Roth Conversions, RMDs, and the Tax Torpedo: A Retiree's Complete 2026 Playbook

Death and taxes are the only two guarantees in life, and the second one is quite complicated. Retirement accounts can lower your tax bills, but the way you use traditional and Roth plans makes a difference.

Your strategy may change over time based on fluctuations in your income, changes in tax rates, and other factors. This guide will help you navigate various retirement accounts, when each option is optimal, and how to reduce your lifetime taxes.

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Traditional IRAs vs. Roth IRAs

Traditional IRAs and Roth IRAs function in the same way as traditional 401(k) and Roth 401(k) plans, respectively, but knowing the difference is vital.

Traditional retirement plans are tax-deferred, so you will immediately lower your tax bill. Roth retirement plans are the opposite. You take the tax hit now, but then do not pay taxes on any withdrawals, including capital gains and dividends.

In the event you pick the right stock and your $10,000 investment turns into $1 million, it's much better to have it in a Roth IRA than a traditional IRA. However, traditional retirement plans can make more sense for high earners. Shielding some of your money from a tax rate above 30% is a guaranteed return, while money in a Roth IRA has to deliver meaningful gains to match the tax deferral.

While you will have to pay taxes on traditional retirement plan withdrawals, you will also be earning less money at that time, which can qualify you for a lower tax bracket.

Roth conversions

Roth conversions involve taking some or all of your traditional retirement plan funds and moving them to a Roth account. Some people use this backdoor strategy to get around the modified adjusted gross income limits that prevent high earners from contributing to Roth accounts outright.

Doing these conversions means you won't have to worry about taxes on withdrawals, but conversions come with a catch. All of the money you convert from a traditional plan to a Roth plan is treated as ordinary income. The $20,000 you move from a traditional IRA to a Roth IRA is taxed as ordinary income.

If you want tax-free growth in a Roth account, it's better to do gradual conversions instead of moving your entire traditional IRA nest egg in one year. A layoff can give you the opportunity to accelerate Roth conversions since a lower income will put you in a lower tax bracket, but make sure you can pay your other expenses and taxes before increasing your Roth conversions in the event you are laid off or have a sudden income drop.

Watch out for RMDs

Long-term investing is a great strategy for building wealth, especially if you ignore market volatility and focus on assets with strong fundamentals. However, this focus can result in high tax bills if you stuff your traditional retirement plans with loads of equities, bonds, cash, and other assets.

That's because the IRS uses required minimum distributions (RMDs) to force withdrawals from traditional retirement plans. If you were born in 1960 or later, you must make these withdrawals upon turning 75, but RMDs start at 73 if you were born between 1951 and 1959. Anyone who was born in 1950 or earlier is already taking out RMDs.

Your RMD is based on a fixed percentage of your portfolio, and this percentage increases each year. That's a big deal for people with multi-million dollar traditional retirement plans who never took the time to gradually withdraw or conduct Roth conversions leading up to their first RMD.

High RMDs will increase your ordinary income and put you into a higher tax bracket. The higher income can also make up to 85% of your Social Security benefits taxable. For instance, if you have $4 million in your traditional retirement plans and must take a 5% RMD, you will have to withdraw $200,000, which is all treated as ordinary income.

Gradually withdrawing from your traditional plans in your 60s and doing some Roth conversions in your 40s or 50s when your income dips will spread the tax impact over time. RMDs are not a feature of Roth retirement plans, making them a good option to consider if you are in a relatively low tax bracket.

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