Roth Conversion Strategies for Public Employees Retiring Before 65

The Golden Tax Window: Your Opportunity Between Retirement and Medicare

For public employees who retire before age 65, there's a unique tax planning opportunity that most people miss—the "tax window" between early retirement and Medicare eligibility. This 5-10 year period often presents the perfect time for strategic Roth conversions, potentially saving tens of thousands in future taxes and Medicare surcharges.

During these years, many public employees have significantly lower taxable income than they'll have later in retirement. Your pension may be your only major income source, Social Security hasn't started yet, and required minimum distributions (RMDs) are still years away. This creates an ideal environment for converting traditional retirement account funds to Roth IRAs at lower tax rates.

Why This Window Matters:

• Lower current income: Less competition for low tax brackets
• Future tax rate protection: Lock in today's rates before potential increases
• Medicare IRMAA avoidance: Reduce future income to avoid costly surcharges
• RMD elimination: Roth IRAs don't have required minimum distributions
• Estate planning benefits: Tax-free legacy for your heirs

Understanding and utilizing this tax window can transform your retirement income strategy and provide lasting financial benefits.

Why This Matters Specifically for Public Employees

Pension Timing Creates Unique Opportunities

Public employees have retirement income patterns that differ significantly from private sector workers, creating distinctive tax planning opportunities:

Early Retirement with Pension Income:

• Early Retirement: Many teachers can retire with full benefits before age 65
• Predictable income: Fixed pension payments provide income stability
• Delayed Social Security: Gap between pension start and Social Security eligibility
• Lower combined income: Pension alone may keep you in lower tax brackets

Example: Texas Teacher Retiring at 60

• TRS pension: $42,000 annually
• No Social Security yet: Doesn't start until age 62-70
• No RMDs yet: Traditional accounts can grow until age 73
• Tax bracket opportunity: Likely in 12% or 22% federal bracket

Delayed Social Security Strategy Benefits

Texas public school employees contribute 8.25% of salary to TRS for fiscal years 2024 and 2025, with the state contributing 8.25%, creating substantial pension benefits. This allows for strategic Social Security timing:

Social Security Delay Benefits:

• Delayed retirement credits: 8% annual increase until age 70
• Lower current income: More room for Roth conversions
• Future IRMAA risk reduction: Less total income when Medicare begins

Multiple Account Coordination

Public employees often have several retirement accounts that need coordination:

• 403(b) and 457(b) plans: Traditional and Roth options available
• Personal IRAs: Additional conversion opportunities
• Pension income: Stable base for planning around
• State-specific benefits: Texas has no state income tax advantage

Benefits of Strategic Roth Conversions

Tax-Free Growth and Distributions

The primary benefit of Roth conversions is transforming taxable retirement accounts into tax-free income sources:

Immediate Benefits:

• Pay taxes at current rates: Lock in today's potentially lower brackets
• Tax-free growth: All future growth is tax-free
• Tax diversification: Mix of taxable, tax-deferred, and tax-free accounts

Long-Term Advantages:

• No RMDs: Unlike traditional accounts, Roth IRAs never require distributions
• Medicare IRMAA avoidance: Tax-free withdrawals don't count toward income limits
• Flexible timing: Withdraw when you need it, not when required

RMD Avoidance Strategy

Large required minimum distributions (RMDs) can trigger higher Medicare premiums, making Roth conversions particularly valuable:

RMD Problem for Public Employees:

• Age 73 or 75: RMDs begin on traditional retirement accounts
• Increasing percentages: RMDs grow larger each year
• Tax bracket escalation: RMDs can push you into higher brackets
• Medicare IRMAA trigger: Higher income from RMDs increases Medicare costs

Roth Conversion Solution:

• Eliminate future RMDs: Roth IRAs have no required distributions
• Control your tax bracket: Choose when and how much to withdraw
• Preserve Medicare savings: Keep MAGI below IRMAA thresholds

Estate Planning Advantages

Roth IRAs provide superior estate planning benefits compared to traditional accounts:

Legacy Benefits:

• Tax-free inheritance: Heirs receive tax-free distributions
• Stretch potential: Beneficiaries can spread distributions over their lifetime
• No RMDs during your lifetime: Maximize account growth for heirs
• Estate tax considerations: Paying conversion taxes now may reduce estate size

Timing Considerations: Maximizing the Tax Window

Optimal Conversion Years

The best years for Roth conversions typically fall between early retirement and full Social Security claiming:

Ages 60-62: Prime Conversion Years

• Pension-only income: Lowest combined income period
• Before Social Security: No additional income competition
• Maximum runway: Most time before Medicare IRMAA impact
• Health insurance: May need ACA marketplace coverage (income matters for subsidies)

Ages 62-65: Moderate Conversion Opportunity

• Reduced Social Security option: May claim early at 62
• Still pre-Medicare: Avoid IRMAA for Medicare start
• Healthcare transition planning: Prepare for Medicare enrollment

Ages 65+: Limited but Strategic Conversions

• Medicare IRMAA consideration: Two-year lookback rule means 2025 conversions affect 2027 Medicare premiums
• Smaller conversion amounts: Stay within IRMAA thresholds
• Coordination with Social Security: Balance total income

Medicare IRMAA Avoidance Planning

IRMAA surcharges for 2025 range from $74.00 to $443.90 per month for Medicare Part B, and $13.70 to $85.80 per month for Medicare Part D. The basic Part B premium for 2025 is $185.00. Strategic Roth conversion timing can help avoid these costs:

IRMAA Avoidance Strategy:

• Complete major conversions before age 63 (two years before Medicare)
• Stay below thresholds in Medicare eligibility years
• Plan conversion amounts to avoid triggering higher IRMAA brackets

2025 IRMAA Thresholds to Avoid:

• Single filers: $106,000+ triggers first IRMAA bracket
• Married filing jointly: $212,000+ triggers first IRMAA bracket
• Conversion planning: Keep total MAGI below these amounts

Case Study: Converting in Low-Income Years After Retiring at 60

Meet Robert: Teacher with Strategic Conversion Plan

Background:

• Age: 60, retired with 30 years of service
• Pension: $45,000 annually
• Traditional 403(b): $380,000 balance
• Traditional IRA: $120,000 balance
• Married filing jointly
• Spouse: Still working, earning $55,000

Pre-Conversion Financial Picture

Annual Income Before Conversions:

• Robert's pension: $45,000
• Spouse's employment: $55,000
• Total household income: $100,000
• Federal tax bracket: 22%
• Texas advantage: No state income tax

Strategic 5-Year Conversion Plan (Ages 60-64)

Year 1 (Age 60): Foundation Year

• Pension income: $45,000
• Spouse income: $55,000
• Roth conversion: $35,000 from 403(b)
• Total taxable income: $135,000
• Effective tax on conversion: 22% ($7,700)

Years 2-3 (Ages 61-62): Acceleration Years

• Annual conversion amount: $45,000
• Tax cost per year: $9,900 (22% bracket)
• Total converted: $90,000 over two years
• Rationale: Still in 22% bracket, maximizing window

Years 4-5 (Ages 63-64): Final Preparation

• Reduced conversion: $25,000 annually
• Total converted: $50,000 over two years
• Medicare IRMAA preparation: Lower income before age 65

5-Year Conversion Summary:

• Total converted: $200,000
• Total tax cost: $44,000
• Average tax rate on conversions: 22%
• Remaining traditional balance: $300,000

Results and Long-Term Benefits

Age 65+ (Medicare Years):

• Pension income: $45,000
• Social Security (delayed until 70): $0 initially, then $36,000+
• Roth withdrawals: Tax-free income as needed
• Traditional account: Smaller balance, lower future RMDs

Projected Benefits:

• Medicare IRMAA avoidance: Stay below thresholds in Medicare years
• Tax bracket management: Control total income in retirement
• RMD reduction: Smaller traditional balances mean smaller required distributions
• Estate benefits: $200,000+ in tax-free Roth accounts for heirs

Financial Impact Analysis:

• Taxes paid on conversion: $44,000 over 5 years
• Estimated tax savings: $15,000+ annually in RMD years (ages 73+)
• Medicare IRMAA avoidance: $888+ annually saved (minimum Part B surcharge)
• Break-even timeline: Approximately 4-5 years after RMDs begin

Advanced Timing Strategies

Bracket Management Technique

Rather than converting fixed dollar amounts, optimize conversions by tax bracket:

22% Bracket Optimization (2025):

• Single filers: Fill up to $47,150 in 22% bracket
• Married filing jointly: Fill up to $94,300 in 22% bracket
• Strategy: Convert enough to reach but not exceed bracket thresholds

Multi-Year Bracket Planning:

• Year 1: Fill 12% bracket completely
• Years 2-4: Utilize full 22% bracket
• Year 5: Strategic smaller conversion for Medicare preparation

ACA Marketplace Coordination

For early retirees using ACA marketplace health insurance:

Income Management for Subsidies:

• Premium tax credits: Based on income relative to poverty level
• Cliff effects: Avoid income levels that eliminate subsidies
• Roth conversion impact: Increases current year income, may reduce subsidies

Strategic Approach:

• Calculate ACA impact: Include conversion income in subsidy calculations
• Compare total costs: Conversion taxes + higher health premiums vs. future benefits
• Consider timing: Convert in years with employer health coverage if possible

State Tax Considerations

Texas Advantage:

• No state income tax: Makes conversions more attractive than high-tax states
• Relocation planning: Consider conversion timing if planning to move
• Municipal bond coordination: Less important in no-tax states

Risks and Trade-Offs: Making Informed Decisions

Paying Taxes Now vs. Later

The fundamental trade-off in Roth conversions is paying taxes upfront for future tax-free income:

Risks of Converting:

• Current tax cost: Real money paid today for future benefits
• Tax rate uncertainty: Future rates might be lower than expected
• Market timing risk: Converting during market lows means fewer shares converted
• Liquidity impact: Using cash for taxes reduces investable assets

Benefits of Converting:

• Tax rate protection: Lock in current rates regardless of future changes
• Tax-free growth: All future appreciation is tax-free
• RMD elimination: Avoid forced distributions and bracket bumps
• Estate planning: Tax-free legacy for heirs

Market Timing Considerations

Convert During Market Downturns:

• More shares converted: Same dollar amount buys more shares when values are lower
• Recovery benefits: All recovery growth is tax-free in Roth account
• Tax efficiency: Pay taxes on temporarily reduced account values

Avoid Converting at Market Peaks:

• Fewer shares converted: High valuations mean fewer shares for same dollar amount
• Downside risk: Paying taxes on peak values that may decline

Opportunity Cost Analysis

Money Used for Tax Payments:

• Lost investment growth: Tax payments can't grow in the market
• Asset allocation impact: May force sale of investments to pay taxes
• Cash flow considerations: Ensure adequate liquidity for conversions

Strategies to Minimize Opportunity Cost:

• Use taxable account funds: Pay taxes from non-retirement accounts
• Spread conversions: Smaller annual amounts may be easier to fund
• Tax withholding caution: Withholding from conversion reduces amount converted

Implementation Guidelines and Best Practices

Annual Review and Adjustment Process

Quarterly Check-ins:

• Monitor income projections: Adjust conversion amounts based on actual pension and other income
• Tax bracket tracking: Ensure conversions don't push you into unintended brackets
• Market conditions: Consider timing based on account values

Year-End Planning:

• Final conversion decisions: Complete conversions by December 31
• Tax payment preparation: Ensure adequate funds for tax obligations
• Next year planning: Set conversion goals for following year

Professional Coordination

Tax Professional Consultation:

• Annual tax projection: Model conversion impacts before executing
• Quarterly payments: Ensure adequate estimated tax payments
• State tax implications: Understand any state-specific impacts

Financial Advisor Coordination:

• Investment allocation: Optimize which accounts to convert from
• Withdrawal strategy: Plan for accessing Roth funds in early retirement
• Estate planning: Coordinate with overall wealth transfer goals

Documentation and Record Keeping

Conversion Tracking:

• Basis tracking: Maintain records of Roth conversion amounts and dates
• Tax payments: Document taxes paid on each conversion
• Five-year rule: Track holding periods for penalty-free withdrawals

Special Considerations for Different Public Employee Groups

TRS (Teacher Retirement System) Members

Unique Advantages:

• Rule of 80: Early retirement capability with full pension
• Predictable income: Fixed pension allows for stable conversion planning
• Health benefits: TRS-Care may provide Medicare supplement options

Strategic Considerations:

• Pension start timing: Coordinate conversions with pension commencement
• Summer income gaps: Teachers may have lower income during non-working summers
• 403(b) coordination: Most teachers have additional retirement accounts for conversion

State Employee Retirement System (ERS) Members

Considerations:

• Different retirement eligibility: May have different early retirement options
• ORP choice: Some may have Optional Retirement Program instead
• State benefits: Different health insurance and benefits coordination

Federal Employees (FERS/CSRS)

Unique Factors:

• TSP accounts: Large Thrift Savings Plan balances for conversion
• Federal pension timing: Different eligibility rules than state systems
• Social Security coordination: FERS includes Social Security, CSRS doesn't

Municipal and Local Government Employees

Variable Considerations:

• Different pension systems: Each municipality may have different rules
• 457(b) availability: Many have penalty-free withdrawal options
• Local tax implications: Some cities have local income taxes

Conclusion: Review Annually with Tax and Financial Professionals

Roth conversion strategies for public employees retiring before 65 represent one of the most powerful tax planning opportunities available. The unique combination of early retirement capability, predictable pension income, and delayed Social Security creates an ideal environment for strategic conversions.

Key Success Factors:

1. Start planning early: Begin modeling conversions at least 5 years before retirement
2. Optimize the tax window: Focus major conversions on the lowest-income years
3. Consider Medicare IRMAA: Plan conversions to avoid future surcharges
4. Maintain flexibility: Adjust strategy based on changing circumstances
5. Professional guidance: Work with tax and financial professionals familiar with public employee benefits

Annual Review Process:

• Tax law changes: Stay current with evolving regulations
• Income projections: Update based on pension COLAs and other changes
• Market conditions: Adjust conversion timing based on account values
• Health and family changes: Modify strategy for changing circumstances

Common Mistakes to Avoid:

• Converting too much too fast: Pushing into unnecessarily high tax brackets
• Ignoring Medicare impact: Forgetting the two-year lookback rule for IRMAA
• Poor timing with market cycles: Converting at market peaks instead of valleys
• Inadequate tax planning: Not preparing for tax payments on conversions

The tax window between early retirement and Medicare eligibility may be the most valuable tax planning opportunity you'll have in retirement. Don't let it pass without careful consideration and strategic action.

Your Next Steps:

1. Calculate your tax window: Identify your lowest-income retirement years
2. Project your retirement income: Model pension, Social Security, and RMD timing
3. Estimate conversion capacity: Determine annual amounts that optimize tax brackets
4. Consult professionals: Work with advisors familiar with public employee benefits
5. Implement systematically: Start conversions during your optimal tax window

Remember, Roth conversion strategies are not one-size-fits-all. Your optimal approach depends on your specific pension benefits, other income sources, tax situation, and retirement goals. The investment in professional guidance during this critical planning period can pay dividends for decades to come. Reach out to me on the contact page below so we can work on your strategic Roth conversion.

Disclaimer: This article provides general information about Roth conversion strategies. Tax laws are complex and can change, and individual situations vary significantly. Always consult with qualified tax and financial professionals who understand public employee benefits before implementing any conversion strategy.