Key Takeaways
- At the IRS’s 2027 figures, a single filer with no other income can convert $68,625 to a Roth before any of it is taxed above 12%.
- A 58-year-old plans to live on $140,000 of savings for the first two years of retirement. That would leave those years with almost no income on the tax return.
- Each year’s $68,625 conversion would cost $5,987 in federal tax, so two years come to $11,974.
- Before 65, someone on Marketplace health coverage also has to stay under 400% of the federal poverty line, or they lose the whole premium tax credit.
If you’re planning to retire early and live off savings for a while, the IRS just gave you the numbers for what may be one of the cheapest tax moves you’ll ever make. On Nov. 5, it published next year’s tax brackets and standard deduction. With them, you can work out exactly how much of a traditional IRA you can move to a Roth in a year with no paycheck while paying no more than 12% on any of it.
Two years of cash, and almost nothing on the tax return
This week, a 58-year-old posted in Reddit’s r/Bogleheads forum about retiring as soon as a year from now. The poster has about $1.2 million in retirement accounts, most of it in a rollover IRA of about $958,000. The post asks how to simplify that portfolio after leaving a financial advisor. But the line that caught my eye was about the cash: “I have separate HYSA of about $140K that should cover first two years of retirement.”
The poster also wants to see whether they can live on around $60,000 a year. Spending money that’s already in a savings account doesn’t create new taxable income, so the poster’s tax return could be close to blank in those two years. Let’s say the poster files single and has nothing else on the return. Then the whole 10% and 12% brackets are open for a Roth conversion.
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A single filer can convert $68,625 at 12% or less
For 2027, a single filer’s standard deduction is $16,600. After it, the first $12,800 of taxable income is taxed at 10%. Income above that is taxed at 12% up to $52,025, and anything over $52,025 at 22%. Add the deduction to the top of the 12% bracket, and a single filer with no other income can convert $68,625 ($16,600 plus $52,025) before any of it is taxed at 22%.
If the poster retires about a year from now, 2028 would be the first full year without a paycheck, and the IRS hasn’t published that year’s brackets yet. It adjusts them for inflation each year, so 2027’s figures are the newest guide we have.
$5,987 of federal tax on $68,625
At 2027’s figures, a full $68,625 conversion is taxed in three steps:
- The $16,600 standard deduction leaves $52,025 of taxable income.
- The first $12,800 is taxed at 10%, for $1,280.
- The next $39,225 is taxed at 12%, for $4,707.
That’s $5,987 in federal tax, less than 9 cents of every dollar converted. Do it again the second year at the same figures, and the poster moves $137,250 into a Roth for $11,974 in federal tax across the two years’ conversions.
The interest on a $140,000 savings account is taxable income, though, and every dollar of it comes out of the $68,625. State income tax, where there is one, comes on top of the federal bill.
Health coverage comes first
The poster is 58, so Medicare is years away, and the post mentions taking a small job for its health benefits as a bridge. A paycheck from that job would use up part of the 12% bracket too. Without one, the likely route is a plan from the Health Insurance Marketplace, which gives the poster a second limit to watch.
The premium tax credit that lowers those premiums goes only to households with income from 100% to 400% of the federal poverty line. Congress lifted the 400% cap only for tax years 2021 through 2025. The House voted in January to extend the higher credits, but the Senate hasn’t passed them. A Roth conversion is taxable income, so it counts toward that line, and a household even a dollar over 400% gets no credit at all. And for tax years after 2025, there’s no cap on paying back advance credits that turn out to be too high.
So a Marketplace buyer’s conversion has to fit under two lines: the top of the 12% bracket, and 400% of the poverty line for their household size, which HHS sets each year.
I’d fill the 12% bracket, with one exception
Frankly, if the poster can cover health insurance without the credit, I’d fill the 12% bracket in both cash years. Every dollar in that rollover IRA gets taxed when it comes out, and I can’t think of a cheaper time to pay that tax than a year with nothing else on the return. If the poster is counting on Marketplace credits, I’d convert only up to the 400% line. I’d leave the rest of the bracket for a year when the health insurance credit isn’t at stake.
Each conversion also starts its own five-year clock before the 10% early-withdrawal tax stops applying to it, so this is money to leave in the Roth while the poster spends the cash. The IRS should publish 2028’s brackets next fall. If Congress brings the higher credits back, the poster could fill the whole bracket without losing the credit outright.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
