Roth conversion planning for military retirees with Savant Wealth Management

When do pre-tax savings call for Roth conversions?

Pre-tax savings call for Roth conversions when your later income, mostly pensions plus required withdrawals, will likely push you into a higher bracket or Medicare tier than today. For a retiree with a military pension and $500,000 or more still pre-tax, that usually means converting before RMDs begin at 75.

Most retirees believe a large balance only matters at RMD age. Take Troy (66) and Olga (63): two pensions and Social Security already put joint MAGI near $160,000. RMDs at 75 would land on top of that, and Troy's TRICARE For Life requires Part B, so every income tier shows up in the premium.

What happens if a conversion trips IRMAA?

A conversion that pushes joint MAGI over an IRMAA line raises Part B premiums 2 years later, and the conversion can't be recharacterized. Many people assume the years before Medicare don't count. A $120,000 conversion at 64, made because Olga isn't on Medicare yet, arrives as an IRMAA notice from Social Security.

Joint MAGI of $280,000 lands in the $405.80 tier, costing both spouses $4,869.60 in extra Part B premiums that year ($202.90 × 2 × 12). Converting $110,000 would have landed in the $284.10 tier, at $1,948.80. A one-time conversion isn't a life-changing event Social Security accepts on Form SSA-44.

Size each year's Roth conversion in 4 steps

Plenty of retirees believe any amount works, so long as they can pay the tax. The rule at Savant Wealth Management is narrower. Once you're 63 or older, convert no more than the room under the next IRMAA tier minus a cushion of at least $5,000, using the income you expect for the conversion year. Only the decision due this year goes on the table; the next one waits for its own date.

Conversions rarely pay if you expect a lower tax rate later, if the tax would have to come out of the converted money itself, or if most of the IRA is headed to charity through qualified charitable distributions after 70½. We'll say so plainly on the intro call. How to draw down the TSP is a separate job, covered by TSP withdrawal planning.

• Step 1: you send the prior federal return, the DFAS and OPM 1099-R forms, the SSA-1099 and the TSP and IRA statements, and Savant Wealth Management sets baseline MAGI for the conversion year from them.
• Step 2: we find the IRMAA tier that will apply 2 years ahead and subtract a cushion of at least $5,000 for income no one can predict, such as fund capital gains distributions. For Troy and Olga, $218,000 − $160,000 = $58,000 of room, less the cushion leaves $53,000, and the conversion is set at $50,000.
• Step 3: before suggesting the amount, we estimate the tax cost and the Part B premium 2 years out, and decide with you which savings account pays the tax so the IRA isn't tapped for it.
• Step 4: the conversion is made in the fall, once the year's income is clearer and well before December 31. You get a one-line written record of the amount, the tax cost and the MAGI it produces, and Form 8606 records it on the return.

When does Olga's conversion pay for itself?

In a hypothetical household, Olga's conversions pay for themselves at 82, when her running savings of $48,000 pass the $44,000 cost. That assumes $50,000 converted each year from 63 to 66, a 22% rate now, a 24% rate later and $25,000 drawn tax-free each year from 75.

The example follows Olga alone and the traditional IRA in her name, which holds $250,000. Her joint MAGI with Troy is $160,000, so a $50,000 conversion lifts it to $210,000, still under the $218,000 joint IRMAA tier that sets premiums 2 years later. At 22%, each conversion costs $11,000, paid from savings. Four years cost $44,000 and move $200,000. Drawn at $25,000 each year from 75 at 24%, the money saves $6,000 each year ($25,000 × 0.24). That reaches $42,000 at 81 and passes the $44,000 cost at 82, before growth.

The running benefit is still $2,000 short at 81 and passes the cost at 82. That is the last year, because $200,000 drawn at $25,000 a year runs out at 82. So the payoff depends on living into the 80s and on the later rate really being higher. A higher rate is likely if Olga files single after Troy: single brackets are roughly half as wide as joint ones, and the single IRMAA tier starts at $109,000, half the joint $218,000. If the later rate is only 20%, each year saves $5,000. Eight withdrawals then return $40,000 against the $44,000 paid, so the conversions never break even before growth.

Two things are missing from the table. Qualified Roth withdrawals stay out of MAGI, so they never push a later Part B premium up. Paying the tax from savings also leaves the full $50,000 working inside the Roth each year. The table counts neither, so the real benefit is larger than shown. Markets still apply: the Roth is invested, and the $200,000 moved into it can fall as easily as it can grow.

One practical detail: TRICARE For Life covers prescriptions, so many beneficiaries skip Part D. With no Part D, there's no Part D surcharge, and the IRMAA math here covers Part B only.

Bring these to the Savant Wealth Management intro call

On the intro call, held over a shared screen or by phone, we set this year's baseline MAGI and the dollar room under the next tier. Bring last year's federal return, the DFAS and OPM 1099-R forms, the SSA-1099, current TSP and IRA statements and any IRMAA letter from Social Security. Savant Wealth Management sends its fee schedule in writing before the call, and asks for $500K in investable assets. No phone number is published here, so pick a time through the request form on this page.