On paper, a retiree can look like they are firmly in the 12% bracket. In practice, their next dollar of income can cost nearly three times that. The reason is due to the way the tax system works, particularly something called “income stacking.”

Take a retired couple, the Smiths. Their income this year looks like this: $48,000 in ordinary income from Social Security, a small pension, and interest, alongside $130,000 in long-term capital gains and qualified dividends from their brokerage account…

For many investors, Roth conversions are one of the best tools for managing long-term taxes. Moving money from a pre-tax IRA into a Roth IRA can reduce future required minimum distributions (RMDs), create more flexibility in retirement, and allow for tax-free growth for life. 

But there’s a hidden trap that catches many people off guard, and it’s usually caught too late. When you factor in lost deductions or credits and other taxable assets, the effective tax rate on a Roth conversion can be far higher than the bracket you think you’re paying…

I recently met with a couple whose net worth was more than 75% tied up in a single stock. They both were employees of the same company and had received stock options as part of their compensation. The stock price had gone up substantially in a few short years, and they had never sold a single share.

While it’s a good problem to have, they were very concerned about what to do now…