Jim Marschall is fully retired and, at 66, about four years from being required to take distributions from his retirement accounts. The former manager with Rayovac in Madison, Wis., has three-fourths of his investments in retirement accounts. Withdrawals from those accounts will be fully taxed as ordinary income (rates range from 10 percent to 35 percent).

The remainder of his investments are in taxable accounts, where qualified dividends and profits from the sale of investments held more than one year are taxed at a maximum capital-gains rate of 15 percent.

Jim and his wife, Sue, 63, are in a great position to trim their tax bill over the next few years, particularly because Sue plans to give up her part-time job as a nurse at the end of the year.

If the Marschalls can hold their taxable income below $65,100 next year — the ceiling for the 15 percent income-tax bracket for married couples filing jointly in 2008 — they will qualify for tax-free treatment of dividends and capital gains. With some exceptions, the 0 percent tax rate is scheduled to continue through 2010 for taxpayers in the two lowest brackets.

Claiming the standard deduction and personal exemptions will knock nearly $19,000 off the Marschalls' adjusted gross income next year. Itemizing deductions would reduce their AGI even more. And a portion of their Social Security benefits — which represent nearly half of their income — is tax-free. So the Marschalls should be able to stay in the 15 percent bracket.

While they're in that low bracket, they may also want to convert a portion of Jim's traditional IRA to a Roth IRA. Although they will owe taxes on the converted amount, once the Roth IRA is open for at least five years, it will provide tax-free retirement income or a tax-free inheritance. The Marschalls can repeat this strategy in 2009 and 2010.

Moving money out of the traditional IRA will also reduce the amount of the annual distribution Jim will have to take once he turns 70 1/2. Distributions are based on your account balance divided by your life expectancy, as detailed in IRS tables. So the smaller the balance, the smaller the required distribution and the accompanying tax bill.

Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to [email protected].