Peak earnings, and thus peak taxes often occur in the final years of one’s career, so it is no surprise that folks love to bask in the thought of paying little to no tax for a time post-retirement. What they may not realize is that the tax relief does not last. Once Social Security benefits turn on and required distributions from IRAs and 401(k)s begin, they may be locked into high tax rates for the rest of their lives. This phenomenon is called the tax gap.
Though it may go against one’s instincts, strategically recognizing income and paying taxes during the tax gap can reduce one’s lifetime tax liability by hundreds of thousands, or even millions of dollars. The U.S. tax code is a marginal tax rate system, meaning that income recognized first fills up the lowest tax bracket before spilling into the next higher subsequent bracket and so on, much like filling up an ice cube tray. This provides the opportunity to intentionally fill up the lowest brackets each year and pay minimal taxes relative to the amount of income recognized.
For married couples, soaking up the 12% ordinary income bracket or the 0% long-term capital gains bracket allows for over $100,000 of income to be recognized at very low tax rates, after factoring in their standard deduction.
The current tax law is especially favorable when looking in both the rearview mirror and through the windshield. In 2026, the tax landscape is set to sunset and revert to the landscapae pre-Tax Cuts and Jobs Act, which went into effect five years ago. This creates a short window from now until the end of 2025 to recognize significant taxable income via strategies, such as Roth conversions, to take advantage of historically low rates. The top of the 24% ordinary income tax bracket is an advantageous target for many, as they will pay a higher rate in the future.
If you would like to explore how we can help reduce your lifetime tax liability by strategically filling in the tax gap, contact us at learnmore@boulaygroup.com.