The Golden Window: A Top Tax Strategy for the Right Retirees

For retirees, tax planning presents unique financial challenges and opportunities. Among these opportunities is what financial experts call the "Golden Window" of tax planning — a critical period for retirees to make strategic moves that can significantly reduce their lifetime tax liability and set them up for long-term financial success.

What is the Golden Window?

The Golden Window refers to the years immediately following retirement and before certain income streams, such as Social Security and required minimum distributions (RMDs), begin. During this period, retirees often find themselves in a lower tax bracket because they’re no longer earning wages, Social Security hasn’t started and they’re not yet mandated to withdraw from tax-deferred accounts, such as IRAs or 401(k)s. For those who retire early, say at 60, and delay Social Security until 70, this window can span a decade or more.

This temporary dip in taxable income creates a strategic opportunity to implement tax-efficient strategies, such as Roth IRA conversions, to minimize taxes over a retiree's lifetime. Without action, retirees risk moving from a high tax bracket during their working years to a near-zero bracket in the early retirement phase, only to face a steep jump when Social Security and RMDs kick in.

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Who should pay attention to the Golden Window?

The Golden Window doesn’t apply to every retiree. Key indicators that you may qualify for this strategic period include:

• Retiring early. Typically, this applies to individuals who retire early, before Social Security or RMDs begin — usually in their early 60s.
• Significant assets. Retirees who have built a substantial nest egg and can cover living expenses without relying on immediate withdrawals from tax-deferred accounts.
• Extended time horizon. Those with at least 10 years before mandatory income streams start, allowing time to implement and benefit from tax strategies.
• High earning history. Individuals who were in higher tax brackets during their working years but now have temporarily reduced taxable income.

Advantages of the Golden Window

There are three key advantages to the Golden Window:

Lower lifetime taxes. The primary benefit of acting during the Golden Window is reducing the total taxes you will pay over your lifetime. This is achieved through strategies like Roth conversions, where funds from tax-deferred accounts are moved into a Roth IRA.

Although you pay taxes on the conversion when you make it, during the Golden Window, your tax rate is likely relatively low — and future withdrawals from the Roth account will be tax-free. Over time, this can result in significant savings, especially when compared with the potential tax burden if conversions are delayed until after Social Security and RMDs begin.

Hedging against future tax rate increases. The current federal deficit and government spending patterns suggest that tax rates may rise in the future. By converting taxable funds into tax-free Roth IRAs during a low-tax period, retirees hedge against these potential increases.

This diversification of tax treatment for retirement accounts — similar to diversifying investments — provides flexibility and peace of mind in an uncertain tax landscape.

Enhanced estate planning. For retirees with a focus on leaving a legacy, the Golden Window offers estate planning advantages. Under current laws, heirs who inherit traditional IRAs must withdraw all funds within 10 years, potentially facing significant tax liabilities.

However, if the inherited account is a Roth IRA, withdrawals remain tax-free. This benefit ensures a smoother financial transition for your beneficiaries.

Potential pitfalls of Golden Window strategies

While the Golden Window presents opportunities, retirees should also be aware of potential pitfalls that could negate its benefits. Missteps often occur when retirees attempt to execute strategies without understanding the broader tax implications, including:

• Impact on Social Security taxation. When Social Security benefits begin, additional income from Roth conversions can push a portion of those Social Security benefits into taxable territory. Retirees must carefully time conversions to avoid this unintended consequence.
• Capital gains collateral damage. Retirees with taxable brokerage accounts may inadvertently trigger higher capital gains taxes. Low-income retirees typically benefit from a 0% capital gains tax rate, but adding income through conversions could move them into a higher bracket, resulting in unexpected tax bills.
• Medicare premium increases (IRMAA). Medicare premiums are based on income from two years prior. Significant income increases due to Roth conversions could result in higher premiums for Medicare, often referred to as IRMAA (income-related monthly adjustment amount). Retirees should consider these potential costs when planning conversions.

The complexities of retirement tax planning make it crucial to consult with a financial adviser or tax professional. Experts can analyze your unique financial situation, model various scenarios and help you avoid costly mistakes, such as triggering unnecessary taxes on Social Security benefits, losing eligibility for favorable capital gains rates and paying unexpected Medicare surcharges.

A strategic step for financial success

The Golden Window is a once-in-a-lifetime opportunity to optimize your retirement finances. By taking proactive steps during this period, retirees can lower lifetime taxes, safeguard against future tax rate increases and enhance the financial well-being of their heirs.

Johnson Investment Counsel serves clients in all 50 states and manages more than $20 billion in assets. Through Johnson Wealth Management, Johnson Family Office Services, Johnson Trust Company and Johnson Asset Management, the firm serves individuals, corporations, retirement plans, foundations and endowments. Johnson Investment Counsel is a 100% employee-owned company with 48 shareholders among over 159 employees. Its professionals are dedicated to developing genuine relationships with clients and delivering exceptional service. Johnson Investment Counsel is committed to remaining an independent acting in the best interests of clients and employees. Johnson Investment Counsel has six offices across Ohio and Michigan with two in Cincinnati and one in Cleveland/Akron, Columbus, Dayton and Metro Detroit. For more information on locations and services, visit www.johnsoninv.com.

Johnson Investment Counsel cannot promise future results. Any expectations presented here should not be taken as any guarantee or other assurance as to future results. Our opinions are a reflection of our best judgment at the time this material was created, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events or otherwise.

Information contained herein is current as of 12/31/2024. It is subject to legislative changes and not intended to be legal or tax advice. Please consult your qualified tax adviser regarding your specific circumstances. The material is provided for informational purposes only on an “as is” basis. Its completeness and accuracy are not guaranteed.

Johnson Investment Counsel is not responsible for the accuracy or relevance of any unapproved content originated or inserted by the publisher of this article, such as hyperlinks and potentially other data.

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