'Roth assets would provide our children with tax-free distributions'

"Upon either of us passing away, the surviving spouse will receive 100% of the deceased spouse's pension." (Photo subjects are models.)

Dear Quentin,

I'm 66, retired, and receive a pension of $165,000 a year, with a 2% annual COLA. I currently have about $450,000 in a 403(b) and $35,000 in a Roth IRA.

My wife is 61 and plans to retire in January 2027. Her projected pension will be $180,000 a year, also with a 2% annual COLA. She has $470,000 in a 403(b) and $6,000 in a Roth IRA.

Once she retires, our combined pension income will be $345,000 a year before any withdrawals from our retirement accounts. Both pensions should continue increasing by 2% annually.

In addition, upon either of us passing away, the surviving spouse will receive 100% of the deceased spouse's pension.

Together, we have nearly $1 million in tax-deferred 403(b) accounts, compared with only about $41,000 in Roth accounts. We also anticipate receiving an inheritance of $600,000.

Depending on how the inheritance is structured, some of those funds could potentially be used to pay the income taxes associated with Roth conversions.

Given our relatively high level of guaranteed pension income, does it actually make sense for us to pursue Roth conversions?

More specifically, would our situation favor:

-- Aggressively converting a substantial portion of our 403(b) accounts to Roth accounts while we are still relatively young;

-- Making smaller, strategic Roth conversions over several years to manage our tax brackets and Medicare IRMAA exposure; or

-- Simply leaving the tax-deferred accounts alone and accepting the future RMDs and associated taxes?

I'm particularly interested in understanding the trade-off between paying taxes today at what may already be a relatively high marginal rate vs. potentially paying higher taxes later.

There is also an estate-planning consideration: Roth assets would provide our children with tax-free distributions, whereas traditional retirement accounts could create a tax burden.

In other words, when a couple already has more than $345,000 a year of lifetime pension income, is a Roth conversion still worth pursuing?

To Roth or Not To Roth

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You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

At this point in your life - even taking your children's inheritance into account - it may be more trouble than it's worth.

Dear Roth,

It's a calculation that should be made with a CFP, but my gut tells me that the window for Roth conversions has narrowed, meaning very piecemeal conversions.

An aggressive conversion strategy probably isn't justified given your wealth and income, but a multi-year Roth-conversion strategy deserves at least some consideration.

You are 66, so the traditional-account RMD clock isn't an immediate crisis. Under current rules, your traditional retirement-plan RMDs won't happen for another few years.

You could convert a modest portion of your traditional 403(b) accounts each year if it keeps you in the same tax bracket and prevents you from tipping over into higher Medicare premiums.

The best time to make such conversions, if you decide to do so, is later in the year when you know exactly how much income you have during the tax year, or during a market downturn.

A multi-year Roth-conversion strategy deserves attention.

A Roth conversion would likely be more attractive if you are currently living in a relatively low or, better yet, zero income-tax state and expect to move to a higher-tax state in the future.

It may be inevitable that your heirs face significant taxes. The SECURE Act forces most non-spouse heirs to empty an inherited traditional IRA within 10 years.

Using some of your $600,000 inheritance to pay tax on Roth conversions can be quite a bit more attractive than funding the tax from your 403(b) accounts.

And, yes, your Medicare premiums, which are in part based on your income, are typically a big consideration when deciding whether to make Roth conversions.

Related: We have $8 million in traditional IRAs. Should we tap them to buy a house - and take the tax hit?

High Medicare premiums

You will already be paying a high premium. Here's why: For 2026, married couples filing jointly begin paying IRMAA above $218,000 of MAGI.

But the higher tiers are $274,000, $342,000, $410,000 and $750,000. Above $410,000, Part B premium is $649.20 a month per person vs. $202.90 at the standard level.

Eligibility for your ACA health-insurance subsidies and IRMAA surcharges is based on your modified adjusted gross income (MAGI).

Withdrawals from traditional IRAs and 401(k)s, capital gains and dividends count as taxable income, while qualified withdrawals from Roth accounts don't count toward MAGI.

IRMAA surcharges are based on your modified adjusted gross income (MAGI) from two years prior; the income data used to calculate your Medicare premiums at that time.

You can only avoid or reduce surcharges if the gain resulted from a "life-changing event," such as retirement or death of a spouse, according to the Social Security Administration.

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An enviable position

Your $345,000 in annual pension income puts you in an unusual, if enviable position. I asked Wes Karger, co-founder and managing partner at TwinFocus, about your predicament.

Your dilemma is less about whether you need Roth assets to fund your retirement, and more about whether converting some of those assets can improve your long-term tax position.

He is cautious about a conversion. "There is an opportunity cost associated with paying that tax today rather than allowing those assets to remain invested on a tax-deferred basis," he says.

Karger points out another important consideration not addressed in your question: your investment strategy and expected return profile of your retirement assets.

You could end up paying a relatively high marginal tax rate to convert assets into a Roth, only to experience a significant market decline due to an unforeseen economic or geopolitical event.

You don't need Roth assets to fund your retirement.

He would evaluate your decision in the context of your underlying investment portfolio, expected returns, volatility, and overall balance sheet, not simply based on the size of their 403(b)s.

"We would, therefore, generally lean toward smaller, deliberate conversions over a number of years rather than an aggressive conversion program," Karger says. (If not small, strategic.)

This approach provides you with flexibility to evaluate your circumstances every year, and also "avoids making a large, irreversible tax decision based on a single year's circumstances."

Finally, your Social Security may not be the deciding factor, given your other assets and income, but it's worth mentioning and including in your retirement stress test.

It's never too late to make these decisions. Well, to be honest, it can be too late! But you still have some time left before those all-important RMDs kick in.

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The Moneyist regrets he cannot respond to letters individually. Check out The Moneyist's private Facebook group, where members help answer life's thorniest money issues. Post your questions, or weigh in on the latest Moneyist columns.

More columns from Quentin Fottrell:

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-Quentin Fottrell