High earners are saving $80,000 in taxes — here’s the 401(k) trick they use

A retired couple thought they were financially safe with $1.5 million in a traditional 401(k), $400,000 in taxable accounts, and $200,000 in a Roth IRA — but later realized taxes would be higher than expected at age 73. When they calculated required minimum distributions (RMDs), they saw withdrawals would push them into a higher tax bracket. These forced withdrawals would also trigger higher Medicare premiums. Up to 85% of their Social Security benefits would become taxable because of the higher income.

The period between age 62 and 72 is called “gap years” because they have no job income and no RMDs. During this gap, the couple uses their taxable account for living expenses, keeping their income low. This low-income period creates the perfect time to convert money from a traditional 401(k) to a Roth IRA, as stated by 24/7 Wall St. They convert $50,000 each year from the traditional 401(k) into a Roth IRA.

Roth conversion tax savings

In 2026 tax brackets, a $50,000 conversion falls in the 22% tax bracket for married couples. They pay roughly $11,000 in taxes each year on the conversion. Over 10 years, they convert $500,000 total into Roth savings. They pay around $110,000 in taxes upfront during those years. This upfront tax payment helps avoid much larger taxes later in retirement. Under SECURE 2.0 rules, RMDs start at age 73. The IRS Uniform Lifetime Table gives a factor of 26.5 at age 73. Without conversions, a $1.5 million balance would require about $56,600 withdrawal in the first year.

RMD income drop

This forced income alone can push retirees into higher tax brackets. After conversions, the balance drops to about $1 million. The new RMD becomes around $37,700 instead. That’s nearly $19,000 less forced income in year one. Over time, the smaller RMDs reduce taxes significantly. Converting $50,000 yearly can reduce future RMDs by about 40%, as stated by 24/7 Wall St. This strategy can save $80,000 or more in lifetime taxes. Savings can be even higher because RMDs normally grow every year. Higher RMDs can also push retirees into the 32% tax bracket.

Medicare IRMAA risk

Medicare uses a system called IRMAA that raises premiums based on income.IRMAA looks at income from two years earlier. Income from 2024 decides Medicare premiums for 2026. In 2026, the first IRMAA limit for married couples is $218,001 income. Below that, Medicare Part B costs $202.90 per person monthly. Just $1 above the limit adds $81.20 extra per person monthly. That equals about $2,297 extra yearly for the couple.

If the couple earns $168,000, they have exactly $50,000 conversion room. A $50,000 conversion keeps them below the surcharge limit. A $60,000 conversion crosses the limit and triggers penalties. That extra $10,000 can cause over $2,000 in Medicare surcharges, as stated by 24/7 Wall St.These surcharges last for two years. This makes the effective tax rate above 40% on that extra income. Experts suggest checking income every November before year-end.

Use taxable account first

If income is close to $218,000, reduce the conversion amount. This careful planning prevents unnecessary Medicare penalties. The couple uses the $400,000 taxable account first for living costs. This avoids increasing taxable income from retirement accounts. Long-term capital gains in this range are taxed around 15%. That is lower than the 22–24% tax on 401(k) withdrawals. This order — taxable first, Roth last — keeps income low.

Lower income makes Roth conversions more efficient. Some investments in taxable accounts generate income at lower tax rates. Dividend ETFs can provide income without raising taxes too much. Experts recommend calculating total income before making conversions. Subtract income from $218,000 to find a safe conversion amount, as noted by 24/7 Wall St.This calculation should be done every year. Retirees should also estimate their future RMDs early.

Plan every year

Divide projected balance at age 73 by 26.5 to estimate withdrawals. If RMD plus Social Security crosses $44,000, benefits become taxable. Roth conversions today can prevent Social Security taxes later. If income already exceeds $218,000, professional advice is recommended, as citied by 24/7 Wall St. Hiring a CPA or CFP can reduce costly Medicare surcharges. The savings from planning usually exceed advisor fees. Data also shows many Americans underestimate retirement needs.

People often think they are more prepared than they really are. Research says one simple habit can double retirement savings. The habit is not about earning more or cutting spending. It is about smart tax planning and account sequencing. This 401(k)-to-Roth conversion strategy is how high earners save up to $80,000 in taxes.

FAQs

Q1. How can Roth conversions help save taxes in retirement?

Roth conversions reduce future required withdrawals, which lowers taxes and can prevent higher Medicare premiums.

Q2. Why do high earners convert 401(k) money before age 73?

They convert during low-income years to pay smaller taxes now and avoid bigger taxes later.