The Gap-Year Roth Conversion Decision
Dana, 61, and Michael, 63, are married and plan for Dana to retire at 62. Dana's employer offers a choice at retirement: a $520,000 lump sum rollable to an IRA, or a joint-and-50%-survivor annuity of $2,900 per month beginning immediately. They hold $1.6 million in Dana's 401(k), $280,000 in Michael's traditional IRA, $180,000 in Roth IRAs, and $320,000 in a taxable brokerage account. The mortgage is paid. Michael will claim Social Security at his full retirement age of 67, about $3,100 per month; Dana plans to wait until 70, when her benefit would be roughly $3,600 per month. Until Dana reaches Medicare eligibility at 65, the couple intends to buy coverage on the health insurance marketplace. They are interested in Roth conversions and want to know when to do them. Neither has any chronic health condition, and both had parents who lived into their nineties.
1. Evaluate the lump sum versus the joint-and-50% annuity. What numbers and risks should drive the decision, and what would you recommend they ask for?
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The annuity's payout rate is the first number to compute: $2,900 x 12 = $34,800, which is 6.7% of the $520,000 lump sum. A rate that high on a joint-life payout starting at 62 is unusual and suggests the plan is subsidizing the annuity - a strong argument for taking it, since a commercial SPIA producing $34,800 a year on $520,000 would be difficult to buy.
Four factors cut the other way. The 50% survivor benefit is thin: if Michael survives, he takes a permanent 50% cut, and he is the older spouse. There is no COLA, so $34,800 loses roughly a third of its purchasing power over 20 years at 3% inflation. Pension risk is real if the plan is small and not PBGC-covered. And an annuity creates fixed taxable income every year, which crowds out cheap Roth conversions.
Counterweights: the annuity builds a guaranteed income floor that lets the couple invest the rest of the portfolio more aggressively and reduces sequence-of-returns risk.
Middle path: ask the plan for a joint-and-100% quote and a life-with-10-year-certain quote before deciding, and take the annuity only if the survivor benefit can be raised. Given the couple's longevity expectations, the annuity likely wins on pure math - but only with better survivor protection.
2. Map out the Roth conversion strategy from retirement to age 75, accounting for marketplace subsidies and Medicare premiums.
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The window has three distinct phases, and the couple has been treating them as one.
Phase 1, ages 62-64 - marketplace coverage. Extra MAGI reduces the premium tax credit dollar for dollar in the phase-out range and, if the enhanced subsidies lapse after 2025, can trigger a hard cliff at 400% of the federal poverty level - losing thousands in subsidy for a small conversion. Convert only up to the point where the marginal subsidy loss exceeds the marginal tax saved. Confirm current law before each year's conversion.
Phase 2, ages 65-74 - the best window. Medicare premiums are based on MAGI from two years earlier, so conversions done at 63 and 64 already set the 65 and 66 premiums; after that the effect becomes controllable. Convert to the top of the 22% or 24% bracket while staying under the relevant IRMAA tier (about $212,000 of MAGI for a married couple in 2025). Remember that required minimum distributions begin at 75 for anyone born in 1960 or later.
Phase 3, age 75 and after. Once RMDs and Social Security begin, conversion room shrinks quickly. Project the first RMD and convert at least enough in Phase 2 to keep it inside the 24% bracket.
3. How does the Social Security claiming decision interact with the pension choice and the conversion plan? Recommend a claiming sequence.
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Dana's benefit at 70 is $3,600 versus roughly $2,700 at 67 and about $1,900 at 62 - the delay is an 8% per-year increase for three years past full retirement age, an unusually good deal for a healthy couple with long-lived parents.
The interaction matters more than the raw total. Claiming at 70 maximizes the survivor benefit: when one spouse dies the household keeps the larger of the two checks, so delaying Dana's benefit protects whichever spouse lives longer. It also stretches the low-bracket years when the couple draws from the IRA, which is precisely the conversion window; claiming early would fill those brackets with partially taxable Social Security and crowd out conversions.
Recommended sequence: Dana retires at 62, the couple lives on the taxable account plus modest IRA withdrawals, converts to the top of the 24% bracket from 65 to 70, Dana claims at 70, and Michael claims at 67. If they take the pension annuity, its fixed income reduces conversion room but also reduces the need to withdraw from the portfolio.
Run a break-even before finalizing: at 70 versus 62, Dana needs roughly 12 years of the higher benefit to catch up, to about age 82 - well inside the couple's likely lifespan.