The IRA Rule That Matters Most Once You’re Within 5 Years of Retirement

If you're not taking advantage of the years before retirement to optimize your finances, you may be missing out. This is your last real window to balance everything in a way that keeps you from paying too many taxes or losing too much to the market.

The runway is long enough to make a real change to your retirement plan, but don't wait too long. Learn more about the key steps for this essential IRA rule to keep withdrawals on track and your nest egg secure.

Step 1: Shift from pure growth to risk-aware

Asset allocation is how much of the IRA is in stocks, bonds, and cash. Early on in your investing journey, it's common to have more assets allocated to higher-risk, higher-growth investments, such as stocks. These are great for long-term growth, but can be too volatile to depend on so close to retirement.

As you get closer to retirement, experts recommend a gradual shift to more secure investments such as bonds, bond funds, and a modest cash allocation. The key isn't to dump all stocks at once, but to shift little by little to a more conservative mix.

Step 2: Catch-up while you can

Younger savers have limits to how much they can put into Traditional and Roth IRAs. For 2026, this is $7,500 for those under age 50. But if you're 50 or older, you can contribute an additional $1,100 to help "catch up" before you reach retirement age. This number gets adjusted regularly and may be more for next year.

The main idea is the same. However, since your last five working years can also be your strongest earning years, it's prime time to automate monthly contributions and top off IRAs at tax time for the prior year (if eligible).

Step 3: Understand how withdrawals are taxed

Traditional IRA withdrawals are generally taxed as ordinary income because you contributed them pre-tax or they were tax-deductible. These withdrawals also sit on top of other income sources you'll get in retirement, such as part-time wages, pensions, and Social Security benefits. Altogether, they can push you into a higher tax bracket and trigger higher taxes than expected from taxation of Social Security benefits and Medicare Income-Related Monthly Adjustment Amounts (IRMAA) surcharges.

During your five years before retirement, make plans for what order to take from different accounts, not just how much you withdraw. Both are essential to keep taxes under control.

Step 4: Consider Roth conversions

This five-year window is an ideal time to look into moving money from a traditional IRA into a Roth IRA. You'll pay income tax on the converted amount in the year you convert, but there are benefits to enjoy later.

Roth IRAs offer tax-free withdrawals in retirement and have no required minimum distributions (unlike traditional IRAs). So, if your income is lower now than it might be once RMDs and Social Security start, you could keep more of your money.

The Roth 5-year rule says earnings in a Roth generally need at least five years plus reaching age 59 1/2 to be withdrawn tax-and penalty-free. Don't sleep on this strategy.

Step 5: Map all income before you assume

It's easy to guess what you'll need in retirement and how much money you'll bring in each month. But miscalculating either can put you in a situation where you pay too much in taxes or don't have enough to thrive.

List out everything you'll make, including Social Security, pensions, part-time work, annuities, rental income, and withdrawals from IRAs.

Create an income timeline

While you're at it, factor in timing. When you take each determines your marginal tax rate year by year, as well as how much of your Social Security is taxable. It may even put you over thresholds for IRMAA Medicare Surcharges, so watch that number carefully.

Carefully detail:

• Age you'll be when each income source starts
• Expected ranges of withdrawals from IRAs
• Years you might purposefully "fill up" lower tax brackets with Roth conversions

Keep this as a living document that you adjust as you get nearer retirement and have new numbers to include.

Bottom line

Within five years of retirement, your most important IRA move is coordinating investments, contributions, and withdrawals. This helps you manage tax outcomes and meet your retirement goals.

No, you can't control everything, but that's why your five-year plan should include some wiggle room. Know how close you are to the next tax bracket cliff and how much market loss you can truly afford to absorb. The key to making it work isn't to control all the pieces, it's to know how they affect your overall retirement picture and what you'll do as a result.

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