A Roth conversion for a military retiree doesn't save tax unless the rates line up

Two tax rates decide a Roth conversion for a military retiree

A conversion moves money from a traditional balance, where tax is due when you take it out, into a Roth balance, where later income draws are tax free. You pay the tax now instead of later. It saves money only when this year's rate on those dollars is lower than the later rate, or when it keeps a later year under a Medicare premium tier. At equal rates and equal growth? A wash. Your pension, about $39,600 a year in the example below, is the floor that every other income source stacks on top of.

$40,000 converted in the year Curtis leaves the Air Force

Take Curtis and Joanne, a hypothetical couple, ages 44 and 42. Curtis retires from the Air Force as an E-8 after 22 years under High-3, with a pension of about $3,300 a month and $410,000 in the TSP. Joanne is a nurse earning $80,000. They have 2 teenagers at home.

Curtis leaves in June and starts a defense contractor job in January. That leaves one odd year with a part-year paycheck. Income is about $40,000 of active pay, $19,800 of pension (6 months at $3,300) and Joanne's $80,000, or $139,800 in all. Curtis rolls $40,000 of TSP money to a traditional IRA and converts it. At an assumed 22 percent, the tax is $8,800, paid from savings.

The next year looks different. Curtis earns $110,000, the pension is a full $39,600 and Joanne earns $80,000, so income is $229,600. The same $40,000 now lands at an assumed 24 percent and costs $9,600. That's $800 more for identical dollars.

The table tracks the Year 2 conversion against the 22 percent tax those dollars would face later. The cost grows at 4 percent because the tax money could have netted that in a taxable account. The benefit grows at 5 percent inside the Roth. Both rates are for illustration only.

Year 1: the part-year salary

Year 2: the full salary and a break-even

'I can undo it if stocks drop next month'

Not anymore. Since the 2017 tax law, a conversion can't be recharacterized, so a conversion made after 2017 is final. Plans written earlier that relied on 'convert big, then undo the excess in the fall' no longer work. If the market falls 20 percent the week after you convert, you still owe tax on the full amount converted.

Some things stay reversible. Roth or traditional contribution elections at the new job's 401(k) can change every pay period, and traditional IRA money can be moved back into the TSP. The conversion deadline is December 31 for that tax year, with no April extension.

'My pension already fills the low brackets'

Only a sliver of them. If neither of you draws a paycheck, the $39,600 pension minus the $32,200 standard deduction for married couples filing jointly (the IRS figure for 2026) leaves just $7,400 of taxable income. The pension alone fills little of the low brackets, which is why a gap between jobs can be a good window.

But once both salaries run, the pension matters a lot. In Year 2 it helps push the conversion to the assumed 24 percent. That's why Year 1 was the window for Curtis, and why Edgepoint Wealth Management looks at the pension before it looks at the TSP.

Later, more income lands on top of the pension. Social Security at age 67 (the full retirement age for anyone born in 1960 or later) and required minimum distributions (RMDs) at age 75 both stack on it. Ask yourself whether the traditional balance will be large by then. Don't assume your later rate is low.

'Roth TSP money gets hit with RMDs anyway'

That was true once, but since 2024 Roth balances in employer plans, the TSP included, have no required minimum distributions during the owner's lifetime. RMDs on traditional money now start at age 75 for anyone born in 1960 or later. If an older playbook moved Roth TSP money to a Roth IRA just to dodge RMDs, or counted on fewer conversion years, it's worth rechecking.

'Just have the tax withheld from the conversion'

Careful people do this to avoid an underpayment notice, and it backfires. Under age 59½, the withheld 22 percent of $40,000, or $8,800, counts as a plain distribution. It's taxed as income, it owes an $880 additional tax (10 percent), and only $31,200 reaches the Roth. That's $880 gone for nothing, plus a smaller Roth.

Do this instead. Raise your W-4 withholding at the new job for the rest of the year, since wage withholding counts as paid evenly through the year. Or make quarterly estimated payments. Either way, the full $40,000 moves, and the tax comes from cash outside the account.

What age turns a conversion into a Medicare premium?

Age 63. Medicare sets each year's premium from the tax return filed two years before, so the income on your age-63 return decides your Part B premium at age 65. For 2026, joint income (modified adjusted gross income, or MAGI) up to $218,000 pays the standard $202.90 a month, and up to $274,000 pays $284.10, according to CMS.

Here are the dates in calendar order. In the conversion year, finish by December 31. The following April, report it on your return; the IRS Form 1099-R shows code 2 for an IRA conversion under age 59½. The 5-year clock on converted dollars starts January 1 of the conversion year. Age 59½ ends the 10 percent additional tax on converted amounts.

At age 63, stop converting if the extra income would push you over a tier. At age 65, TRICARE For Life requires Part B, so for a military retiree the premium isn't optional. At age 75, RMDs start for people born in 1960 or later.

Conversion year and the next April

Ages 59½, 63, 65 and 75

How much cash does each of 3 conversion paths need this year?

Path A needs $8,800 of cash this year: converting $40,000 in Year 1 at an assumed 22 percent. It has no premium effect, since age 63 is decades away, and it's final once done. Path B needs no conversion cash, but your take-home pay drops. Path C needs cash later, at a rate nobody knows yet.

Path B means no conversion, with new 401(k) contributions going Roth at an assumed 24 percent. Take-home pay drops by the tax on each paycheck, and you can change the election every pay period. Path C waits for the years after the second career and before Social Security. Conversions there should stop by age 63 to protect the age-65 premium. Whichever path you pick, no investment is guaranteed, and a Roth balance can sit lower for years.

The table compares the three on the same tests. Then run the checklist and questions below against your own accounts.

• Compare your traditional and Roth balances today.
• Compare this year's income with next year's.
• Check that you have cash outside the IRA to pay the tax.
• Write down your age against 59½, and count the years until age 63.
• Ask the TSP whether an in-plan Roth conversion is available for your balance, and how tax is handled.
• Ask your CPA for your marginal rate with and without the conversion.
• Ask which tax years count for your children's college aid.

The 2 tax years Edgepoint Wealth Management pulls up first

Edgepoint Wealth Management would first look at the tax years on either side of your retirement date, because a part-year salary is usually the cheapest conversion window. It would also check how much cash you have to pay the tax without touching the IRA. If your later rate turns out to be 12 percent instead of 22, even the Year 1 conversion loses money. With teenagers, a conversion in a year that college aid formulas count can cut aid, and this federal-tax math doesn't capture that, or state tax.