Hey everyone! I hope you finished your 2025 taxes because October 15th is right around the corner.

This year, I put off finishing our taxes until the very last moment. Everything was mostly done back in April, but I had to wait on a few K1s. I filed an extension and ignored it until I got back from visiting my dad in Thailand. Right after I returned, our tenant moved out, and I’ve been up to my elbows in paint, repairs, and scheduling contractors. Currently, I’m pulling up old carpet and refinishing the stairs. This will save me around $1,500. Home improvement is ridiculously expensive these days.

Anyway, I finally wrapped up our taxes last week and sent them off. With that off my plate, it’s time to tackle my next big financial project: figuring out our Roth conversion strategy for 2026.

This is Mrs. RB40’s first full year of retirement, which means our household income is significantly lower than in previous years. This is a good opportunity to shift money from our Traditional IRA into a Roth IRA while we’re sitting in a lower tax bracket. The bottom line is this will help lower our taxes in the future.

Why Bother with a Roth Conversion?

Tax-Free Growth & Withdrawals: Once money is inside a Roth account, investment earnings grow tax-free, and qualified withdrawals down the road are also completely tax-free. No Required Minimum Distributions (RMDs): Roth IRAs do not require original owners to take lifetime RMDs. This will help the account compound longer. Estate planning: If my son inherits our Roth IRA, he won’t have to pay any tax on the account.

Our Traditional IRA is substantially larger than our Roth IRA. That’s pretty standard for my generation because we could contribute much more to our 401k than Roth accounts over the last 30 years.

The main problem with a large Traditional IRA is RMDs down the road. If our Traditional IRA keeps growing at a healthy rate, it’ll be quite large by the time we turn 75. We’ll be pushed into a higher tax bracket by RMDs. I know, I know… This is a first-world problem. But why not optimize our taxes with a little planning?

I’m 53 this year. With our lower earned income, we have a window of opportunity to move some money into our Roth IRA. You don’t have to pay the 10% early withdrawal penalty when you do a Roth conversion, making it a great chance to draw down our Traditional IRA a little bit.

How Much Should We Convert in 2026?

I tried using the tax software to model our conversion limits, but it was pretty clunky. This kind of task is where our AI overlord can shine. I surrendered to the inevitability and asked Gemini for some assistance.

Here is our estimated income for 2026:

Mrs. RB40’s pension and back pay: $42,000. She had some vacation payout from the previous year. Blog and side hustle: $1,000. Blogging income has disappeared and I haven’t done much side hustle this year. Rental income: We had some rental revenue, but it’ll be negative overall because we spent a lot of money fixing up the unit. Capital gains: $40,000. I sold some stocks earlier this year to pad our short-term spending account. Now that Mrs. RB40 is retired, we want a bigger cash buffer. Dividends: $20,000.

I gave this information to Gemini and it told me that we should convert $28,100. This will minimize our taxes for 2026.

The 2026 Tax Math:

If we convert $28,100, we will pay $4,172 in federal taxes. That breaks down as $1,080 in tax on our ordinary income and $3,092 on the Roth conversion.

The best part? Our $60,000 in capital gains and dividends will remain tax-free because our total taxable income will sit right at the upper limit of the 0% capital gains tax bracket ($98,900 for married filing jointly).

If we convert more than $28,100, we’ll trigger a 15% tax on those capital gains and dividends. That creates an effective marginal tax rate of 27% (12% ordinary + 15% capital gains push) on every extra dollar converted.

Anyway, I wrote this post to help Mrs. RB40 understand why we should do a Roth IRA conversion. I tried to explain Roth conversion to her when we walked to the library, but she wanted to change the subject. I guess tax is a pretty boring subject unless you love sticking it to the government. We’ll pay some taxes now at a lower rate so we aren’t forced into higher tax brackets in 2048. Yes, it’s a snoozer, but I think it’s pretty important.

Looking Ahead: 2027 to 2032

Next year, our ordinary income will drop significantly. Mrs. RB40’s pension will settle around $25,000. My earned income will probably be a big fat zero. I don’t plan to sell stocks next year so we shouldn’t have any capital gains.

Without capital gains or back pay stacking on top, 2027 becomes a prime conversion year. We will be able to convert around $90,000 and pay an effective tax rate of just 10.3%. This is our prime window to pay less tax, reduce future RMDs, and give our Roth IRA a longer time to compound.

2033 to 2048: The Long-Term Plan

I’ll turn 59 ½ in 2033. Running the numbers with Gemini showed that we could still run into trouble with RMDs if we only convert up to the top of the 12% tax bracket. From ages 60 to 75, we should withdraw more and go deep into the 22% tax bracket (~$218,000/year) to shrink our Traditional IRA balance.

I’m totally okay with that! We can spend more and live it up a bit, or put the extra money into our taxable brokerage account. A taxable brokerage account is actually better than a Traditional IRA for inheritance anyway. The cost basis gets reset to fair market value on the original owner’s date of death, wiping out accrued capital gains for our son.

California Dreaming (State Tax Bonus)

One extra lesson I got from Gemini was about state taxes. At our projected income level, we’ll actually pay less state income tax if we live in California. Oregon’s tax brackets jump rapidly to 8.75% at just ~$27,000 of joint income. California’s tax structure is much more progressive across the lower brackets.

OR estimated tax liability in 2026: ~$9,433 CA estimated tax liability in 2026: ~$4,037

That’s good to know because we plan to move to California after RB40Jr. finishes high school in 2029. Mrs. RB40’s parent are in California and they need a lot more help these days. She has been flying back and forth frequently.

Alright, that’s enough tax talk for today. I applaud you if you got this far! I’m pretty sure Mrs. RB40 tuned out before the end of this post. I suppose she can hire a tax planner if she really needs one.

Have you done any Roth conversions in early retirement? Am I missing anything?

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