A wiley vet named Nords is an awesome source for military folks. Hope he catches your post. He usually comes on to offer advice.
Thanks for the tags, Bigdawg and JDarnell!
Okay, I’m second guessing our investment strategy and I’d love your input.
Current status: 7 years from FIRE with two active duty military pensions coming 2028 or later (mine will begin in 2028 when I pull the plug. Not sure yet when DW wants to retire…).
In order to minimize our tax exposure come 2028, should we immediately stop contributing to our TSPs and up contributions to our taxable brokerage + back-door Roths? What would you do in my situation?
This is where I struggle.
Current marginal tax rate: 24% (AGI with max tax deferred = 193K)
Projected marginal tax rate: 22% (combined pensions = 137K)
TDub, the bigger question is what your income-tax bracket will be at age 72 with your pension(s), Social Security, and Required Minimum Distributions from your traditional retirement accounts.
It’s quite likely that you’ll be not only in the 24% income-tax bracket, but your Medicare premiums will be subject to IRMAA. If your traditional TSPs (and traditional IRAs) continue to compound without any withdrawals after age 59.5 then your RMDs might even blunder into the 32% income-tax bracket.
Right now, you could be in the lowest income-tax bracket of your life. It makes sense to stop contributing to your traditional TSPs and traditional IRAs and to start contributing to your Roth TSPs and Roth IRAs. (Your Roth IRA contributions might be limited by your AGI, and in that situation— with existing traditional TSPs and traditional IRAs— it might be simpler to continue making non-deductible contributions to your traditional IRAs.) You’ll boost your income taxes a bit now in hopes of avoiding even higher income taxes later.
When you retire from active duty without seeking additional paychecks, you’ll have a few years of lower taxable income. That’s the opportunity to do small incremental Roth IRA conversions of your traditional IRAs and traditional TSPs. You could make them up to the top of the 24% income-tax bracket (where you’d be paying income taxes anyway) and pay the conversion taxes out of your taxable accounts.
If you wanted to get very aggressive with the conversions after you retire from active duty, you could even make charitable contributions (above the standard income-tax deduction) and accelerate the conversions. However you could also do the same with traditional TSPs and traditional IRAs using your RMDs as charitable contributions. It all depends on your lifetime philanthropy plan.
My spouse and I spent 16 years converting our traditional TSPs and traditional IRAs, a little every year. We converted up to the top of the 22% income-tax bracket (and the old 15% & 25% income-tax brackets) in order to avoid ending up in the 24% income-tax bracket in our 70s.
Today we have enough compound growth in our assets to never need to touch our Roth IRAs. However we could also draw down our Roth IRAs (beyond our pensions) in order to make charitable donations from our taxable accounts, or to leave the taxable accounts to our heirs at a stepped-up cost basis.
By the way, there are very few dual-military couples with two active-duty pensions. I don’t think there’s enough of your demographic to make statistically valid conclusions about financial independence.
However I’ve heard from dozens of them over the last two decades, and every one of them has more money than they need... in most cases, far more money. My spouse and I are in a similar situation with my active-duty pension and her Reserve pension. Let me know if you have more questions.
