Strategic Roth conversions offer tax relief for pre-retirement couples

A financial analysis details a tax planning strategy for a hypothetical 63-year-old couple holding $1.5 million in a traditional 401(k). The plan proposes converting $600,000 to a Roth IRA in annual increments of $75,000 over eight years. The objective is to lock in lower marginal tax rates before Required Minimum Distributions (RMDs) commence at age 73, while avoiding Medicare Income-Related Monthly Adjustment Amount (IRMAA) surcharges by keeping modified adjusted gross income below the $218,000 threshold for joint filers.

The strategy recommends delaying Social Security benefits until age 70 to maximise future payouts and maintain lower taxable income during the conversion window. Delaying benefits past full retirement age adds approximately 8% annually to the check up to age 70. This approach keeps taxable income low during the conversion years, providing more headroom under the bracket ceilings and preserving Roth conversion capacity.

For a married couple filing jointly in 2026, the standard deduction is $32,200. The 12% tax bracket applies up to $100,800 of taxable income, and the 22% bracket runs up to $211,400. By spreading conversions, the couple can stay within these lower brackets. Concentrating income into a single large conversion could push the couple into higher tiers, triggering IRMAA surcharges that exceed $6,900 per person at the highest level.

The current interest rate environment also supports this strategy. The Fed funds target upper bound sits at 3.75%, and 10-year Treasury yields are near 5%. Bonds held inside a traditional 401(k) generate taxable interest at these rates, which compounds the RMD problem. Moving that bond sleeve into a Roth allows the interest to grow tax-free for the rest of the account's life.

Inflation is nudging brackets higher each year, with core PCE at 130.08, noted as being in the 90th percentile of the past year. Bracket ceilings will keep lifting, giving each successive conversion slightly more room at the same marginal rate. The analysis advises timing conversions in late fall to account for known dividends, capital gains, and wages, avoiding early-year estimation errors that could result in unintended tax overages.