A worked example

What “fill the low bracket” actually costs

Devon, 38, single, earning $250k and planning to stop at 45, leaving 30 low-bracket years before RMDs begin at 75, and a $600k brokerage account to live on in the meantime.

“A common rule of thumb is to convert enough to fill the 12% bracket in my low-income years. What does that do compared with a smaller conversion?”

What the projection shows

First, the rule of thumb is stated as a bracket but has to be executed as a dollar amount. Here, $64,000 is the largest conversion that actually stays in the 12% bracket, so picking a round $75,000 would put the year in the 22% bracket instead. Second, even filling the bracket precisely costs more than doing nothing: $599,894 of lifetime tax versus $577,320 for converting nothing, while the smaller $35k schedule costs $512,079. Both schedules stay inside 12% the whole way and end up $87,659 apart in after-tax wealth. The reason is that conversion dollars also push Devon's dividends and realized gains out of the 0% capital-gains bracket and into 15%. So dollars that appear to cost 12% actually cost about 27%, compared with RMD years that would be taxed at 22%. Planners call this the long-term capital gains “bump zone.”