The Last-Dollar Secret: Lower Your Tax Bill While It Still Matters

Your tax bracket isn’t just a number—it’s the gatekeeper to every dollar you earn above today’s threshold and a signal flare for your financial decisions. Do you know what your last dollar of taxable income is actually taxed at? That number could be the difference between locking in a smart strategy or leaving money on the table. Right now, we’re living in what I like to call a “tax sale.” The 2017 Tax Cuts and Jobs Act temporarily lowered federal income tax rates, but those cuts are set to expire at the end of this year. And with a new tax bill already making its way through Congress, we’re staring down changes that could limit key tax-saving strategies in the near future. The window to act is still open—but it could be starting to close.

Meet Willie

Let me introduce you to Willie. He’s 70 years old, recently retired, and files a joint return with his spouse. Thanks to thoughtful planning and modest withdrawals, Willie stays squarely in the 12% tax bracket. He’s got a $1 million IRA and uses regular monthly distributions to supplement his Social Security. But Willie doesn’t stop there. Each year, he converts as much of his IRA to a Roth IRA as he can without tipping into the next bracket. By doing so, Willie is building a tax-free income bucket he can tap into later and lowering the size of his required minimum distributions (RMDs) when he turns 73. His tax strategy today is protecting him from bigger tax burdens tomorrow.

Required Minimum Distributions (RMDs)

If you’re already 73 or older, you know about RMDs. But here’s the key insight: don’t just take the minimum! Consider using your full low tax bracket—say, up to the 12%, 22%, or 24% threshold—to withdraw more or do Roth conversions. Even if you don’t need the funds for living expenses, moving money to a taxable investment account or converting it to a Roth can reduce future tax liability for both you and your heirs. It’s about playing the long game.

Beneficiary RMD Timing

Speaking of heirs, inherited IRAs come with their own complexities. The 10-year rule now requires non-spouse beneficiaries to empty the inherited account within a decade. And if the original IRA owner passed away while taking their RMD, the beneficiary needs to handle that too—immediately. Some beneficiaries can postpone distributions and even wait until the 10th year to withdraw everything, but then find themselves slammed with a massive tax bill. Here the math becomes especially important; the better approach is to start early and withdraw the max while staying in a lower bracket.

Roth Conversion Opportunities

Is there still an opportunity for you to “do what Willie did”? There very well might be. As my colleague Mark Brinser put it,

One of the ways to evaluate Roth conversions is to “guesstimate” your future income tax bracket. While that may be hard to predict for ten or twenty years down the road, it is probably easier to see that in two years, even if your income does not change, your tax bracket [could] increase. It will be especially important to evaluate Roth conversions if you expect your [2025] income to be above [$197,300 for Single filers or $394,660 for those Married Filing Joint][i] as that is where the sunsetting not only affects the tax rate, but the tax bracket income ranges.[ii]

A couple caveats to remember: RMDs must be taken first before a Roth conversion can be made, and once you make a Roth conversion, it’s permanent. That’s why it’s sometimes prudent to wait until the end of the year to determine the final amount to convert while staying in your desired bracket.

Give Charitably (QCDs)

Now let’s talk charitable giving. If you’re over 70½ and give to charity, you may want to give directly from your IRA using a Qualified Charitable Distribution (QCD – see other articles on this topic[iii]). This strategy lowers your adjusted gross income (AGI), which in turn could reduce taxes tied to AGI thresholds—think Medicare surcharges and taxation of Social Security. Better yet, QCDs count toward your RMD. That gives you the ability to satisfy your distribution requirements tax-efficiently, creating more room in your bracket for low-cost Roth conversions. It’s a rare case of doing good while also doing well.

Conclusion

In a world where US tax laws seemingly shift like sand, timing is everything. Whether you’re managing your own IRA or preparing your estate for the next generation, there are opportunities today that might not exist tomorrow. Take time now to evaluate your tax bracket, explore Roth conversion potential, consider the power of QCDs, and avoid unnecessary tax burdens from inherited IRAs. Remember: Act before the brackets rise—pay less now and win the prize.

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[i] I edited the quote with italic to account for the 2025 thresholds and current circumstances.

[ii] https://mystewardshipadvisor.com/articles/beyond-politics-proactive-financial-planning-amidst-tax-law-sunsets/

[iii] https://mystewardshipadvisor.com/?s=qualified+charitable+distribution