The Development
A recent report from Kiplinger highlights how "soft retirement" - the practice of gradually reducing work hours or responsibilities rather than stopping abruptly - creates a unique transition window for Roth conversions. The report, published on September 6, 2026, explains that this phased approach to leaving the workforce can open up a period when your taxable income may be lower than during your peak earning years, making it an opportune time to convert traditional IRA or 401(k) assets into a Roth IRA.
Roth conversions involve moving money from a tax-deferred account, like a traditional IRA, into a Roth IRA. The amount converted is treated as ordinary income in the year of the conversion, so you pay income tax on it at your current rate. The benefit is that qualified withdrawals from a Roth IRA are tax-free in retirement, and unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) during the owner's lifetime.
According to the report, the soft retirement period - which might involve working part-time, consulting, or taking on less demanding roles - can result in a lower marginal tax bracket than either your full-time working years or your later retirement years when RMDs might kick in. This lower bracket makes conversions more tax-efficient, as you pay less tax per dollar converted.
The Tax Traps to Watch
The report cautions that this window is not without pitfalls. Several tax traps can undermine the benefits of a Roth conversion during soft retirement. One major trap involves Medicare premiums. Higher income in a given year, including income from a Roth conversion, can trigger higher Medicare Part B and Part D premiums two years later, due to income-related monthly adjustment amounts (IRMAA). If you convert a large sum, you could push your modified adjusted gross income above the IRMAA thresholds, leading to surcharges on your Medicare premiums.
Another trap relates to the timing of Social Security benefits. If you begin taking Social Security before your full retirement age and also do a Roth conversion, the additional income could temporarily reduce your benefits if you are still working and earning above certain limits. Even after full retirement age, the provisional income formula that determines whether your Social Security benefits are taxable can be affected by conversion income, potentially making a larger portion of your benefits subject to federal income tax.
Additionally, the report notes that state taxes can complicate conversions. While some states follow federal rules and do not tax Roth conversions, others impose their own income tax on the converted amount. If you live in a state with a high income tax rate, the conversion could be less attractive, especially if you plan to move to a no-tax state later.
How the Mechanism Works
To understand why soft retirement matters for Roth conversions, it helps to see how the tax system treats different income phases. During your full-time working years, your marginal tax rate is often at its peak, making conversions expensive. In full retirement, after age 72 or 73 (depending on your birth year), you must begin taking RMDs from traditional IRAs and 401(k)s, which can push your income into higher brackets, again making conversions less beneficial. Soft retirement sits in between: you may have left your high-paying job, but you have not yet started RMDs or perhaps not even claimed Social Security. Your taxable income might be relatively low, placing you in a lower bracket.
The conversion itself is a taxable event. You report the amount converted as ordinary income on your federal tax return. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, that $50,000 is added to your other income for the year. If your total income remains within the 12% or 22% bracket, you pay that rate on the conversion. Over time, the money grows tax-free, and you can withdraw it without owing federal income tax, provided you meet the five-year holding period and are at least 59½ years old.
The strategic value of converting during a low-income year is that you "fill up" your lower tax brackets. You might convert just enough to stay within the 12% bracket, for instance, rather than converting an amount that pushes you into the 24% or higher brackets. This approach can reduce your lifetime tax bill compared to leaving the money in a traditional IRA and paying taxes on RMDs later.
What It Means for American Readers
For Americans who are considering a gradual exit from the workforce, the report suggests that this period deserves careful tax planning. If you expect your income to drop significantly in the years before you start Social Security or before RMDs begin, you might have a window to convert retirement assets at a lower tax rate. However, the report emphasizes that you must account for the indirect effects on Medicare premiums and Social Security taxation.
The IRMAA surcharge is a particularly sneaky cost. Medicare Part B premiums are based on your income from two years prior. If you do a large conversion in 2026, it could affect your 2028 premiums. The surcharge can be substantial, adding hundreds of dollars per month for high-income retirees. The report advises that you may want to spread conversions over several years to avoid crossing IRMAA thresholds in any single year.
Similarly, if you are receiving Social Security benefits, the taxation of those benefits depends on your provisional income, which includes half of your Social Security benefit plus other income, including Roth conversion amounts. Up to 85% of your Social Security benefits can become taxable if your provisional income exceeds certain limits. A conversion could inadvertently push you over those limits, increasing your tax bill more than you anticipated.
Planning Considerations
The report does not offer one-size-fits-all advice, but it outlines factors to weigh. Your current and future tax brackets, your expected retirement spending, your health care situation, and your estate plans all play a role. For some, converting during soft retirement might be a smart move to reduce future RMDs and tax diversification. For others, the tax traps might outweigh the benefits.
One key point is that Roth conversions are irreversible. Once you convert, you cannot undo it without complex recharacterization rules, which were eliminated for conversions made after 2017 (except for certain limited circumstances). Therefore, you need to be confident that you can pay the tax bill from non-retirement funds, as using retirement funds to pay the tax would reduce the benefit of the conversion.
Another consideration is the five-year rule for Roth IRAs. To withdraw earnings tax-free, you must have had a Roth IRA open for at least five years and be at least 59½ years old. If you convert funds, each conversion has its own five-year clock for the converted amount to avoid the 10% early withdrawal penalty, though the clock for tax-free treatment of earnings is separate. If you are close to retirement age, this may not be a concern, but if you are in your 50s and plan to access the converted funds before 59½, you need to be aware of these rules.
The report also notes that you should consider the source of funds for paying the conversion tax. Ideally, you pay the tax from a taxable account, not from the retirement account itself, because withdrawing from the retirement account to pay taxes would reduce the amount that grows tax-free and could trigger additional taxes and penalties if you are under 59½.
Finally, the report suggests that soft retirement is a time to revisit your overall retirement income plan. You might work with a tax professional to model different conversion scenarios, taking into account your projected income, Medicare premiums, Social Security claiming strategies, and state taxes. The goal is to find a balance that minimizes your lifetime tax burden without triggering unintended consequences.
In summary, the Kiplinger report highlights that soft retirement can be a valuable window for Roth conversions, but it is not a simple decision. The lower income during this phase can make conversions cheaper, but the ripple effects on Medicare premiums and Social Security taxation require careful planning. As with any significant financial move, the specifics of your situation matter, and what works for one person may not work for another.
Source: Kiplinger
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