Retired and not touching your 401(k) yet? That's the exact mistake that cost her 22% at 73 — and most people make it
There's a special kind of financial mistake that feels exactly like being responsible. This is the flagship model.
Here's the setup: a woman retires at 64 with $380,000 in her 401(k). No job, no pension, hasn't claimed Social Security yet. For nine years, she touches nothing. Doesn't withdraw, doesn't convert, lets it grow. Gold star, right?
The IRS Would Like a Word
Wrong, and the wrongness has a price tag. At 73, the IRS shows up with required minimum distributions — mandatory withdrawals from pre-tax accounts, whether you want them or not. Her untouched $380,000 had compounded to roughly $642,000, which meant a first forced withdrawal of about $24,200. Stacked on top of her Social Security (85% of it taxable), that pushed her income past the 12% bracket ceiling and straight into 22% territory.
The tragedy isn't the tax bill itself. It's that for nine entire years she was sitting in the lowest tax bracket she would ever see again — nearly zero income, a fat standard deduction, acres of room in the 12% bracket — and used none of it.
Every year you don't fill that low-bracket space with a Roth conversion, it expires. Permanently. It does not roll over. It does not wait for you to feel ready. It's the tax code's version of "use it or lose it," and she lost it nine times in a row.
What the Move Actually Was
The playbook for those gap years — the stretch between your last paycheck and your first RMD — is partial Roth conversions sized to fill the 12% bracket annually, paying the tax from regular savings so the converted money keeps compounding tax-free. Do that for nine years and the balance driving your future RMDs shrinks dramatically, on your schedule, at bargain rates.
This is not an exotic problem, either. "It's starting to bite a lot of people that have been good savers," James Mahaney of Mavericus Retirement Services told Financial Planning about the RMD squeeze — the diligent ones, the ones who never touched the account, are precisely the ones getting hit.
So if you're recently retired and feeling smug about leaving your 401(k) alone: congratulations, you may be actively scheduling a fight with the IRS for your seventies. Doing nothing is also a decision. This one comes with interest.
