The gap years: why the time between your last paycheck and your first Social Security check is worth planning around
For many couples, the first few years of retirement are the lowest-tax years they'll ever have. Filling them on purpose can shrink the tax bill for decades.
Picture a couple who retire at 64. Their paychecks stop. They've decided, sensibly, to wait until 70 to claim the larger Social Security benefit. For six years, their taxable income is whatever they choose to make it, because it comes almost entirely from decisions about which account to draw from.
Those are the gap years. If they live off the brokerage account and leave the IRA alone, their tax return shows very little income and they sit comfortably in a low bracket. That sounds like a win, and in the short run it is. The problem arrives later.
What happens if you do nothing
The IRA keeps growing untouched through the gap years. Then Social Security starts at 70, and at 73 or 75, depending on when you were born, required minimum distributions begin. Now the couple has two large incomes they can't turn off, stacked on top of each other, pushing them into brackets they never occupied while working. A surviving spouse, filing as a single person a few years later, gets the same income in brackets that are roughly half as wide.
The low-tax years weren't used. They were simply skipped.
What a Roth conversion does
A conversion moves money from the traditional IRA into a Roth IRA and pays tax on it in the year you move it. During the gap years that tax can be paid at a low rate, often from the brokerage account so the whole converted amount keeps compounding. Every dollar converted is a dollar that won't be forced out later as a required distribution, won't push Medicare premiums up through IRMAA, and will pass to a surviving spouse or to children without an income tax bill attached.
The illustration shows a hypothetical couple with $1.6 million in a traditional IRA at 64. Switch conversions on and watch what happens to the pre-tax balance, the Roth balance, and the estimated lifetime taxes. Then drag the slider to change how much they convert each year. There's a point where converting more stops helping, because you've climbed into the brackets you were trying to avoid.
What it isn't
A conversion isn't free money and it isn't always right. It's a bet that your tax rate now is lower than your tax rate, or your heirs' tax rate, later. It interacts with Medicare premiums, with the taxation of Social Security itself, with ACA subsidies if you're buying health insurance before 65, and with state taxes if you ever leave Florida. Each of those is a reason to run the numbers with someone rather than guess.
The gap years are the one stretch of retirement where you choose your own tax rate. Most couples don't realize it until the window has closed.
If you're within a few years of retirement and haven't thought about this, it's worth a conversation before the window opens, not after.