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A few weeks ago, I got a question from a family member—not a client—who asked whether he should be contributing to a traditional 401(k) or a Roth 401(k) at work.
He’s in his late fifties, early sixties (some of his highest earning years) and currently contributing to the Roth 401(k). When I asked what tax bracket he’s in, he said the 22% bracket.
And that’s what I want to talk about here.
A Quick Way to Understand Tax Brackets
Let’s start with something simple but often misunderstood. Smart tax planning is about trying to fill up low tax brackets and duck under high tax brackets. In simple terms:
High Income Years: If you’re in a high tax bracket this year, you may want to defer taxable income to a future year when you hope to be in a lower tax bracket. This is when you might contribute to an account like a traditional 401(k), taking the tax deduction now and paying taxes later.
Lower Income Years: If you’re in a lower tax bracket this year, you may want to pull out MORE income, even if you don’t need it, so you have less money getting hit at higher tax brackets.
This may seem counterintuitive, but you have to remember: you’re going to pay taxes on your retirement income. It’s less about whether you need the money now or later. It’s more about which tax bracket you choose to take advantage of.
A Look Ahead to Retirement
I find this visual helps people understand how income and taxes work for many people in retirement.
Many of our clients end their careers after a nice run of peak-earning years. Their income has been high, and for many of them, that means they’ve deferred their tax bill by contributing to pre-tax accounts.
When they hit retirement, that W-2 paycheck goes away, and in many cases, their tax bracket plunges with it. While any of us love paying as little in taxes as legally possible, there is a smarter way to view your taxes.
We are not trying to pay the least amount of taxes this year. We are trying to pay the least in taxes over your lifetime.
In that sense, we want to pay the MOST taxes when we are in the LOWEST tax bracket. We’re not going for a low score, but a high score within our tax bracket without tipping it into the next bracket.
Roth Conversions in Low Tax Years
This is the context where we like to ask questions about Roth Conversions. With Roth conversions, clients move money from pre-tax accounts, pay taxes at their current low rate (often 12% or lower), and continue its growth in after-tax Roth accounts.
Why does this timing matter? You can see in the graphic above that income tends to trend upward for many retirees once they’ve turned on Social Security or their RMDs are beginning.
Bringing It All Together
Smart tax planning doesn’t mean avoiding taxes forever. It means paying taxes on your terms, at the right time, and at the right rate. For many people, that means:
- Contributing to traditional accounts during high-earning years
- Reducing taxable income at higher brackets
- Creating flexibility for strategic Roth conversions later
If this sounds like your situation—or if you’re not sure which bracket you’re actually in—let’s talk. A quick look at your income and savings strategy can often lead to meaningful improvements that compound over time.
You don’t have to guess your way through retirement tax planning. That’s exactly what we’re here for.
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This material is intended for informational/educational purposes only and should not be construed as investment/tax advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
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