A Financial Planner Says A Retiree Should Think Twice Before Making This Tax Change In December

At the end of the year, retirees have at least a few financial housekeeping tasks to wrap up. Ending the year financially strong is a goal that many people chase as the winter months take hold. Retirees might consider using annual gift exclusion limits to gradually transfer wealth to their loved ones without tax implications, for instance. But there are some changes that retirees should handle with extreme caution. In a conversation with MoneyTalksNews, Desiree Kaul, a certified financial planner and founder of Kaul Financial Solutions in Satellite Beach, Florida, told the outlet that while Traditional-to-Roth IRA conversions can be a valuable tax planning outlet, they may initiate a cascading tax liability if done incorrectly. "The converted amount is treated as ordinary income and can push someone into a higher tax bracket," she warned.

The advantages of withdrawing funds from an account that adds no extra tax liability are obvious. The use of a Roth account to drive your long-term financial strategy in retirement is enticing, but if you've already built a sizeable nest egg in other accounts that do trigger tax implications, the transition should be done with care and over time. Kaul notes that "Roth conversions should be part of a multi-year strategy, not a last-minute decision." December is an ideal time to pull the trigger on this move, but acting too hastily can cost you dearly.

Taking distributions from a Traditional IRA counts as standard income, just like a paycheck during your working years. Functionally, both are income sources that come without tax initially applied. However, during your working years, a portion of your income gets withheld to cover your tax bill. Frequently, this withholding rate goes beyond your actual obligation each year, and playing around with exemptions is one way to create a bigger refund. Distributions don't have the same tax withholding features as a standard. This means retirees have to add the full tax liability of a withdrawal into their income calculation. Drawing out a substantial portion of your Traditional IRA in order to move the funds into a Roth account can balloon your income figure, potentially vaulting you into a new tax bracket and adding even greater payment obligations to the government.

Beyond the basics of April tax math, if you aren't careful with the amount you draw out in pursuit of a Roth conversion strategy, you may end up paying significantly more for your Medicare coverage. For the 2024 tax year, as an example, a single filer would pay $81.20 in surcharges if their modified adjusted gross income (MAGI) was less than $137,000. Jump above this threshold, and your Part B monthly premium more than doubles to $202.90. Similar tax thresholds exist for Social Security benefits. For joint filers, "combined income" above $32,000 in 2025 results in tax on up to 85% of your benefit amount. Simply overshooting your drawdown target can make the following year notably more expensive. Instead, aim to make the conversion gradually, with smaller withdrawals spread out over a long period of time.