“Sitting on a Tax Time Bomb”: Jim Saulnier’s Warning to Retiree With $2 Million

A 62-year-old federal retiree wrote into The Retirement and IRA Show with a question many retirees ask: Should I accelerate Roth IRA conversions when the market drops?

She retired in June. Her husband died at 57. Between her federal pension and survivor Social Security, she covers basic needs and discretionary spending on $106,000 of pre-tax income. She has $2 million invested across her federal retirement plan (including traditional and Roth), a personal IRA, and a Roth IRA. About a quarter of the total is in Roth accounts. Her plan is to wait until her RMD age in 2038 and then run annual Roth conversions to fill the 24% federal bracket. She’s worried that she’s “basically sitting on a tax time bomb.”

“With the recent market downturn, would it be a good time to be making the largest portion of my annual Roth conversions while the market is down?” she asked. “Does it make sense to convert during a stock market dip?”

Hosts Jim Saulnier and Chris Stein agreed — to a point. Converting traditional dollars to Roth dollars while balances are temporarily depressed is a real lever. You pay tax on a smaller number, and the recovery happens inside a tax-free wrapper. But Saulnier pushed back hard on timing conversions to small market dips.

“Your strategy makes sound sense,” Saulnier said. “Don’t wait only for market corrections though. More times than not, markets continue up as this market has shown.” By the time he read her March email in late April, the market was back at all-time highs. Over a 30-year hold inside a Roth, converting during a 7% to 9% drop is unlikely to meaningfully change what an heir receives. But “if you’re ever faced with a 50% drop in the market, then yeah, I would love to do conversions then because markets will recover.”

On timing, Saulnier cautioned: “You cannot undo conversions anymore. It’s difficult for us as a firm to recommend people do conversions in January or February, because if they need to undo them for one reason or another, you cannot do that.” Recharacterizations were eliminated by the 2017 tax law. Once you convert, the tax bill is locked in. Saulnier’s firm typically runs conversions in October, November, and December, when the year’s income, market value, and any health or job surprises are visible. Convert in February, and a layoff, windfall, or medical event in August can leave you stuck with a tax bill that no longer fits.

The IRMAA Bombshell: 24% Is Really 28%

This is the part most retirees miss. “She thinks it’s 24%, it’s really 28% effectively,” Stein said. The mechanics: the top of the 22% bracket and the top of the 24% bracket sit roughly $100,000 apart. Pushing a $100,000 conversion through that span vaults a Medicare-aged retiree up IRMAA tiers, adding about $4,000 a year in Part B and Part D premium surcharges. Stack that on top of the roughly $24,000 of federal income tax, and the all-in cost on that conversion is closer to 28% than 24%. State income tax sits on top of that.

IRMAA is the silent partner in every Roth conversion strategy after age 63 (the two-year lookback means age 63 income drives age 65 premiums). Most bracket-filling spreadsheets ignore it.

The Federal Retiree Loophole

Stein flagged a workaround unique to federal retirees. “I’ve got a number of people that I’ve talked to that have a lot of income and they have opted not to be in Medicare, just do” the Federal Employees Health Benefits (FEHB) program, he said. “That’s the ultimate get-out-of-jail-free card for IRMAA.” If you are not enrolled in Medicare Part B, you do not pay IRMAA, regardless of income. Federal Employees Health Benefits coverage can stand alone.

Tips for Roth Conversions

Three rules emerged from the segment:

1. Convert in Q4, not Q1. Wait until October through December when full-year income, capital gains, and any surprise events are known. There is no take-back button.
2. Do not chase 7% dips. Run conversions on a schedule sized to your bracket plan. Save aggressive moves for genuine drawdowns of 30% or more.
3. Always model IRMAA into your effective rate. Build a stacked-rate worksheet that includes federal income tax, IRMAA surcharges across all three tiers you might cross, and state tax. Then decide where to stop converting.