By Col. Steve Strobridge, USAF (Ret)

This is the first of a series of articles dealing with financial and life issues during the transition to retired life.

If you’re a retired servicemember, you have a guaranteed, inflation-protected annuity. If you had a post-military career, chances are you also have a 401(k) from your civilian employer.

Many prudent savers also have established an individual retirement account (IRA) of one sort or another, such as:

• a regular IRA that lets you defer an additional $5,500 ($6,500 if you’re age 50 or older) a year from federal income tax;
• a Roth IRA, which entails post-tax deposits but allows tax-free withdrawals after age 59 1/2;
• a post-tax regular IRA, which allows people whose income is above a certain level to make after-tax contributions that grow tax-free (upon withdrawal, the gains are taxable, but the amount of the original post-tax contributions is not); and/or
• a spousal IRA, which allowed you to make (pre- or post-tax) IRA deposits (regular or Roth) for a non-employed spouse.

All your working life, you (and your spouse, if applicable) have saved for retirement in one or more of these ways. Now, if you’re planning to ramp down to part-time work, or retire fully from working life, it’s time to review your IRA strategy to make sure you’ll get the most bang for your IRA buck.

If you’re working part-time, you might no longer have access to a 401(k), so IRA deposits are a higher priority.

If part-time or fully retired, it might be worthwhile to consider converting part or all of your and/or your spouse’s regular IRAs to a Roth.

The Roth has two big advantages. First, Roth withdrawals are tax-free — both for you and for your beneficiaries if you die before the Roth is exhausted. Second, minimum required distributions from 401(k)s and regular IRAs at age 70 1/2 don’t apply to Roth IRAs. If you don’t need the money in any given year, you can leave it to continue building tax-free.

Why is it prudent to at least consider converting your IRA to a Roth when you stop working or move to part-time work? Because your reduced income means you’re now in a lower tax bracket, so the income tax “price of conversion” is lower.

To convert an IRA to a Roth, you must pay any income tax due on whatever amount you elect to convert. It’s a one-time tax hit, but then all Roth withdrawals will be tax-free.

Let’s say you have $50,000 in a regular IRA, and all contributions were pre-tax (that is, you deducted the contributions from your taxable income in the year you made them). If you’re now in the 15-percent tax bracket, and you elect to convert the full $50,000 to a Roth, you’ll pay a one-time tax of about $7,500 to get future Roth withdrawals tax-free.

If you made post-tax IRA contributions totaling $20,000 (40 percent) of the $50,000 IRA amount, you’ll pay income taxes on 60 percent of whatever amount you elect to convert to a Roth (e.g., if you chose to convert $20,000 in that situation, you’d pay taxes on $12,000 of it).

If you retire from work at age 69 or earlier, you have a “golden window” for conversion — the years when your income is reduced, but before you must take minimum regular IRA distributions at age 70 1/2.

In my own case, once I fully retired at age 66, I converted most of my regular IRA to a Roth over the course of three years to ease the tax bite in any given year.

Even if you or your spouse still are working and your income is above the limit for any Roth contributions ($135,000 single and $199,000 married filing jointly for 2018), it could be worth your while to consider converting the whole of your or your spouse’s IRA to a Roth. My wife did with her spousal IRA several years before I retired.

Why? Because conversion of the whole amount for a one-time tax payment opens a door to permit annual Roth contributions in future years as long as there is earned income — even if your income is above the statutory limit for Roth contributions.

Here's how that works: By law, you can contribute to a regular IRA at any income level. If your income is above a certain level ($73,000 single and $121,000 married filing jointly for 2018), the contributions must be post-tax. (Deductible contributions start phasing out at $63,000 single and $101,000 joint.) 

Further, there’s no income limit on your ability to convert a regular IRA to a Roth, as long as you pay income taxes on any taxable gain. But if your IRA amount starts at zero each year, and each year’s new contribution to the regular IRA is post-tax, and if you convert the full amount of each contribution immediately to a Roth, there is no taxable amount.

One last note about IRA contributions for retirees: Even if you’re still working, you no longer can make IRA contributions beginning the year in which you turn 70 1/2. In my case, that was 2017, but I had earned income in 2017, and my spouse hadn’t turned 70 1/2 by the end of the year. So we made a spousal post-tax regular IRA contribution for her (and immediately converted it to a Roth).

If you haven’t yet considered making any IRA conversions, you should at least take a look at the rules and the options. It would be prudent to consult with your financial planner or tax adviser about your particular situation.