The Smart Tax Move Retirees Can Make in 2026 to Keep More of Their Income

In an ideal world, taxes would disappear for people in retirement. In reality, they can be a huge burden for older Americans, even among folks whose incomes go down once they stop working.

There's one move in particular, though, to consider this year if you want to reduce your tax burden throughout retirement. And it could have more benefits than you'd think.

Image source: Getty Images.

The upside of a Roth conversion

If you have most or all of your savings in a traditional retirement account, you could be headed for a tax nightmare once you start tapping your IRA or 401(k). Not only will those withdrawals be taxable, but eventually, you may be forced to withdraw more than you want to in the form of required minimum distributions (RMDs).

That's why 2026 could be a good year for a Roth conversion, depending on your income.

With a Roth conversion, you move money from a traditional retirement account to a Roth IRA. The trade-off is that you pay taxes on the amount you convert the year of that transfer. But once that money gets into a Roth account, it gets to grow tax-free. And future withdrawals aren't taxed, either.

Roth accounts also don't force savers to take RMDs. That gives you more control over your money.

Plus, there are other benefits of having savings in a Roth. For one thing, if your retirement plan withdrawals don't count toward your taxable income, you may be able to avoid paying taxes on your Social Security benefits.

Also, while Medicare sets a standard monthly premium for Part B each year, higher earners can be assessed surcharges that drive those premium costs up. And large RMDs could spell the difference between paying more for Medicare or not. But if your retirement plan withdrawals don't count as taxable income, you may not have to worry about paying more for Medicare, either.

Why a Roth conversion could make sense in 2026

While there are many perks that come with doing a Roth conversion, it's important to get your timing right. Since the amount you convert is taxable, you want to, if possible, avoid getting pushed into a much higher tax bracket.

You also need to be careful if you're old enough for Medicare (or close to it). A large Roth conversion could lead to a scenario where you're subject to higher Part B costs down the line.

For these reasons, it's best to do a Roth conversion during a low-income year. If that's the scenario you're looking at now, then it could be a good time to make that move.

For some retirees, there can be a window when income falls early on because you're withdrawing minimally from your savings and you're not yet collecting Social Security. If you're in that boat, a Roth conversion could make sense this year.

Of course, Roth conversions aren't right for everyone. And if you're inclined to do one, you'll need to think about how much to convert, how that will affect your current tax bracket, and how you'll pay the tax bill that ensues. But if you think 2026 will a lower-income year than you've had in a while, it could be a good time to convert at least some of your retirement savings to a Roth.

The Motley Fool has a disclosure policy.