Retirement Can Create a Valuable Tax Window
The years between retirement and RMD age can be extremely important.
For many couples, this period may run from the early 60s into the early 70s. During that time, taxable income may be much lower than it was during working years. That gap can create an opportunity to intentionally draw from tax-deferred accounts while staying within manageable tax brackets.
This does not mean retirees should withdraw money recklessly or create taxes unnecessarily. It means they should evaluate whether it makes sense to use lower tax brackets while they are available.
In practical terms, that may involve:
The right answer is highly personal. But the opportunity is often missed because retirees naturally gravitate toward minimizing current-year taxes. That instinct is understandable. It is not always optimal.
Straight Withdrawals vs. Roth Conversions
There are two common ways to intentionally reduce future tax-deferred balances during early retirement.
1. Traditional Retirement Account Withdrawals
A retiree may take distributions from a traditional IRA or 401(k), pay the tax, and use the money for living expenses, reinvest it in a taxable account, or build liquidity.
This approach can be useful when the retiree needs cash flow anyway. Instead of funding expenses entirely from cash or taxable accounts, the couple may choose to “fill up” lower tax brackets with retirement account withdrawals.
2. Roth Conversions
A Roth conversion involves moving assets from a pre-tax retirement account into a Roth IRA. The converted amount is generally taxable in the year of conversion, but future qualified Roth IRA withdrawals may be tax-free.
Roth conversions can be particularly attractive when retirees are temporarily in a lower tax bracket than they expect to be in later.
The tradeoff is simple but important. Pay taxes now, with the goal of creating more tax flexibility later. Potential benefits may include:
However, Roth conversions are not automatically beneficial. They must be evaluated carefully alongside cash flow, tax brackets, Medicare premiums, charitable goals, estate plans, and investment time horizon.
The Survivor Spouse Tax Trap
One of the most important — and often most emotional — issues for married retirees is the potential tax impact after the first spouse dies.
During retirement, many couples file jointly. Joint tax brackets are wider than single brackets, which can allow more income to be taxed at lower rates.
After one spouse passes away, the surviving spouse may eventually file as a single taxpayer. But many income sources may remain similar:
This can create what is sometimes called the “widow’s penalty” or “survivor spouse tax trap.” The surviving spouse may have similar taxable income, but less favorable tax brackets.
For couples with large tax-deferred balances, this can be especially painful. The same IRA that was manageable under married filing jointly brackets may become much more tax-sensitive when one spouse is filing alone.
This is one of the strongest reasons to consider proactive tax planning during the early retirement window. It is not just about reducing lifetime taxes. It is also about protecting flexibility and reducing future strain for the surviving spouse.
Why Current Tax Rates Should Not Be Taken for Granted
No one can predict future tax policy with certainty.Current federal tax brackets may remain in place for years, or they may change as fiscal priorities evolve. But given the long-term pressures facing the federal budget, retirees should be cautious about assuming today’s tax environment will always be more favorable than tomorrows.
For many affluent retirees, the question is not whether tax rates will rise or fall next year. The better question is whether they have built enough tax flexibility to handle different outcomes.
Tax diversification can help. That means having multiple sources of retirement income, such as:
The more flexibility retirees have, the easier it may be to manage taxes, income needs, and legacy goals over time.
A Simple Framework for Early Retirees
For couples retiring in their early 60s with large 401(k) or IRA balances, a thoughtful review should include several questions:
This helps identify whether there is a temporary low-income window.
Projecting future account balances and required withdrawals can help determine whether the current strategy may create future tax pressure.
This may involve IRA withdrawals, Roth conversions, or a combination of both.
Survivor spouse tax planning should be part of the conversation, not an afterthought.
The best strategy considers the full picture, not just federal brackets.
For Roth conversions in particular, paying the tax from outside assets may improve the long-term benefit, but this depends on each household’s liquidity and goals.
The Goal Is Not to Eliminate Taxes
For many retirees, the goal should not be to pay the least tax possible this year. The goal should be to manage taxes intelligently over a lifetime.
Sometimes that means accepting a moderate tax bill today to reduce a potentially larger tax problem later. Other times, it means preserving liquidity, avoiding unnecessary conversions, or coordinating with charitable giving strategies.
The right approach depends on the household. But the biggest mistake is often inaction.
Early retirement can create a narrow window where couples have more control over taxable income than they had during their working years or will have once RMDs and Social Security begin.
Used thoughtfully, that window can help create a more flexible, resilient retirement income strategy. Ignored, it can quietly allow future tax problems to compound.
For retirees with substantial tax-deferred savings, the years immediately after retirement may be some of the most important planning years of all.
*This material is for educational purposes only and is not intended as tax, legal, or investment advice. Individuals should consult with their tax, legal, and financial professionals regards their specific circumstances
TSG Wealth Management, a member of the Wells Fargo Advisors Financial Network, LLC does not provide legal or tax advice.
Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Channel View Wealth Advisors of TSG Wealth Management is a separate entity from WFAFN.
