How to Reposition $1.575M of Retirement Assets in 5 Years (saving $157,500 in the process)

(Would you rather watch the video? Click here.)

If all your money is sitting in a taxable retirement account, like most Americans (hello 401k’s, 403b’s, and traditional IRA’s), then you might have a big tax problem in retirement.

Not only is all of that money taxable in retirement, but it is also likely to be subject to the expiring tax cuts in 2026 (which will increase rates and shift the tax brackets significantly).

So not only do you have to worry about tax rates themselves, but you also have to worry about shifting tax brackets (which can actually be more costly depending on which income threshold you would like to retire at).

Now, with taxes in retirement, you can just deal with them (like most people do), or you can start implementing a repositioning strategy if it makes sense for you.

Repositioning your assets into a bucket with no tax liability in retirement is a great strategy for many reasons, one of the big reasons being that it’s a great way to ensure that you can collect your social security in retirement completely tax-free!

So that’s great.

Repositioning your assets will lower your provisional income, which is how the tax on social security is calculated (read more about that here).

So if you can reposition enough of your assets, not only will you be able to collect your social security income tax-free in retirement, but you can also collect the rest of your retirement completely tax-free just by leveraging the current tax cuts and conversion capacity of the 24% tax bracket right now (set to expire in 2026).

Here’s how it works. ⚙️ 🔧

Let’s say you have $2M in your 401k — your goal is to reposition most of that money into a tax-free environment.

You do this by choosing to pay the taxes today, while they are at historical lows! (You also know what they are, we don’t know what they’ll be in 10 years but pretty much everybody agrees that they will be much higher)

This gives you more control over your retirement since you are making the conscious decision to pay your taxes today at rates that are known (giving the government less control over your retirement portfolio as well… always a good thing, right?!)

The current tax cuts allow you to reposition $315,000 per year in the 24% tax bracket (with your effective rate being approximately 18.1%).

Doing this, over a 5-year period allows you to move $1.575M into a bucket that is completely tax-free. (So even if the government doubles tax rates during your retirement, your portfolio will be unaffected — because 2 times 0, is still 0!)

Like I mentioned, implementing this strategy moves the majority of your assets into a bucket that is not considered “provisional income”, therefore you can take your social security check in retirement completely tax-free (this is really just a nice bonus)!

The big benefit is that repositioning your assets in this manner also helps to eliminate the dreaded required minimum distributions (where the government forces you to take money out of your retirement accounts so they can collect tax revenue).

If you convert approximately $1.6M of your $2M retirement portfolio, you will be left with about $400k in your 401k (or other taxable retirement accounts), which can be strategically offset by your standard deduction in retirement…. which simply means that you will receive that money completely tax-free as well…

The rest of your retirement assets having been reallocated into tax-free buckets are completely free of any tax liability, not only in retirement, but upon transfer to your beneficiaries when you pass away (more on that in a future blog).

Many people believe that this strategy is unrealistic, or they don’t have enough time to convert, or they have too much money to convert, or even that it’s not really worth it, but the reality is that if the tax cuts expire and they simply go back to what they were prior, this strategy will save you almost $157,500 because you’re paying money on an effective tax rate of about 18%, rather than 28%! (A 10% savings!)

Think about this — you can save yourself about 10% a year in taxes in retirement if the tax rates ONLY go back to what they were…. Most economists and experts agree that tax rates need to go up significantly…so this repositioning will likely be even more profitable than I’m showing!

So even if you have $2M (or more) saved, or you are just a couple of years away from retirement (or even in retirement), you still have a window to be able to reposition a large amount of money in a short amount of time.

There are some things to consider when implementing a repositioning strategy, like what your income from other sources will be, and what the optimal conversion amount is, but really, it’s a math equation.

If tax rates go back to where they were (or increase), this repositioning makes a lot of sense in terms of lowering your tax bill in retirement, but more importantly, it can help reduce your tax liability in the future to $0!

How nice would it be to retire knowing that you don’t owe a single dollar to the federal government?

Well, it’s possible.

If you want to explore the math and do a repositioning analysis on your retirement portfolio, just to see if would ever make sense for you, let me know.

It doesn’t always make sense, but a lot of times it does.