By: John P. Napolitano, CFP®, CPA, PFS, MST

When high wage earners retire early, they often bask in the sunshine of extremely low tax rates when their income disappears.

But for many, it appears that this brief respite from the top tax rates may be only temporary. The sweet spot for early retirees regarding this topic is prior to age 70½. 

Most high earners have accrued substantial sums in retirement plans; IRA’s, 401k’s, pension and profit sharing plans. Most know that you must start taking distributions by 70½, and for high earners it’s engrained in their mind to defer income and any ensuing taxes as long as possible. While that strategy generally makes sense, we’ve countered that approach for early retirees by utilizing the Roth Conversion.

A potential con to this strategy is future tax rates. Will income tax rates be higher or lower when you’re age 71 than they are now? The only answer is who knows, so this strategy at its worst may be a hedge against future tax increases.

When converting to Roth, you will pay income taxes on the amount converted. No one likes that. If you are married, you can convert more than $80,000, assuming no other income, and pay only about 12% in federal taxes for that conversion. That’s perhaps a lower rate than you’ll pay when it comes to required minimum distributions (RMD). Of course, this all depends on your retirement account balances and your current after tax non-qualified assets.

The first potential benefit to you is that you may pay a lower rate on the converted dollars today than you will when you reach the RMD age of 70½. The second potential benefit is that your RMD’s will be lower because Roth Conversions will leave you with a smaller balance from which to make your RMDs. The third benefit may be to your heirs. While not everyone is planning for the next generation, if you feel that you may never spend your retirement assets this is something that you may consider.

This strategy may make more sense if congress passes the pending tax changes to inherited retirement accounts through the SECURE Act (HR 1499). With overwhelming bi-partisan support, this act forces inherited RMD’s to occur over 10 years vs the beneficiary’s life expectancy. This is pertinent for your middle aged kids when they ultimately inherit your retirement account–especially if they’re in their peak earnings years. Inherited Roth’s also need distributing over 10 years, but at least with no tax penalties.

To further this strategy, consider naming your grandchildren as beneficiaries, Roth or not. Even with a traditional IRA, bestowing it to a minor allows the money grow deferred. The grandchild, assuming the Roth IRAs endure the next decade or two, can then make their own Roth Conversion at the most opportune tax saving moment.

John P. Napolitano CFP®, CPA is CEO of US Wealth Management in Braintree, MA. Visit JohnPNapolitano on LinkedIn or uswealthnapolitano.com. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/ SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.