A married couple, both 65, retired last year with $1.5 million stacked inside traditional 401(k)s. They delayed Social Security to 70, live off a taxable brokerage account, and figure they will just start withdrawals when the IRS forces them to at 73. It is also the setup for the most expensive tax mistake retirees in this balance range make.
A caller on the Clark Howard podcast framed the alternative cleanly: “If you in dribs and drabs each year move money from the traditional 401k into the Roth and because your income’s lower, you’re lowering the tax”. That is bracket smoothing, and for a $1.5 million balance it is worth roughly six figures over a retirement.
Why The Do-Nothing Path Ends At 24%
Assume the portfolio compounds at 7% from 65 to 73. The $1.5 million grows to roughly $2.6 million. First-year RMDs at 73 use a divisor near 26.5, producing a mandatory distribution around $97,000. Layer in combined Social Security near $84,000 (both spouses claiming at 70) and the couple is staring at roughly $181,000 of gross income before any brokerage interest or dividends.
The 2026 standard deduction for married couples filing jointly is $32,200. That leaves taxable income near $149,000, which pushes them past the $100,800 threshold where the 22% bracket ends and 24% begins. Once provisional income clears the upper Social Security threshold, 85% of that $84,000 in benefits becomes taxable. Add IRMAA, where a two-year lookback tacks roughly $70 to $400+ per person per month onto Medicare Part B and D premiums, and the effective marginal rate on the last dollars of RMD sits close to 40%.
The 12% Bracket Is A Gift With An Expiration Date
Between 65 and 72, this couple has no wages, no Social Security, and no RMDs. Their taxable income from the brokerage is small. The 12% bracket for joint filers runs up to $100,800 of taxable income in 2026. Add the standard deduction and they can pull roughly $133,000 out of the traditional 401(k), convert it to Roth, and pay a blended federal rate under 11%.
Do that eight times. Roughly $1.1 million migrates from traditional to Roth at 12% or lower. RMDs at 73 shrink to a fraction of the original projection. Social Security stays largely untaxed because provisional income drops. IRMAA surcharges never trigger because MAGI stays well below the first tier near $212,000 for joint filers.
The arithmetic is stark. Paying 12% now to avoid 24% federal plus IRMAA plus Social Security inclusion later is the single highest-return move available to a retiree in this balance band. And it disappears the moment RMDs and Social Security stack on top of each other.
A Wrinkle For Those Still Working
For readers 60 to 63 still on payroll, the SECURE 2.0 super catch-up allows a total 401(k) contribution of $35,750 in 2026. But if 2025 W-2 wages topped $150,000, the catch-up portion must go into a Roth 401(k). The tax break shifts from now to later, which is fine, but the surprise on this year’s cash flow is real.
Three Moves Before Year-End
- Map your 12% headroom. Take projected gross income, subtract the $32,200 standard deduction, and see how much conversion space sits below the $100,800 top of the 12% bracket. Convert to the ceiling, not a dollar over.
- Project the RMD at 73. Divide your expected balance at 73 by 26.5. If that number plus 85% of your Social Security lands you above $211,400 taxable income, the 24% bracket is your baseline and every conversion done at 12% or 22% saves the spread.
- Watch the IRMAA two-year lookback. A conversion done at 63 hits Medicare premiums at 65. Front-load conversions before the Medicare start date, or size them to stay under the first surcharge tier for the year that matters.
The 10-year Treasury near 4.6% means the opportunity cost of prepaying tax has real weight, but the math still favors conversions for anyone facing a two-bracket jump at 73. Run your own numbers before December 31.
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