Phased Retirement Financial Planning: Taxes, Social Security & the Roth Window

Phased retirement — scaling from full-time work to part-time, consulting, or freelance before stopping entirely — is increasingly common. But the financial planning for it is more complicated than either full-time work or full retirement. Every major equation changes: the Social Security earnings test, IRMAA look-back, Roth conversion windows, healthcare coverage, and Medicare enrollment. Here's how to get the most out of this often under-planned transition.

Why phased retirement needs its own plan

Most retirement planning literature assumes a clean break: you work full-time, then you stop. Real life looks different. Engineers become consultants. Executives go part-time. Practice owners reduce their schedule. Teachers take on tutoring or adjunct work. Each of these creates a hybrid income picture — part wages, part portfolio withdrawals, sometimes part Social Security — that doesn't fit neatly into either the accumulation or distribution planning framework.

The stakes are real. Done without planning, phased retirement can:

• Trigger the Social Security earnings test and have benefits partially withheld
• Push provisional income high enough that 85% of Social Security is taxable even at modest benefit levels
• Create IRMAA Medicare surcharges two years after a high-income consulting year
• Close the Roth conversion window — a once-in-a-retirement opportunity — through inattention

Done well, phased retirement can reduce lifetime taxes significantly while extending portfolio longevity. The key is treating it as its own planning phase, not an afterthought.

Social Security and the earnings test

If you haven't yet reached your Full Retirement Age (FRA) and you claim Social Security while still working, the SSA imposes an earnings test on your benefit.¹

In 2026, the limits are:

The good news: withheld benefits are not permanently lost. After you reach FRA, the SSA recalculates your benefit and credits back the months when benefits were withheld — raising your monthly payment permanently. It typically takes about 2–3 years of post-FRA benefits to fully recover the withheld amount, so the earnings test is largely a timing issue, not a permanent loss.

The strategic implication: often better to delay SS while working

If you're working part-time and earning more than $24,480 before FRA, you face a choice: claim SS and have some benefits withheld, or delay SS entirely. For most people, delaying makes more sense during phased retirement because:

• Every year you delay after 62 increases your monthly SS benefit (up to 8%/year from FRA to 70)
• Delayed SS doesn't count toward provisional income while you're still working (removing a major tax complication)
• The income from part-time work reduces your need to start SS distributions early

The exception: if you have health reasons to believe a shorter lifespan, or if the earnings test wouldn't actually trigger (your income is below $24,480), early claiming may still make sense. See our Social Security Claiming Strategy Guide for the full break-even analysis.

Provisional income and SS taxation while working

If you do claim Social Security while working, be aware of the provisional income calculation. Provisional income = adjusted gross income + tax-exempt interest + 50% of SS benefits.²

Even modest wages can push provisional income well above the thresholds where 85% of SS benefits become taxable:

• Single filer: $34,000 provisional income → 85% inclusion
• Married filing jointly: $44,000 provisional income → 85% inclusion

A 65-year-old single retiree earning $30,000 from consulting and collecting $20,000 in annual SS benefits has provisional income of $30,000 + $0 investment income + $10,000 (50% of SS) = $40,000 — already in the 85% inclusion zone. That $20,000 SS benefit becomes $17,000 taxable income, adding to ordinary income tax.

This isn't necessarily a reason to avoid working — but it does argue for (a) deferring SS until FRA or 70 to maximize the eventual benefit, or (b) managing other income sources to keep provisional income below the thresholds.

The Roth conversion window: the under-used opportunity

Phased retirement often creates the ideal Roth conversion window. Here's why: you may have lower income than during peak working years but not yet zero — enough to fill lower tax brackets without wasting the standard deduction.

The mechanics work like this. Assume you're a single filer in 2026, earning $35,000 from part-time consulting, and you haven't yet claimed Social Security. Your taxable income after the $16,100 standard deduction is $18,900 — well inside the 12% bracket, which tops out at $50,400 of taxable income. That leaves $31,500 of 12% bracket headroom. A Roth conversion of up to $31,500 from your traditional IRA converts at 12 cents on the dollar.³

Compare that to full retirement: once RMDs begin (at age 73 or 75 under SECURE 2.0), the mandatory distributions may fill your brackets entirely, leaving little or no room for Roth conversions. The phased retirement years — typically ages 60–67 — are often the last opportunity to meaningfully shift IRA money to Roth before the RMD window closes.

Use our Roth Conversion Window Calculator to model your specific situation.

Healthcare: the ACA gap and Medicare timing

Healthcare is often the deciding factor in whether phased retirement is financially viable. The key question: are you covered by an employer plan during the transition?

Still covered by employer health insurance

If your employer still offers health insurance even at reduced hours, this is the cleanest path — retain coverage until you turn 65 and enroll in Medicare. When employer coverage ends, you have an 8-month Special Enrollment Period to sign up for Medicare Part B without a late-enrollment penalty. This SEP starts from the date employment or employer coverage ends, whichever comes first.⁴

ACA marketplace in the gap (if no employer coverage)

If you lose employer coverage before 65, the ACA marketplace becomes your bridge. In 2026, the enhanced premium tax credits introduced by the American Rescue Plan Act expired — subsidies are now back to the original rules, with the 400% FPL cliff ($62,600/year for a single person in 2026).

At age 60, a benchmark Silver plan costs roughly $15,900/year without subsidies. If your income (including consulting wages and portfolio distributions) stays below 400% FPL, you may qualify for meaningful subsidies. This is another reason to plan your income sources carefully during the ACA bridge years: Roth distributions are excluded from MAGI, while traditional IRA withdrawals count fully. Managing your distribution mix can materially change your subsidy eligibility.

See our Healthcare Costs in Retirement Guide for detailed ACA income management strategies.

Self-employment income: SE tax and retirement account contributions

If phased retirement involves consulting, freelancing, or self-employment (rather than W-2 part-time work), you face a different tax profile — and one meaningful opportunity.

Self-employment tax

Self-employment income is subject to SE tax: the combined Social Security and Medicare tax that W-2 employees split with their employer. You pay both sides. The good news: half of SE tax is deductible from gross income, and the deduction is above-the-line (reduces AGI, not just taxable income). This matters for IRMAA and SS provisional income calculations.

Solo 401(k): contributions continue

A solo 401(k) is available to self-employed individuals with no full-time employees (other than a spouse). Even in phased retirement, if you have self-employment income, you can continue contributing:

• Employee elective deferral: up to $24,500 in 2026 ($32,500 with the age 50+ catch-up, or $35,750 with the SECURE 2.0 super catch-up for ages 60–63)⁵
• Employer profit-sharing contribution: up to 25% of net self-employment income

These contributions reduce MAGI directly, which can keep you below IRMAA thresholds, lower SS provisional income, and extend the Roth conversion window simultaneously. A 62-year-old consultant earning $80,000 in net SE income who contributes the maximum employee deferral plus profit-sharing can shelter $44,500+ from current taxation.

Alternatively, if you'd rather accelerate Roth conversions, a solo Roth 401(k) lets the employee deferral portion go in after-tax — contributing to tax diversification without reducing the current-year Roth conversion headroom.

IRMAA look-back: plan 2 years ahead

Medicare IRMAA surcharges are based on your MAGI from two years prior. In 2026, IRMAA uses 2024 income. This creates a specific planning risk for high-earning phased retirees: a strong consulting year in 2024 that pushed MAGI above $103,000 single / $206,000 MFJ (2024 thresholds) may now be generating Medicare surcharges of $860 to $5,498/year on top of your base Part B premium.

The planning implication is forward-looking: decisions you make in 2026 about consulting income, IRA withdrawals, and Roth conversions will affect your 2028 Medicare premiums. High-income years during phased retirement should be modeled with the 2-year IRMAA lookback in mind.

If a one-time event (e.g., a large contract or business sale) pushes income above an IRMAA tier, SSA Form SSA-44 allows you to appeal the surcharge if your income has since decreased — a useful tool for retirees with lumpy consulting income.

Bucket strategy adjustments for phased retirement

The standard bucket strategy assumes you're drawing from the portfolio to cover all living expenses. During phased retirement, part-time income fills some or all of that need. The practical implication: the Cash Bucket (12–24 months of living expenses) may not need to be fully funded, because some expenses are covered by wages.

A useful adjustment: size the Cash Bucket to cover only the expenses not covered by part-time income. If you spend $6,000/month and earn $3,000/month from consulting, your net draw from the portfolio is $3,000/month. The Cash Bucket for 18 months of net draw is $54,000 — significantly less than the $108,000 you'd need at full retirement.

This also means you can leave more of the portfolio in the Growth Bucket during phased retirement, potentially improving long-run outcomes. See our Bucket Strategy Calculator to model this with your numbers.

Worked example: Michael, age 62, phasing from engineering to consulting

Michael retired from a corporate engineering job at 62 and now consults 20 hours/week for $70,000/year net of SE tax deductions. He has:

• $1.4M in a traditional IRA
• $400K in a taxable brokerage account
• $85K in a solo 401(k) he rolled over from a former employer plan
• Projected SS benefit of $28,000/year at age 67 (FRA), $37,000/year if delayed to 70

Decision 1: Don't claim SS while working. At $70,000 SE income, Michael is far above the $24,480 earnings test limit. Even if SS were claimed, most benefits would be withheld and the provisional income cascade would tax 85% of the SS benefit. He waits until 70, targeting $37,000/year for maximum lifetime income and survivor benefit protection.

Decision 2: Maximize Roth conversions. With $70,000 SE income and the $16,100 standard deduction, Michael's taxable income is $53,900 — just above the 12% bracket ceiling of $50,400. However, his half-SE-tax deduction reduces this further. He converts approximately $20,000/year from his traditional IRA to Roth, staying well within the 12% bracket and well below IRMAA Tier 1 at $109,000 MAGI. Over 5 phased-retirement years (ages 62–67), he shifts $100,000 into Roth tax-free.

Decision 3: Continue solo 401(k) contributions. Michael contributes $32,500/year (employee deferral $24,500 + age 50+ catch-up $8,000) to a traditional solo 401(k). This reduces his MAGI to approximately $37,500 — keeping him in the 12% bracket and creating additional Roth conversion headroom. The contributions will eventually face RMDs, but the combination of lower pre-67 taxes and continued Roth conversion capacity makes the traditional vehicle worthwhile.

Decision 4: Portfolio draw is minimal. With $70,000 in consulting income and <$37,000 in annual spending, Michael actually adds to savings during phased retirement. He uses the taxable brokerage for Roth conversion tax payments to avoid dipping the IRA unnecessarily.

Decision 5: Healthcare via employer's COBRA, then ACA. Michael negotiated 18 months of COBRA coverage after leaving corporate employment, then transitions to ACA marketplace coverage for the years 62–65. With solo 401(k) contributions and above-the-line SE deductions reducing his MAGI to ~$37,000, he qualifies for a meaningful ACA subsidy. At 65, he enrolls in Medicare during the 8-month SEP after his COBRA-equivalent coverage ends.

The result: by the time Michael turns 67 and claims Social Security, he has (a) eliminated most future RMD exposure through Roth conversions, (b) maximized his SS benefit through delay, (c) avoided IRMAA surcharges throughout phased retirement, and (d) extended the portfolio's longevity significantly compared to an unplanned early retirement.

When phased retirement planning requires a specialist

The interactions between consulting income, Roth conversion timing, IRMAA look-back, solo 401(k) decisions, and Social Security delay are non-trivial. A few percentage points difference in tax rate on Roth conversions over a 5-year window can mean $50,000–$100,000 in lifetime tax savings on a $1M+ IRA.

This planning is squarely in the domain of a retirement income specialist — not a generalist advisor focused on portfolio construction. The right advisor models the full transition period: income sequencing, bracket management, IRMAA exposure, and the handoff from part-time income to full portfolio distributions and Social Security at the end of phased retirement.

1. SSA.gov — "How Work Affects Your Benefits." 2026 earnings test limits: $24,480 before FRA, $65,160 in the year you reach FRA. Rules verified against SSA 2026 cost-of-living adjustments.
2. IRS Publication 915 — "Social Security and Equivalent Railroad Retirement Benefits." Provisional income formula and taxation thresholds: 50% inclusion above $25,000 single / $32,000 MFJ; 85% inclusion above $34,000 single / $44,000 MFJ. IRC §86.
3. IRS Rev. Proc. 2025-32 — "2026 Inflation Adjustments." Standard deduction $16,100 single / $32,200 MFJ. 12% bracket top: $50,400 taxable income (single) / $100,800 (MFJ). IRMAA Tier 1: $109,000 single / $218,000 MFJ (CMS 2026 Part B fact sheet).
4. Medicare.gov — Special Enrollment Periods for Part A & Part B. 8-month SEP after employment-based coverage ends. Enrolling outside IEP or SEP triggers a 10% per-year late-enrollment penalty on Part B premiums.
5. IRS — Retirement Topics: 401(k) Contribution Limits. 2026 employee deferral $24,500; age 50+ catch-up $8,000; SECURE 2.0 ages 60–63 super catch-up $11,250. Solo 401(k) employer contribution up to 25% of net self-employment compensation.

Tax figures and thresholds verified against 2026 sources as of May 2026.