Couple With $345k Pensions Weighs Roth Conversion Strategy

A 66-year-old retired man and his 61-year-old wife have a combined annual pension income of $345,000, according to a question posed to MarketWatch's The Moneyist column. The couple holds close to $1 million in tax-deferred 403(b) retirement accounts but only about $41,000 in Roth IRAs. They are considering using a $600,000 expected inheritance to pay the associated income taxes if they decide to convert some of their traditional savings.

They seek to understand the trade-off between paying taxes now at their current high marginal rate versus facing potentially higher taxes later on required minimum distributions. An estate-planning consideration is that Roth assets would provide their children with tax-free inheritances, whereas traditional retirement accounts could create a future tax burden for heirs.

The Financial Advisor's Perspective

Quentin Fottrell, the Moneyist, responded that an aggressive Roth conversion strategy is probably not justified given their level of wealth and guaranteed income. He stated that the window for meaningful conversions has narrowed for them. However, he suggested a multi-year, strategic conversion approach might still deserve consideration.

Fottrell advised that the best time to execute such conversions, if pursued, would be later in the tax year when their exact income is known or during a market downturn. He noted that using inheritance funds to pay the conversion tax is more attractive than using money from the 403(b) accounts themselves.

Key Considerations for Conversion

The man is 66, so required minimum distributions (RMDs) from his traditional accounts are not an immediate crisis under current rules. Fottrell suggested the couple could convert a modest portion of their 403(b) accounts each year if doing so keeps them in their current tax bracket and prevents them from tipping into higher Medicare Income-Related Monthly Adjustment Amount (IRMAA) premiums.

A conversion would be more attractive if they currently live in a low or zero income-tax state and plan to move to a higher-tax state in the future. Eligibility for Affordable Care Act health-insurance subsidies and the IRMAA surcharges are based on modified adjusted gross income (MAGI). Withdrawals from traditional retirement accounts count toward MAGI, while qualified Roth withdrawals do not.

The Impact of Medicare IRMAA

The couple's high pension income already places them in a high Medicare premium bracket. For 2026, IRMAA surcharges for married couples filing jointly begin at a modified adjusted gross income above $218,000. The tiers escalate at $274,000, $342,000, $410,000, and $750,000.

Above the $410,000 MAGI threshold, the monthly Medicare Part B premium is $649.20 per person, compared to the standard premium of $202.90. Fottrell emphasized that IRMAA is a major consideration when deciding on Roth conversions, as the surcharges are based on income from two years prior.

Estate Planning and Heirs

Fottrell pointed out that it may be inevitable for the couple's heirs to face significant taxes due to the SECURE Act. This legislation forces most non-spouse beneficiaries to empty an inherited traditional IRA within 10 years, triggering taxable distributions. This reality adds weight to the argument for creating a tax-free inheritance via Roth accounts.

Despite this, Fottrell's concluding advice was cautious. He indicated that, given their circumstances, pursuing conversions might be more trouble than it's worth, even when considering the children's inheritance. The final recommendation was to make the calculation with a certified financial planner, leaning toward very piecemeal conversions if any are done at all.