How Taxes, Income Sources & Home Equity Changed 4 Retirement Plans for the Same $2.75M Couple (Part 2)

By David Lundberg, MBA, MSCJ, Marine Veteran, Flat-Fee Fiduciary Financial Planner. Ashley Lundberg, MSBL, Financial Educator and Wellness Guide. Founders of Awaken Financial Designs. Yoga Teacher Certified for Wellness. Headquartered in North Carolina, Arizona, and virtually nationwide where appropriately licensed.

What if the same retired couple with about $2.75 million (plus their home), with the same assets and the same retirement date, could experience dramatically different tax, income, and legacy outcomes? Only the decisions changed. In Part 1 of this case study, we walked through four different retirement plans for a married couple we called Mark and Carol. We showed how various Roth IRA conversion strategies, the widow tax, and legacy composition could create very different outcomes depending on the path chosen.

Many of you asked thoughtful questions after Part 1. You wanted to see what was happening beneath the surface. You wanted to understand lifetime taxes, where retirement income may actually come from year by year, how Medicare IRMAA surcharges may interact with conversion strategies, and how a primary residence may fit into retirement and legacy planning.

This article answers those questions.

A Note About This Case Study:We filmed a comprehensive YouTube video walking through Part 2 of this case study with all of the visuals, lifetime tax breakdowns, income source charts, and home equity analysis discussed below. If you prefer to watch instead of read, you can see the full video here: We Modeled 4 Retirement Plans for a $2.75M Couple — Part 2 (Taxes, Income Sources & Home Equity). This article adapts that video into written form for couples who prefer to read and reference the planning concepts at their own pace.

If You Missed Part 1

In Part 1, we modeled four different retirement plans for Mark and Carol, a hypothetical married couple living in Arizona, ages 66 and 63, who retired at age 62 with approximately $2.75 million in total assets. We focused primarily on monthly after-tax spending, Roth IRA conversion strategies, legacy composition, and the widow tax. For full context on the starting point, the four-plan framework, and the surviving spouse modeling, we recommend reading Part 1 here: Should Married Couples Do Roth IRA Conversions? A $2.75M Retirement Case Study.

Now let us go deeper.

A Brief Wellness Note Before We Begin.

Before walking into a comprehensive financial conversation, we often suggest a brief moment of intentional breathing. As certified yoga and breathwork instructors, we have found that the nervous system has a real influence on clarity and decision quality.

Part 2 of our YouTube video opened with a Fire Breath exercise, sometimes called Bhastrika Pranayama. This is a faster, controlled breathing technique often described as helping reduce stress and improve mental focus before important conversations. As always, this is optional, educational only, and not therapy or medical advice. If you have any medical concerns, please consult your physician before practicing this or any breathing technique.

If you choose to practice a simpler version on your own, simply sit upright, breathe in and out through the nose for several rapid but controlled cycles, then return to slow, natural breathing. Even 30 seconds can shift how the body and mind feel before walking into financial decisions of this size.

Now let us look beneath the surface. 

Most couples never see this part. They see account balances. They see investment returns. They see headlines about Roth conversions and taxes. What they rarely see is how all the pieces may interact over twenty or thirty years of retirement. That is where some of the most important planning decisions often live.

Across all four retirement plans, the starting point is identical.

Mark holds approximately $1,500,000 in his traditional IRA. Carol holds approximately $700,000 in hers. Mark holds approximately $200,000 in his Roth IRA. Carol holds approximately $100,000 in hers. They share a joint taxable brokerage account of approximately $250,000 with a cost basis of approximately $125,000. They hold approximately $150,000 in joint cash and bank accounts. Mark receives approximately $3,100 per month in Social Security. Carol receives approximately $1,700 per month. Plus their home valued around $900,000 paid off. 

This detail matters more than it may first appear. Whose name is on which account often affects Required Minimum Distribution timing. In this case, Mark's RMDs will begin earlier than Carol's because Mark is the older spouse. That timing alone may shape how the retirement income flow looks year by year, especially if one spouse passes before the other.

What follows is how four different planning decisions may create four different retirement outcomes.

Lifetime Taxes Across Four Plans

One of the most common assumptions retired couples bring into planning conversations is that paying the least taxes possible is the goal. It is one of the goals. It is rarely the only goal.

Across all four plans, estimated lifetime taxes from 2026 through 2051 vary, but not always in the direction many couples expect.

Plan 1, with no Roth conversion, produced approximately $738,000 in estimated lifetime taxes. Plan 2, with Roth conversions filling the 22 percent tax bracket, produced approximately $721,000. Plan 3, with aggressive Roth conversions filling the 32 percent bracket, produced approximately $715,000. Plan 4, with no conversion and the surviving spouse scenario, produced approximately $808,000.

Notice something important. The most aggressive Roth conversion strategy did produce the lowest lifetime tax total. Yet the difference between Plan 1 and Plan 3 was approximately $23,000 across more than two decades of retirement. The monthly spending sacrifice required to achieve that lower tax outcome was significantly larger than the tax savings themselves, as we showed in Part 1.

Many people assume the goal is paying the least taxes possible. The real goal is maximizing after-tax outcomes. Those two things are not always the same. Remember thai is just another crucial piece to be aware of. 

Medicare IRMAA: The Hidden Cost of Higher Taxable Income

Medicare premiums are not flat across all retirees. The Income-Related Monthly Adjustment Amount, or IRMAA, may increase Medicare Part B and Part D premiums based on modified adjusted gross income reported two years prior. Roth conversions increase taxable income in the year of conversion. That income may push retirees into higher IRMAA tiers, increasing Medicare premiums on a two-year lookback basis.

Across the four plans, estimated lifetime IRMAA costs varied. Plan 1 produced approximately $31,000 in lifetime IRMAA. Plan 2 produced approximately $48,000. Plan 3 produced approximately $74,000. Plan 4 produced approximately $56,000.

This is one of the most important interaction effects in retirement planning. Tax planning is rarely isolated. Everything is connected. A Roth conversion strategy that lowers lifetime income taxes may simultaneously increase lifetime Medicare premiums. Whether the net result is favorable depends on the couple's full picture.

Net Investment Income Tax, or NIIT, also showed minor variations across the four plans, ranging from approximately $5,400 to $6,800 over the same period. The NIIT differences were small compared to the IRMAA differences, but the broader point is the same. Several smaller tax exposures often move together when one major variable changes.

This is exactly why visual planning matters. One number rarely tells the full story.

Tax-Free or Low-Tax Years After Age 73

One of the most powerful visual differences in Part 2 was how many years of tax-free or low-tax retirement income each plan may produce after age 73, the age at which Required Minimum Distributions generally begin under current law.

Plan 1 produced approximately zero tax-free years after age 73. Plan 2 produced approximately eight tax-free or very low-tax years. Plan 3 produced approximately nineteen. Plan 4 produced approximately zero. The aggressive Roth conversion in Plan 3 created the longest stretch of tax-free retirement income. But it also required the most upfront sacrifice during the conversion years.

The same couple. The same assets. Very different retirement experiences.

Where Does Retirement Income Actually Come From?

This may be one of the most overlooked questions in retirement planning. Where, exactly, does the money come from each year? This is often called “tax order of withdrawal”. 

Looking at projected income sources in 2039, when Mark would be 79 and Carol would be 76, the four plans produced very different breakdowns.

In Plan 1, approximately 32 percent of income came from Social Security and approximately 68 percent came from traditional IRA distributions and Required Minimum Distributions. Roth IRA contributions to income were near zero. Taxable brokerage contributions were near zero. All retirement income flowed through ordinary income taxation.

In Plan 2, approximately 36 percent came from Social Security, approximately 16 percent from traditional IRA distributions, and approximately 48 percent from previously converted Roth IRA dollars. Most of the income enjoyed favorable tax treatment.

In Plan 3, approximately 32 percent came from Social Security and approximately 68 percent came from Roth IRA distributions. Very little came from the traditional IRA, because most of it had been converted years earlier.

In Plan 4, with Carol as the surviving spouse filing as a single taxpayer, approximately 21 percent came from Social Security, approximately 64 percent came from traditional IRA distributions and RMDs, approximately 8 percent came from her Roth IRA, and approximately 7 percent came from the taxable brokerage account.

Plan 4 reveals something many couples never fully see. After one spouse passes away, the surviving spouse may carry the largest tax exposure of all four plans. Approximately 64 percent of Carol's retirement income would flow through ordinary income tax at single-filer rates, with a smaller standard deduction and tighter brackets than during marriage.

This is the widow tax in motion.

The Primary Residence: A Real Asset Often Treated as an Afterthought

Mark and Carol own their home outright. The home is valued at approximately $900,000, with a cost basis of approximately $760,000, creating an unrealized capital gain of approximately $140,000.

Most retirement planning software includes a primary residence as part of net worth, but not as a spendable or investable asset. That distinction matters. A home does not generate retirement income unless it is sold, borrowed against, or accessed through a specialized financial tool. We have met many couples who feel financially constrained while simultaneously sitting on hundreds of thousands of dollars of home equity they have never considered as part of their retirement strategy.  Yet a home is often one of the largest assets a couple holds. 

Three planning considerations may shape how a primary residence fits into a retirement and legacy strategy.

Section 121 Capital Gains Exclusion

Under current tax law, married couples filing jointly may exclude up to $500,000 of capital gains, or $250,000 per spouse, on the sale of a primary residence, provided certain residency and ownership requirements are met. In Mark and Carol's case, the $140,000 unrealized gain would be fully excluded. If they sold their home today under current law, the capital gains tax owed on the sale of the home may be $0. This is one of the more favorable tax benefits available to long-term homeowners.

Step-Up in Basis at Death

Under current law, the cost basis of a primary residence generally steps up to fair market value at the original owner's death. If Mark and Carol passed away and the home transferred to their heirs at a fair market value of $900,000, the heirs would generally inherit the property at the stepped-up basis. There is typically no time limit for the heirs to sell. The tax treatment is similar to the taxable brokerage account in this respect. The home, like the brokerage account, may pass with significant tax efficiency under current law.

Reverse Mortgage as an Optional Tool

For couples who wish to remain in their home but access some equity without selling, a reverse mortgage may potentially serve as a source of tax-free cash flow during later retirement years. Illustrated at approximately 20 percent of home value in this case study, that may represent approximately $180,000 of potential equity access.

Reverse mortgages are not appropriate for everyone. Terms, availability, interest costs, fees, and amounts vary based on age, home value, lender, and current rates. They also reduce the value of the home eventually passed on to heirs. They are simply one of several tools that may be considered as part of a coordinated retirement plan, alongside downsizing or other options.

The bigger insight is this. A home is more than just shelter. It is an asset class with its own tax treatment and its own planning potential, and it deserves to be part of the conversation rather than left in a footnote.

The Widow Tax in Motion

In Part 1, we discussed the widow tax in detail. Part 2 makes the impact visible.

In Plan 4, after Mark passes at age 77, Carol becomes a single-filer taxpayer. She retains only the higher of the two Social Security benefits, approximately $3,100 per month rather than the combined $4,800 the household previously received together. That represents a permanent income reduction of approximately $20,400 per year.

Her standard deduction generally decreases. Her tax brackets compress under single filer status. Medicare IRMAA thresholds shift to the lower single-filer thresholds. RMDs from her inherited traditional IRA force taxable income whether she needs it or not.

In 2039, approximately 64 percent of her retirement income would flow through ordinary income tax. Many fixed household expenses, such as housing costs, property taxes, insurance, and utilities, often do not decline in proportion to the income loss.

This is why Plan 4 produced the highest lifetime taxes of all four plans. Not because of the strategy. Rather, because of the surviving spouse's tax exposure over many years as a single filer.

This is part of why coordinated planning may matter so much. Decisions made today can shape how a surviving spouse may live for decades. Many couples spend years preparing for retirement together but never stop to ask what retirement may look like for the spouse who remains. 

The Lowest Tax Plan Was Not Automatically the Best Plan

There was a moment during our conversation that may have been one of the most revealing of the entire case study. One of us asked the other a simple question. If you looked only at lifetime tax totals, which plan would you choose?

The initial answer was Plan 1. After a second look, the answer changed to Plan 3, because Plan 3 had the lowest lifetime tax total of approximately $715,000.

That moment captured something important. Even with all of the data visible, with charts and projections and visuals in front of us, the lowest-tax answer was not necessarily the best answer. Plan 3 also produced the lowest monthly spending in any year of the plan, by a significant margin. Plan 3 created the highest lifetime IRMAA costs. Plan 3 required the largest sacrifice during the conversion years.

The best plan depends on what each couple values.

One plan optimized for taxes. One plan optimized for flexibility. One plan optimized for legacy. One plan optimized for monthly spending. One plan optimized for surviving spouse outcomes. There was no universally perfect answer. The right answer depends on what each couple actually values, not on any single calculation.  The best plan was the one that fit how this couple actually wanted to live and what they actually wanted to leave behind.

Numbers Without Options Can Feel Like Pressure. Numbers With Options Often Create Clarity.

This is one of the most important lessons from the entire two-part case study. One of the biggest surprises from this case study was realizing that several plans were perfectly reasonable. The goal was never finding the one perfect answer. The goal was understanding the tradeoffs clearly enough to make an informed decision.

Couples often come to us with questions. Should we convert? Should we delay Social Security? Should we sell the house? Should we worry about the surviving spouse? Should we be doing more?

When those questions are answered in isolation, they often create more anxiety. When they are answered inside a coordinated visual plan that shows several options side by side, they often create clarity instead.

The four-plan framework we use is not about identifying a winner. It is about helping couples see how different decisions may create different outcomes, so the decision they ultimately make is one they understand and feel confident about.

A tax return shows you the past. A retirement plan should help you understand what may happen next.

A Final Reflection

If you read Parts 1 and 2 of this case study and found yourself imagining what your own four plans might look like, that wondering is worth following. For many couples, this is where the real conversation begins. Not with a decision. With awareness. Awareness of the opportunities. Awareness of the tradeoffs. Awareness of what may be possible.

The most important question is not which plan is mathematically optimal. The most important question is which plan helps you live the life you actually want to live, together. 

The Awaken Commitment

Stop guessing when you can retire or how much is enough. For the first time, see it clearly. Your retirement age options, your real after-tax spending, and your personal numbers, built visually in your own plan. Many people spend additional years working simply because they never saw their options clearly.

Next Step: A Complimentary Discovery & Alignment Call

If reading this case study brought new questions to mind about your own retirement situation, we invite you to schedule a complimentary Discovery & Alignment Call with our team. This is not a sales call. It is a brief conversation to learn about your situation, share more about how our flat-fee planning process works, and decide together whether further coordinated planning may be a good fit for you.

You can schedule a Discovery & Alignment Call here: https://www.awakenfinancialdesigns.com/appointments

Awaken Financial Designs is headquartered in Cary, North Carolina, and registered in Arizona, with virtual guidance available to couples nationwide where we are appropriately licensed. We operate as a flat-fee fiduciary firm. We do not charge assets under management fees. This allows us to focus on coordinated planning rather than the size of an investment portfolio.

Frequently Asked Questions

What does Part 2 of the case study cover that Part 1 did not?Part 2 goes beneath the surface of the four retirement plans introduced in Part 1. It covers estimated lifetime taxes, Medicare IRMAA surcharge impacts, NIIT considerations, where retirement income may actually come from year by year, primary residence planning including Section 121 and step-up in basis, and how the widow tax affects the surviving spouse over time.

Why do Roth IRA conversions sometimes increase Medicare premiums?Roth conversions increase taxable income in the year of conversion. Medicare IRMAA surcharges are based on modified adjusted gross income from two years prior. Higher income from a Roth conversion may push a retiree into a higher IRMAA tier, increasing Medicare Part B and Part D premiums for the following years.

What is the Section 121 capital gains exclusion? Under current law, married couples filing jointly may exclude up to $500,000 of capital gains, or $250,000 per spouse, on the sale of a primary residence, provided residency and ownership requirements are met. This exclusion may significantly reduce or eliminate capital gains taxes on the sale of a long-term home.

What is step-up in basis on a primary residence? Under current law, the cost basis of a primary residence generally steps up to fair market value at the owner's death. Heirs generally inherit the home at this stepped-up basis, which may reduce or eliminate capital gains taxes on any appreciation that occurred during the original owner's lifetime.

Is a reverse mortgage a good idea in retirement?A reverse mortgage may potentially serve as a source of tax-free cash flow for some retirees, but it is not appropriate for everyone. Terms, costs, fees, and amounts vary based on age, home value, lender, and current rates. Reverse mortgages also reduce the value of the home eventually passed on to heirs. They should be considered carefully within the context of a complete retirement plan.

What is the widow tax?The widow tax informally refers to the financial impact a surviving spouse may experience, including transition to single filer status, lower standard deduction, reduced Social Security income, and potential changes in Medicare IRMAA surcharges. It may significantly affect after-tax income for the surviving spouse.

Why does whose name is on each account matter?The ownership of accounts may affect Required Minimum Distribution timing, surviving spouse planning, and tax outcomes over time. RMDs begin based on the age of the account owner, so the older spouse's accounts may require distributions earlier than the younger spouse's accounts.

Is the lowest-tax retirement plan always the best plan?No. While lower lifetime taxes may seem appealing, they often require significant tradeoffs in monthly spending, lifestyle, or flexibility. The best retirement plan depends on what each couple actually values, including spending priorities, legacy goals, healthcare considerations, and surviving spouse planning.

Where do retired couples typically draw their income from?Sources may include Social Security, traditional IRA and 401(k) distributions, Roth IRA distributions, taxable brokerage accounts, and home equity. The mix and timing depend on the couple's strategy and may shift significantly over time, especially after Required Minimum Distributions begin or after a surviving spouse becomes a single filer.

Do you work with couples outside of North Carolina and Arizona?Yes. Awaken Financial Designs is headquartered in Cary, North Carolina, and registered in Arizona. We provide virtual guidance to married couples nationwide where we are appropriately licensed.

Can two couples with the same assets experience very different retirement outcomes?

Yes. Retirement outcomes are often shaped by withdrawal strategies, Roth conversions, Social Security timing, taxes, healthcare costs, home equity decisions, and surviving spouse planning. Two couples with identical assets may experience very different after-tax spending, legacy outcomes, and lifetime tax burdens depending on the decisions they make.

Disclosures: Awaken Financial Designs LLC | CRD #339725 | Flat-fee fiduciary RIA | Veteran and Woman Owned | Headquartered in Cary, North Carolina, with registration in Arizona. Virtual nationwide where appropriately licensed. This article is for educational purposes only and is not financial, tax, or legal advice. The case study presented is hypothetical and for illustrative purposes only. Names and identifying information have been altered for privacy. The case study is hypothetical and for educational purposes only. The individuals described are not actual clients.  All figures are illustrative estimates based on planning software projections and assumptions. Actual results will vary significantly based on individual circumstances. Tax laws are subject to change. Reverse mortgage terms, availability, and amounts vary based on age, home value, lender, and current rates. Please consult qualified financial, tax, and legal professionals regarding your specific situation.