I recently signed up for Cole Krilich’s newsletter. He writes about pensions, and since pensions come up on the show more often than you’d think, I figured I should be able to talk about them without nodding politely and hoping Scott jumps in. His latest email covered what he calls a pension holder’s “golden window,” and I read it twice. Not because I suddenly have a pension (I don’t), but because I realized the idea applies even more powerfully to a group of people I talk to every single week: early retirees.
That golden window has a more searchable name: the Roth conversion window. And if you’re planning to leave work before 59½ with most of your money locked inside a 401(k), it might be the most valuable stretch of time in your entire financial life.
Let’s talk about what it is, why early retirees get the biggest one, and how to use it without getting an unpleasant surprise from the IRS.
What Is the Roth Conversion Window?
The Roth conversion window is the period after you stop working but before two big income sources kick in: Social Security and Required Minimum Distributions (RMDs). Under current law, RMDs start at age 73 if you were born between 1951 and 1959, and at age 75 if you were born in 1960 or later.
During those years, your taxable income is often lower than it’s been since your first job out of college. Your paycheck is gone. Social Security hasn’t started. The government isn’t yet forcing you to pull money out of your traditional accounts. Your tax brackets are sitting there, mostly empty, like a gym in the second week of February.
That’s the opportunity. When your income is low, you can move money from pre-tax accounts into Roth accounts and pay tax on it at rates that may be far lower than what you paid while working, and far lower than what you’d pay later when RMDs and Social Security stack on top of each other.
Once that money is in a Roth, it grows tax free and comes out tax free (assuming you follow the rules). No RMDs on Roth IRAs during your lifetime, either. Future you will be delighted. Future you might even send a thank you card.
Why Early Retirees Get the Biggest Window
Here’s what jumped out at me while reading Cole’s email. A traditional retiree who leaves work at 65 and starts RMDs at 75 gets about 10 years in the Roth conversion window. That’s nice.
Someone who retires at 45? That window could stretch 25 to 30 years. That’s not a window. That’s a sliding glass door.
More years means you can spread conversions out, keep each year’s taxable income in lower brackets, and avoid the classic mistake of converting a giant chunk all at once and getting launched into a tax bracket you didn’t even know existed.
But early retirees face a problem that traditional retirees usually don’t. And Scott and I have a name for it.
The Middle Class Trap, Revisited
We talk a lot on the show about The Middle Class Trap. It’s the situation where the bulk of your net worth lives in two places: your pre-tax retirement accounts and your home equity.
Let me be clear: if this describes you, you didn’t do anything wrong. You did exactly what everyone told you to do. You maxed out your 401(k), grabbed the employer match, and paid your mortgage on time. Congratulations, you’re a responsible adult. Here’s your prize: a pile of money you can’t easily touch until 59½ and a house you can’t eat.
If you want to retire early from that position, you need money to live on today. Your home equity isn’t going to buy groceries unless you sell the house or borrow against it. (And today’s rates make that unpalatable.) Your 401(k) is sitting behind that famous 10% early withdrawal penalty, which has scared more early retirees away from their own money than any horror movie ever made.
So what are your options? There are two tools I want to focus on, because they get confused all the time: the 72(t) and the Roth conversion. They sound similar. They’re both taxable. But they do very different jobs.
Option One: The 72(t), or “Yes, You Can Touch That Money”
A 72(t) distribution, officially known as Substantially Equal Periodic Payments (SEPP), lets you pull money out of an IRA before 59½ without paying the 10% early withdrawal penalty.
The catch? The IRS wants commitment. You calculate your annual payment using one of three IRS-approved methods (the RMD method, the amortization method, or the annuitization method), and then you take that payment every year for five years or until you turn 59½, whichever comes later.
So if you start at 50, you’re locked in until 59½. If you start at 57, you’re locked in until 62. Think of it as a relationship where the IRS insists you both sign a lease before the first date.
And the rules are strict. If you take too much, too little, or change the payment outside of what’s allowed, the IRS can retroactively apply the 10% penalty to every distribution you’ve taken, plus interest.
Here’s the good news. The 72(t) actually puts money in your checking account. It funds your life. You can pay the mortgage, buy groceries, and take that trip to see the grandkids, or the Grand Canyon, or the grand opening of the new taco place.
A few practical notes:
- The distributions are taxable as ordinary income. No penalty doesn’t mean no tax.
- You can size it. If your IRA is bigger than you need, you can split it into two IRAs and run the 72(t) on just one of them. That way your payment matches your spending instead of forcing you to take more than you want.
- It works from IRAs, not usually from your current employer’s 401(k). You’ll need to roll your 401(k) into an IRA first.
Option Two: The Roth Conversion, or “Great, Now It’s Somewhere Else”
A Roth conversion moves money from a traditional, tax-deferred account into a Roth IRA. You pay ordinary income tax on the amount you convert in the year you convert it. There’s no 10% penalty on the conversion itself, regardless of your age.
This is the classic Roth conversion window strategy, and it’s powerful. You’re paying tax now, at a low rate, so you never pay tax on that money or its growth again.
But here’s the part that trips people up. A Roth conversion doesn’t fund your lifestyle today. It just moves money from one pocket to another pocket and sends the IRS a reminder to bill you for the privilege. If you’re struggling to find cash for this year’s expenses, a Roth conversion alone isn’t going to help. You’ll have a lovely, tax-optimized Roth IRA and an empty refrigerator.
Now, there’s a wrinkle that makes conversions more useful for early retirees. Each Roth conversion starts its own five-year clock. After five years, you can withdraw that converted amount (the principal, not the earnings) without the 10% penalty, even if you’re under 59½. This is the famous Roth conversion ladder. Convert $40,000 this year, and in five years that $40,000 is available to spend. (Bonus, the growth ISN’T available to spend, so you will still have a bit in that Roth, continuing to grow until you DO reach 59½.)
So conversions can fund your life eventually. Just not this year, and not next year, and not the year after that, unless you’re turning 59½ during any of those years. You need something to cover the gap, which is why the ladder usually requires a bridge: a taxable brokerage account, cash savings, Roth contributions you’ve made over the years (which you can withdraw anytime), or, yes, a 72(t).
Using Both Tools Together
This is where things get fun. At least, fun for people like me who think tax brackets are a fascinating puzzle.
You don’t have to choose between a 72(t) and Roth conversions. You can use both in the same year. The 72(t) covers your spending. The Roth conversion uses whatever room is left in a low tax bracket to move more money into the Roth.
Let’s look at a hypothetical couple, Jen and Mark, both 50. They have $1.4 million in pre-tax accounts, $500,000 of home equity, and only $40,000 in a taxable brokerage account. Classic Middle Class Trap. They spend about $55,000 a year.
Here’s one way their year could look:
- They roll their 401(k)s into IRAs, split off one IRA, and set up a 72(t) that pays about $40,000 a year.
- They pull the remaining $15,000 they need from their brokerage account.
- They convert another $50,000 from their other IRA into a Roth.
Their taxable income from the 72(t) and the conversion adds up to about $90,000. After the standard deduction (roughly $32,000 for married couples filing jointly in 2026), their taxable income lands in the mid $50,000s, which keeps them inside the 12% bracket. Their federal tax bill comes to roughly $6,500, plus whatever their state wants.
That’s an effective federal rate in the single digits on $90,000 of income. Compare that to what they were paying on their paychecks, or what they might pay at 75 with RMDs, Social Security, and possibly a surviving spouse filing single. Much better.
And in five years, that first $50,000 conversion becomes available to spend, penalty free. Keep doing it every year and you’ve built a ladder that can eventually replace the 72(t) or the brokerage bridge entirely.
These numbers are simplified, of course. Your situation will be different, and I’m a podcast host, not your CPA. But the concept holds, you just have to do the math for your specific situation.
The Part Nobody Likes: Paying the Tax Bill
Both a 72(t) and a Roth conversion are taxable events. The IRS doesn’t care that you’re retired. The IRS has never cared about anything, as far as I can tell.
Those taxes belong to the year you make the move, and your final bill is due by April 15 of the following year. Convert in October 2026, and the reckoning arrives by April 15, 2027.
But here’s something a lot of new retirees miss. The U.S. tax system is technically pay as you go. When you had a paycheck, withholding handled this quietly in the background. Once you retire, nobody is withholding anything unless you ask. If you owe a big chunk at tax time and didn’t pay enough during the year, you can get hit with an underpayment penalty.
You’ve got a few ways to handle it:
- Make quarterly estimated tax payments. Annoying? A little. Effective? Very.
- Have taxes withheld from your 72(t) distributions. Your IRA custodian can do this. Withholding counts as if it were paid evenly throughout the year, which is a handy trick.
- Look into the safe harbor rules. Paying at least 100% of last year’s tax (110% if your income was above $150,000) generally protects you from the penalty. Ask your tax pro how this applies in your first year of retirement, when last year’s tax bill was probably a lot bigger.
And one important warning: if you’re under 59½, don’t pay the tax on a Roth conversion by withholding it from the conversion itself. Any amount withheld is treated as a distribution, not a conversion, which means it gets taxed and may get hit with the 10% penalty. Pay the tax from money outside the IRA. This is one of the best arguments for building up a taxable brokerage account before you retire, even if you’re otherwise a 401(k) superfan.
Other Things That Care About Your Income
Low income during the Roth conversion window is great for taxes. But taxes aren’t the only thing measuring your income. A few other characters are watching:
ACA health insurance subsidies. If you’re buying health insurance on the marketplace, your premium tax credit depends on your income. Every dollar you convert raises that income. A big conversion might save you on future taxes and cost you thousands in lost subsidies this year. Run the numbers both ways.
IRMAA. Once you’re on Medicare, higher income can trigger Income-Related Monthly Adjustment Amounts, which raise your Part B and Part D premiums. IRMAA uses a two year lookback, so conversions you do at 63 can affect your premiums at 65.
Social Security taxation. Once benefits start, more income can make more of your Social Security taxable. That’s one more reason to do the heavy lifting before benefits begin.
None of this means you shouldn’t convert. It just means the “right” amount isn’t always “fill the bracket to the brim.” Sometimes it’s “fill the bracket to right below the point where something else gets more expensive.”
You Don’t Have to Wait Until Retirement
This isn’t just for early retirees and people with pensions. You can do it now, even with a paycheck. (Just know that it might be taxed at a higher rate.)
Carl and I have oversaved in our 401(k), and would like to get that money moved into Roth accounts before RMD age hits. We have about 22 years, so this isn’t URGENT, but we want to take advantage of lower tax brackets as long as we can. And the more we convert now, the less we have to take as RMDs when we hit 75. For me, it’s about choice. I can CHOOSE to withdraw now, but I don’t get any choice on the amount after I turn 75.
If you find yourself with a lot of money in a traditional account, and room in your tax bracket, it could be worth looking at Roth conversions even while you’re still working. This is the part I wish Carl and I had done, was taken a look at our income for the year and topped up the tax brackets when we had room.
How Much Should You Convert?
There’s no universal answer, which I realize is the most frustrating possible thing to read after 2,000 words. But here’s the general framework:
- Figure out your spending need and how you’ll fund it (72(t), brokerage, cash, Roth contributions).
- Estimate your taxable income from those sources.
- Identify the bracket you want to stay in, usually the 10% or 12% bracket for early retirees, sometimes the 22% if your pre-tax balance is huge.
- Check the side effects, especially ACA subsidies.
- Convert the difference, ideally late in the year once you know your actual income.
- Set aside the tax money from outside the IRA and pay it on time.
Then reevaluate again next year. And the year after that. The beauty of the early retiree’s Roth conversion window is that you have time. You don’t need to solve your entire tax future in one December. AND your decision for this year does not have to be your decision for all time. Every year can be different.
Make a calendar note for mid-November to reassess your income picture for this year and look at tax brackets, and see if you have any room for conversions. Include this link to our Roth Conversion Window Worksheet to make it even easier.
The Bottom Line
The Middle Class Trap isn’t a life sentence. It’s a planning problem, and planning problems have solutions.
A 72(t) gets you access to your money today without the 10% penalty. A Roth conversion moves money into an account that will never be taxed again. One funds your life. The other funds your future. Used together during the Roth conversion window, they can turn a pile of hard-to-reach pre-tax money into a flexible, tax-efficient retirement.
Just remember that both come with a tax bill, that the IRS expects to be paid along the way, and that a good tax professional is worth every penny when you’re making moves this big.
And thank you, Cole, for a pension newsletter that sent me down a very non-pension rabbit hole.
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