The Taxes Your Bracket Doesn't Show You in Your Retirement Year

Note: The examples and case studies in this article are hypothetical but represent real situations I have encountered in my practice working with Washington State public employees.

Picture Brenda. She's 63, a program manager for a county health department, with 30 years in PERS 2. Her last day is June 30, 2027.

Her husband Gary is 65 and already retired from teaching. He has a TRS 2 pension, Social Security and Medicare. Between Brenda's DCP and their IRAs, they have about $1.05 million saved.

Brenda has read that the years before RMDs are the time for Roth conversions. She figures she'll convert $40,000 in December 2027, while they're still in the 22% bracket.

She's right about the bracket. The $40,000 will still cost her more than 22%, and the reason is the calendar.

The year two incomes overlap

Brenda has 30 years of service and was hired before May 2013, so PERS 2 pays her full benefit at 62 with no early retirement reduction [1]. With an average final compensation of $118,000, that's 2% × 30 × $118,000, or $70,800 a year [1].

Retiring mid-year means 2027 holds a little of everything. There's about $60,000 of salary after her DCP contributions, a vacation cash-out of about $14,000, and six months of pension at about $35,400. Gary adds his $46,000 TRS 2 pension and about $27,200 of Social Security that's taxable.

That's roughly $182,600 before any conversion. Add the $40,000 and they're at $222,600.

The year after, with no salary and no cash-out, the same household lands around $145,000.

For a lot of public employees, the retirement year is the most crowded tax year they'll ever have. That makes it a tough place to stack a voluntary conversion.

A Medicare bill that looks back two years

Medicare Part B and Part D premiums go up once your modified adjusted gross income (MAGI) passes certain levels. That surcharge is called IRMAA. Social Security sets it from the most recent tax return the IRS gives them, which is usually from two years earlier [2].

Brenda turns 65 in 2029. Her first Medicare premiums, and Gary's premiums for that year, will likely be set from their 2027 return.

Using this year's numbers, the first surcharge starts above $218,000 of joint MAGI [2, 3]. It works like a cliff. One dollar over, and each of them pays $81.20 more a month for Part B and $14.50 more for Part D [3]. For the two of them, that's about $2,300 for the year.

The $40,000 conversion puts them about $4,600 over the line. (The thresholds tend to move up a little each year, but the cliff works the same way.)

Social Security does let you ask for a lower IRMAA after a life-changing event, and stopping work counts [2, 4]. Good to know it's there. I wouldn't build a plan around it, though.

Gary's $6,000 deduction starts shrinking

The 2025 tax law added a $6,000 deduction for people 65 and older, for tax years 2025 through 2028 [5]. Gary qualifies in 2027. Brenda won't turn 65 until 2029, after it's scheduled to end.

For joint filers, it starts phasing out once MAGI goes above $150,000 [5]. It shrinks by 6 cents for every dollar over that line [6].

At $182,600, Gary already loses about $1,960 of it. With the conversion he loses about $4,360. That extra $2,400 of lost deduction adds roughly $530 of tax at 22%.

That's not much by itself. Put it next to the Medicare surcharge, though, and the conversion starts to look different.

What the $40,000 really costs

At 22%, the conversion's federal tax is $8,800. Add the $530 from the shrinking deduction and about $2,300 of Medicare surcharges in 2029, and the total comes to about $11,600.

That's roughly 29% on money Brenda thought she was converting at 22%.

Now move the conversion to 2028. They start near $145,000, and $40,000 takes them to about $185,000. That's well under the IRMAA line. Gary still loses part of his deduction, about $460 in tax, but there's no Medicare surcharge two years later.

Waiting one year saves them a little over $2,300 on the same $40,000.

Sometimes crossing the line is worth it, say a big conversion that shrinks years of RMDs later on. I just want it to be a choice you make on purpose.

Two warnings that probably don't apply to you

Retirement podcasts talk a lot about the Social Security "tax torpedo," where extra IRA income makes more of your benefit taxable. Up to 85% of benefits can be taxed once a couple's provisional income passes $44,000 [7], and that threshold has never been indexed for inflation [8].

With two pensions, Brenda and Gary are far past it. Gary's benefit is already 85% taxable no matter what she converts. If you have a DRS pension, you're probably in the same spot.

The other one is losing marketplace health subsidies before 65. PEBB retiree premiums aren't based on income, so if Brenda enrolls in PEBB retiree coverage, a conversion doesn't touch her health bill. She can defer PEBB to buy marketplace coverage instead, but she only gets a one-time chance to come back [9], and her conversions would count against any subsidy.

Run the year three ways

Before you settle on a retirement date or a conversion amount, sketch three versions of your exit year: no extra income, a little, and a lot. Then do the same for the year after.

For each one, write down the MAGI and see where it lands against the IRMAA line and the $150,000 deduction phaseout. It's about an hour with last year's tax return.

You want to know which side of those lines you're on before December, while you can still change it.

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If you’re concerned about your current financial plan and would like to explore professional help, consider reaching out.

I specialize in helping Washington Public employees who are nearing retirement or are retired, reduce taxes, maximize pensions, and retire stress-free.

No sales pressure. No obligations. Just professional guidance to help you make the best decision for your financial future.

-Seth Deal

Sources

[1] Washington State Department of Retirement Systems. "PERS Plan 2." https://www.drs.wa.gov/plan/pers2/

[2] Social Security Administration. "Premiums: Rules for Higher-Income Beneficiaries." https://www.ssa.gov/benefits/medicare/medicare-premiums.html

[3] Centers for Medicare & Medicaid Services. "2026 Medicare Parts A & B Premiums and Deductibles." https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles

[4] Social Security Administration. "Request to lower an Income-Related Monthly Adjustment Amount (IRMAA)." https://www.ssa.gov/medicare/lower-irmaa

[5] Internal Revenue Service. "One, Big, Beautiful Bill provisions: Individuals and workers." https://www.irs.gov/newsroom/one-big-beautiful-bill-provisions-individuals-and-workers

[6] Internal Revenue Service. "Schedule 1-A (Form 1040), Additional Deductions." Part V, lines 31–35. https://www.irs.gov/pub/irs-pdf/f1040s1a.pdf

[7] Internal Revenue Service. "Publication 554, Tax Guide for Seniors." https://www.irs.gov/publications/p554

[8] Congressional Research Service. "Social Security: Taxation of Benefits." RL32552. https://www.everycrsreport.com/reports/RL32552.html

[9] Washington Administrative Code. "WAC 182-12-205." https://app.leg.wa.gov/wac/default.aspx?cite=182-12-205