What Are Retirement Gap Years? Timing Social Security, Roth Moves, and Medicare

When people hear “gap year,” they often think of the year between high school and college. But there’s another kind of gap year that can have a big financial impact: the years between retiring and starting Social Security or pension income.

These retirement gap years—sometimes just a couple of years, sometimes a full decade—can be a powerful window for planning. Done well, they may help you reduce lifetime taxes, increase future pension or social security income, and create more flexibility in retirement. Done poorly, they may create avoidable tax surprises, missed opportunities, and cash flow stress.

Here’s what to consider and what you can do to make the most of this unique phase of retirement.

What Are “Gap Years,” and Why Do They Matter?

Your gap years typically begin when you stop earning employment income and end when you begin receiving:

• Social Security
• A pension
• Required Minimum Distributions (RMDs) from retirement accounts (starting later in retirement)

During these years, your income may be unusually low—especially compared to your working years and later retirement years when Social Security and RMDs begin. That lower-income period creates opportunities that may not exist later.

The First Big Question: What Will I Live On?

Before you take advantage of tax strategies, you need a plan for the basics: how you’ll fund your lifestyle in the meantime.

Common “gap year” income sources include:

• Cash savings or emergency reserves
• Taxable brokerage accounts
• Roth IRA distributions (if qualified)
• Traditional IRA distributions (strategic, but taxable)
• Part-time income or consulting
• Severance packages or deferred compensation
• Rental income or business income

The key is not just having money available—it’s having money available in the right type of account, so you can control taxes and avoid triggering penalties or higher Medicare costs later.

Why “Buckets” Matter: Build Flexibility with Different Tax Types of Money

One of the most effective ways to plan for gap years is to think in three tax buckets:

1) Taxable Bucket (Brokerage Accounts)

This includes non-retirement investments and savings. It can be a very useful bridge because you can often control the tax impact through thoughtful withdrawal planning.

2) Tax-Deferred Bucket (Traditional IRA/401(k))

These accounts grow tax-deferred, but withdrawals are taxed as ordinary income. Later in retirement, they may create large taxable income due to RMDs.

3) Tax-Free Bucket (Roth IRA/Roth 401(k))

Qualified Roth withdrawals are generally tax-free. This bucket can provide flexibility later, especially when managing Medicare premiums and tax brackets.

The goal isn’t to “pick the best bucket.” The goal is to have access to all three, allowing you to decide each year which buckets to draw from based on your tax strategy, healthcare planning, and long-term goals.

Opportunities in the Gap Years (That You May Not Get Later)

1) Roth Conversions: A Prime Window for Tax Planning

Gap years are often the best time to consider Roth conversions, because your taxable income may be lower than it will be once Social Security and RMDs begin.

A Roth conversion allows you to move money from a tax-deferred account (like a Traditional IRA) into a Roth IRA. You pay taxes now, but it may reduce future taxes and create tax-free growth in the future.

Why this matters:

• Reduces future RMDs
• Can lower lifetime tax burden
• Creates tax-free income later
• May reduce taxes for heirs (depending on your estate goals)

A common strategy is to convert “up to” a certain tax bracket each year, rather than converting large amounts all at once.

2) Capital Gains Harvesting: Use Low-Income Years Wisely

If you have a taxable brokerage account, gap years may allow you to realize capital gains intentionally at favorable tax rates.

This strategy—often called capital gains harvesting—can help you:

• Reset your cost basis higher
• Reduce future taxable gains
• Potentially take gains at a lower tax rate than you would later

This can be especially useful if you expect a higher income in future years due to Social Security, pensions, or RMDs. Tax outcomes depend on your total income, filing status, and other factors (i.g., NIIT, Credits). Coordinate with a tax professional.

3) Grow Your Social Security and Pension Income

Gap years can also be an opportunity to increase future pension or Social Security income.

Social Security:

Delaying Social Security can increase your benefit meaningfully over time. Many retirees use gap years to fund expenses from savings while letting Social Security grow. After your full retirement age up to age 70, your Social Security benefit earns delayed retirement credits of up to 8% per year (under current SSA Rules)!

Pensions (if you have options):
Some pensions offer different payout structures, survivor benefits, or start-date choices. The gap years are the time to carefully model those decisions.

The tradeoff is simple but important:
Do you want more income now, or more Pension or Social Security income later?
Your health, family longevity, and overall balance sheet all matter here.

What to Watch Out For: Hidden Costs and Tax Traps

The gap years can be powerful, but they can also create unintended consequences if strategies are done without coordination.

IRMAA: Medicare Premium Surcharges

One of the most overlooked retirement planning issues is IRMAA, the Medicare premium surcharge tied to income.

Large Roth conversions or realizing large capital gains can increase your “income” for Medicare purposes and potentially cause higher Medicare premiums later. Medicare uses a 2-year lookback to determine if any surcharges apply, so even if you aren’t 65, you have to look out for this.

Even if the strategy is still worthwhile, it’s important to plan around thresholds and timing.

Health Insurance Planning and ACA Subsidies

If you retire before Medicare age, health insurance becomes a major factor.

Some retirees purchase coverage through the marketplace, where premium support may be available based on income. However, these tax credits are income tested and can phase out abruptly.

Even though subsidies may be lower than they were in the past, they can still be meaningful—and they can disappear quickly if income rises unexpectedly.

This is where coordination matters most:
A Roth conversion that looks great from a tax perspective may unintentionally increase healthcare costs in the same year.

Taxes Can Rise Later—Even If You Retire “Lower Income”

Many retirees assume their taxes will automatically go down in retirement. But later retirement income can increase due to:

• Social Security becoming taxable depending on other income
• Pension income stacking on top of other withdrawals
• RMDs forcing distributions (even if you don’t need the money)
• Higher investment income as accounts grow

That’s why the gap years are so valuable: you may have a brief period of control before income becomes less flexible.

Final Thought: Gap Years Don’t Just “Happen”—They Should Be Designed

The retirement gap years can be one of the most valuable planning windows you’ll ever have. It’s a rare time when you may have lower income, more control, and more options than you’ll have later in retirement.

But the strategies in these years—especially Roth conversions, investment withdrawals, and healthcare planning—need to be coordinated. One decision can affect taxes, Medicare premiums, and long-term income sustainability.

If you’re thinking about retirement or wondering how to handle these gap years, please contact your financial advisor. A well-designed plan can help you live confidently today while protecting your flexibility for the years ahead.

 

 

DISCLOSURES: Leonard Rickey Investment Advisors, P.L.L.C. (“LRIA”) is an SEC-registered investment adviser. Information is educational only and not tax, legal, or investment advice. Rules and outcomes vary by individual circumstances. LRIA offers services only where registered, notice-filed, or exempt. Not an offer to buy or sell securities. Form ADV and Form CRS available upon request.