For many, the years immediately after leaving work look very different from both their working years and the later years of retirement. Your paycheck may disappear, Social Security may not have started yet, and required minimum distributions may still be years away. That temporary change in income can create a planning window.
And it is a relevant issue for a large number of households. According to the Federal Reserve’s 2025 Survey of Household Economics and Decisionmaking, 61% of U.S. adults have a tax-preferred retirement account such as a 401(k), IRA, or Roth IRA, while 37% have stocks, bonds, ETFs, or mutual funds outside a retirement account. Those different types of accounts can be taxed very differently when you begin using them in retirement.
We call the temporary period of lower taxable income the opportunity zone. We previously discussed what the opportunity zone is and why early retirement can create a period of relatively low taxable income. In our latest video, we take the idea a step further by looking at what you can actually do with that window.
The important part is not simply recognizing that your income is lower. It is understanding what that lower income could allow you to do before your tax picture changes again. Here’s our expansion on the insights introduced in the embedded video.
Tax Planning Often Looks Backward. Retirement Planning Needs to Look Forward.
Most people experience taxes as a backward-looking exercise. Tax season arrives, documents are collected, a return is prepared, and you find out what happened during the previous year. That process is necessary, but it does not necessarily help you identify opportunities that are still ahead. Retirement tax planning works differently. Instead of asking only, “What did I pay last year?” you need to ask, “What is my tax situation likely to look like three, five, or ten years from now?”
That means looking at when Social Security may begin, when pension income may start, how much you expect to withdraw from your retirement accounts, and when required minimum distributions may become part of the picture. Under current federal rules, RMDs generally begin at age 73 for traditional IRAs and many retirement plans. Roth IRAs generally are not subject to lifetime RMDs for the original owner. Those future income sources matter because they can change the amount of room you have in lower federal tax brackets.
For 2026, federal income tax rates range from 10% to 37%. For married couples filing jointly, the 12% bracket extends through $100,800 of taxable income, with the 22% bracket beginning above that amount. The thresholds differ by filing status. The specific bracket is less important than the pattern: if your taxable income is temporarily lower after retirement and expected to rise later, those years deserve a closer look.
What the Opportunity Zone Can Look Like
Consider a hypothetical couple who retires after several high-income working years. Their income drops substantially once their paychecks stop. Social Security has not started yet, and they are not yet required to take RMDs from their traditional retirement accounts. For a few years, their taxable income may be considerably lower than it was while they were working. Then the picture changes.
Social Security begins. Retirement account withdrawals increase. Eventually, RMDs become part of the equation. For someone who accumulated substantial assets in traditional IRAs, 401(k)s, or other pre-tax accounts, those future distributions can create considerably more taxable income. The opportunity zone sits between those two periods.
The question is not simply whether you are in a lower tax bracket today. The more important question is whether today’s lower tax rate is temporary and whether there are decisions you can make now that could reduce future taxable income. That is where the planning becomes more interesting.
1. Consider Roth Conversions While Your Tax Rate Is Lower
A Roth conversion moves money from a traditional IRA or other eligible pre-tax retirement account into a Roth IRA. The amount converted generally becomes taxable income in the year of the conversion. That immediate tax bill is exactly why timing matters. If you expect to have several years of relatively low taxable income after retirement, you may have an opportunity to convert some of your traditional retirement savings while there is room in a lower tax bracket.
The goal is not necessarily to convert as much as possible. It is to determine how much makes sense given your projected income, tax bracket, cash flow, and future retirement needs. A conversion can also change the size of your traditional retirement accounts. Reducing those balances before RMDs begin may reduce the amount subject to future required distributions. Meanwhile, Roth IRAs are not subject to lifetime RMDs for the original owner under current rules.
This is one reason Roth conversions can be particularly relevant during the early years of retirement. You are not simply deciding this year’s taxes. You are changing where some of your future retirement income will come from. For a more detailed look at the mechanics and tax considerations surrounding Roth conversions, the IRS Roth IRA guidance is a useful starting point.
2. Use Pre-Tax Accounts for Spending When It Makes Sense
The second strategy is more straightforward, but it is easy to overlook. If you need to withdraw money to fund your lifestyle in retirement, the opportunity zone may be a good time to consider taking some of that money from pre-tax accounts. Suppose you need $3,000 a month to supplement Social Security, cash or other investment income. You have several possible accounts you could draw from. A Roth IRA may offer tax-free qualified withdrawals. A taxable brokerage account may generate capital gains. A traditional IRA creates taxable income.
There is no universal rule that says one account should always be used first. The right choice depends on the individual’s entire tax picture. But if you know that money will eventually have to come out of your traditional retirement accounts, taking some of those withdrawals during a period of lower taxable income can be worth evaluating.
You are essentially asking whether it makes sense to recognize some of that income now, when you may have more room in a lower bracket, rather than automatically preserving every dollar of the traditional account for a future year when your taxable income could be higher. That decision should be coordinated with your other income sources rather than made in isolation.
3. Look at Capital Gains in Your Taxable Accounts
The opportunity zone is not limited to IRAs.If you have investments in a taxable brokerage account, the years after retirement may also provide opportunities to manage capital gains. This matters because taxable investment accounts are common. The Federal Reserve found that 37% of adults held stocks, bonds, ETFs or mutual funds outside a retirement account in 2025.
Long-term capital gains have their own federal tax rates. Depending on taxable income, some long-term gains can be taxed at 0%, while other gains generally fall into the 15% or 20% federal rates. Short-term gains are generally taxed as ordinary income. That means taxable income matters when deciding whether and when to sell appreciated investments.
A retiree with a temporarily low-income year might have room to realize some long-term gains at a lower federal rate than would apply in a later year. Depending on the circumstances, that could mean selling an appreciated investment to fund spending, changing investment allocations, or realizing gains as part of your portfolio strategy.
There are important details to consider, including the amount of the gain, other taxable income, state taxes, and the potential effect on other tax-related items. The IRS provides additional guidance on capital gains and losses, including how long-term and short-term gains are treated. The point is not to sell investments simply because you are in a lower bracket. It is to recognize that a low-income year can change the tax consequences of a transaction.
The Three Strategies Need to Work Together
The biggest mistake in opportunity-zone planning can be treating each decision as a separate transaction. A Roth conversion affects taxable income. A retirement withdrawal affects taxable income. Realizing capital gains affects taxable income. Social Security can affect your tax situation. Future RMDs can affect it again. These decisions interact.
For that reason, the most useful question may be, “How much room do I have left this year?” rather than, “Should I do a Roth conversion?” You may discover that a particular amount of Roth conversion fits alongside a planned IRA withdrawal. Or you may find that realizing a capital gain uses some of the remaining room in your lower tax bracket. In another year, the right answer could be different. This is why the opportunity zone is really a planning exercise rather than a single strategy.
Start With Your Future Tax Picture
If you are approaching retirement, start by mapping out what your income could look like after your last paycheck. Estimate your retirement spending. Identify when Social Security could begin. Look at your traditional IRA and 401(k) balances. Consider when RMDs will begin. Review taxable investments and unrealized gains. Then look at how those pieces could interact with federal tax brackets over the next several years.
You do not need to predict your financial life perfectly. The goal is to identify periods where the tax picture may be meaningfully different from what comes before or after.
The Federal Reserve’s 2025 survey found that only 35% of non-retired adults said their retirement savings plan was on track, while 43% said it was not on track and 21% did not know. That does not mean everyone needs a complex tax strategy. It does reinforce the value of understanding how retirement income, savings, and taxes fit together before decisions become time-sensitive. That is the part of the opportunity zone that can be easy to miss. If you only look backward at last year’s tax return, you may see what happened. If you look ahead, you can begin to see decisions that are still available to you.
Learn More About Investment Tax Planning
The opportunity zone is one part of a larger question: how should your different investment accounts work together from a tax perspective? Personal Wealth Advisory’s Investment Tax Webinar covers important considerations around investment taxes and how different investment decisions can affect your overall tax picture.
Register for the next Investment Tax Webinar to learn more about how the tax treatment of your investments can affect your retirement strategy. You can also read our earlier article on the Opportunity Zone for a deeper explanation of how the early-retirement tax window works.
The information in this article is for educational purposes only and is not tax or legal advice. Tax rules and individual circumstances can change. Before implementing a Roth conversion, withdrawal strategy, or capital-gains strategy, consult your tax professional and financial advisor regarding your specific circumstances.
Frequently Asked Questions
What is the opportunity zone in retirement tax planning?
The opportunity zone is a period, often occurring in the early years of retirement, when your taxable income may temporarily be lower than it was during your working years or may be expected to be later in retirement. This can create an opportunity to make strategic tax decisions before Social Security, required minimum distributions, and other income sources increase your taxable income.
When does the retirement opportunity zone typically occur?
It often occurs after someone stops working but before Social Security and required minimum distributions significantly increase their taxable income. The length of this period varies from person to person. For some retirees, it may last only a year or two, while others may have several years of relatively lower taxable income.
Should I consider a Roth conversion when my income is lower in retirement?
A lower-income year may be an appropriate time to evaluate a Roth conversion. Converting money from a traditional IRA or other pre-tax retirement account generally creates taxable income in the year of the conversion. If your tax rate is temporarily lower than you expect it to be in future years, converting some assets may allow you to recognize that income at a lower rate. The amount and timing of any conversion should be evaluated based on your complete tax and retirement plan.
Can I use my traditional IRA for retirement spending during the opportunity zone?
Potentially. If you need to withdraw money to support your retirement lifestyle, using some money from a traditional IRA during a period of lower taxable income may be worth considering. This can be particularly relevant if you expect to have larger required distributions or other taxable income later. The decision should be coordinated with withdrawals from Roth accounts, taxable investments, and other sources of income.
Can the opportunity zone affect how I manage investments in a taxable brokerage account?
Yes. A period of relatively low taxable income can affect the tax cost of realizing long-term capital gains. Depending on your taxable income and other circumstances, you may have an opportunity to sell appreciated investments, rebalance your portfolio, or otherwise realize gains at a potentially lower federal capital gains rate. Capital gains planning should be considered alongside your other income because realizing gains can change your overall tax picture.