Tax Flexibility is the Next Step for Retirees
In Financial Planning’s “Next Step” series, advisors weigh in on the most impactful single move for Americans on the road to retirement. This edition features a 50-year-old financial services professional in Seattle who, with a $1.3 million nest egg (80% in pre-tax accounts), robust savings habits, and a clear eye on retiring at 60, stands well above national benchmarks—but faces a looming challenge: turning all that hard-earned, tax-deferred money into spendable retirement income.
As I shared for this article, the most strategic next step isn’t just about piling up more dollars—it’s about intentionally building out tax flexibility. With nearly all savings trapped in pre-tax IRAs and 401(k)s, early retirees often face what I call the “Retirement Income Jenga Tower”—the challenge of stacking and pulling various withdrawals, Social Security timing, and tax brackets for maximum after-tax income. Too much in pre-tax accounts can lead to unexpectedly high taxes down the line, especially as required minimum distributions kick in, Social Security begins, and Medicare means-testing (IRMAA) becomes a reality.
My advice: Now is the time to start gradually funneling a portion of ongoing savings into taxable brokerage accounts and/or additional Roth contributions (directly, through employer plans, or with strategies like mega backdoor Roths if available). Doing so creates a “third bucket”—money you can access anytime, penalty-free, with full control over the tax hit. This flexibility lets you fine-tune your taxable income in your early 60s, control health care and ACA subsidy cliffs, and even perform partial Roth conversions in lower-tax years before RMDs and Social Security begin. Beyond tax control, this approach greatly smooths legacy and survivor planning for couples with substantial savings.
As I often remind clients—especially experienced investors like this participant—the real magic in retirement is not just in how much you accumulate, but where you keep it, and how many levers you have when it’s time to actually spend. Making a subtle tweak now—diverting a sliver of your 20% savings rate toward taxable or Roth buckets, and working with your CPA on a multi-year Roth “glidepath”—could be the multiplier that keeps your future taxes down and your income consistently strong, year after year.
Bottom line:
Adding flexibility to your nest egg is the ultimate force multiplier at this stage. It’s not just about growth, but about laying the groundwork today so you can control your withdrawals, tax bracket, and retirement options tomorrow—keeping more of what you’ve worked so hard to save, on your terms.