# Soft Retirement Creates a Tax Planning Window, But Pitfalls Lurk

Soft retirement—gradually reducing work hours instead of stopping cold—opens a narrow tax opportunity many people miss. If you plan to phase out of full-time employment in 2026, your income will likely drop significantly, putting you in a lower tax bracket. That lower bracket becomes your conversion sweet spot.

Here's how it works. When you convert a traditional IRA to a Roth, you owe income tax on the converted amount at your ordinary tax rate. Normally this costs you 24% or 32% if you earn a solid salary. But if you drop to part-time or consulting work in 2026, your taxable income falls. Convert during that low-income year, and you pay 12% or even 10% tax on that same conversion amount instead. Over time, tax-free growth in the Roth more than offsets the conversion tax bill.

The trap arrives fast. The IRS watches your income closely. A larger Roth conversion can push you into a higher tax bracket mid-year and trigger the Net Investment Income Tax (NIIT) if your modified adjusted gross income tops certain thresholds. For single filers in 2026, that threshold sits at $200,000. For married couples filing jointly, it's $250,000. Cross it, and you owe an extra 3.8% tax on investment income.

Social Security creates another snare. If you claim benefits before full retirement age, conversion income counts toward the earnings test. Earn over $23,400 (the 2024 limit, likely higher in 2026), and the government withholds $1 in benefits for every $2 you earn above that cap. A large conversion might trigger this penalty indirectly if your part-time income plus the conversion pushes you over the limit.

Medicare premiums represent a third landmine. The IRS bases Medicare Part B and Part D premiums on your modified adjusted gross income from two years prior. A 2026 conversion bumps your 2026 MAGI, which affects your 2028 premiums. If you're bridge retiring from age 62 to 65 (before Medicare kicks in), this matters less. But if you hit 65 in 2026, watch closely.

The pro move: map your soft retirement income carefully. If you'll earn $40,000 from part-time work in 2026, you have room to convert before hitting the 24% bracket or Social Security earnings test. Convert conservatively in chunks across multiple years if your soft retirement spans 2026 and 2027. This spreads the tax hit and reduces the odds of triggering NIIT or Medicare premium penalties.

Consult a tax professional before pulling the trigger. The numbers shift yearly with inflation adjustments, and your personal situation determines the optimal conversion size. Soft retirement gives you control over your tax brackets that full-time workers never have. Use it wisely, or leave tens of thousands on the table in unnecessary taxes over retirement.