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Sarah had it all planned out. After 28 years of working for the State, she'd saved $850,000 in her deferred compensation plan and was ready to retire at 62. She'd done the math on her pension, budgeted for her new lifestyle, and was counting down the days to freedom from work stress. Then her benefits counselor mentioned something that made her stomach drop: "You'll need to figure out health insurance until Medicare kicks in at 65." Suddenly, Sarah was staring at three years of full-premium health insurance costs out of her own pocket. Without careful planning, this decision could significantly impact her retirement budget. If you're a Washington State public employee planning to retire before 65, this decision could make or break your retirement budget. The Pre-65 Coverage Gap That Catches Everyone Off GuardHere's what most early retirees don't realize: the moment you leave public employment, your subsidized health benefits end. While you have options for continued coverage, you'll be paying the full freight—both your portion AND what your employer used to contribute. The stakes are high. Choose wrong, and you could face: · Massive premium increases that drain your retirement savings · Coverage gaps that leave you vulnerable to medical bills · Tax penalties and missed opportunities that cost thousands But here's the good news: with the right strategy, you can minimize these costs and even turn this challenge into a tax-saving opportunity. Your BRIDGE Coverage Strategy: 4 Approaches to ConsiderStrategy #1: Master the PEBB vs. COBRA Decision (Timing Is Everything)The Critical Deadline: You have exactly 60 days from your last day of work to elect PEBB retiree continuation. Miss this window, and you may be stuck with inferior options. Here's the key difference most people miss: COBRA Limitation: Maximum 18 months of coverage (29 months if disabled, 36 months for certain family events). If you retire at 62, COBRA won't get you to Medicare at 65—leaving you scrambling for coverage in your mid-60s.2 PEBB Advantage: Continues until Medicare eligibility at 65, making it the only option that truly bridges the full gap for most early retirees.1 Strategy #2: The Spouse Coverage Coordination PlayIf your spouse is still working with employer benefits, you might be sitting on a goldmine opportunity. The Strategy: Instead of expensive family PEBB coverage, consider: · Individual PEBB retiree coverage for you · Individual coverage for your working spouse through their employer · Can also go on your spouse’s employer plan, but may lose access to PEBB Bonus Opportunity: If your spouse's employer offers HSA contributions, this creates additional tax-advantaged savings that could fund future medical expenses in retirement. Critical Analysis Required: Compare total premiums, deductibles, out-of-pocket maximums, and ensure both your physicians are in-network. Strategy #3: The Geographic Arbitrage Opportunity (Location Matters More Than You Think)Planning to relocate in retirement? Your timing and destination could significantly impact your health insurance costs. Key Considerations: · PEBB retiree coverage travels with you nationwide · Marketplace plans vary dramatically by state · Provider networks change with geography · Lower cost-of-living areas might offset higher insurance premiums Strategic Timing: If you're moving anyway, coordinate your retirement and relocation to optimize both housing and healthcare costs. Strategy #4: The Tax-Efficient Premium Strategy (Advanced Planning for Maximum Savings)This is where sophisticated planning pays off. Your health insurance premiums during early retirement interact with your tax strategy in ways that could save—or cost—you thousands. Marketplace Premium Tax Credits: Available based on income levels, these credits can dramatically reduce your costs: · 2025 benefits available for incomes starting at $15,060 (individual) or $31,200 (family of four)4 · No upper income limit currently—credits available when premiums exceed 8.5% of household income · Critical Alert: Enhanced credits expire end of 2025, potentially increasing 2026 costs significantly5 Income Management Opportunity: By carefully managing your retirement income timing (pension start dates, deferred comp withdrawals, Roth conversions), you might qualify for substantial premium subsidies. Professional Coordination Required: This strategy demands careful coordination with your tax advisor to optimize your complete financial picture. Your Next Steps: Don't Leave Money on the TableIf you're planning early retirement from Washington State public employment: Immediate Actions: 1. Request a personalized benefits estimate from your agency's benefits office¹ 2. Calculate your projected healthcare costs for the full bridge period (not just year one) 3. Analyze how different retirement timing scenarios affect your total costs Strategic Planning: 1. Model multiple coverage strategies with actual premium quotes 2. Coordinate with your tax advisor on income management strategies³ 3. Evaluate spouse coverage coordination opportunities Timeline Planning: 1. Start this analysis at least 12 months before your target retirement date 2. Remember: you have only 60 days post-employment to elect PEBB continuation¹ 3. Plan for potential 2026 premium increases when enhanced tax credits expire⁵ Your pre-65 health insurance strategy isn't just about maintaining coverage—it's about preserving your retirement savings and optimizing your tax situation during these critical transition years. Don't let poor health insurance planning derail the retirement you've worked decades to achieve. Sources: ¹ Washington State Health Care Authority. Retirees - PEBB Benefits. https://www.hca.wa.gov/employee-retiree-benefits/retirees ² U.S. Department of Labor. COBRA Continuation Coverage. https://www.dol.gov/agencies/ebsa/laws-and-regulations/laws/cobra ³ Internal Revenue Service. Publication 502 - Medical and Dental Expenses. https://www.irs.gov/publications/p502 ⁴ Healthcare.gov. Lower Costs on Marketplace Coverage - Premium Tax Credits. https://www.healthcare.gov/lower-costs/ ⁵ Peterson-KFF Health System Tracker. Early Indications of the Impact of the Enhanced Premium Tax Credit Expiration on 2026 Marketplace Premiums. https://www.healthsystemtracker.org/brief/early-indications-of-the-impact-of-the-enhanced-premium-tax-credit-expiration-on-2026-marketplace-premiums/ -Seth Deal
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David, a 65-year-old retired Washington State employee, never gave long-term care much thought. He had a solid pension, good health, and figured Medicare would handle any future medical needs.
Then his wife Sarah fell and broke her hip. What started as a simple recovery became a 14-month journey through assisted living that had significant costs. David's savings—money earmarked for travel and home improvements—vanished. The financial stress nearly cost them their home. "I thought we were prepared for retirement," David told me. "Nobody warned us that Medicare doesn't cover long-term care, or that it could cost more per year than I ever made working." If you're a Washington State public employee approaching retirement, the statistics are sobering: 70% of people over 65 will need long-term care services¹. In Washington, that care averages $152,570 annually for a nursing home and $83,700 for assisted living². Here's what these costs really mean for your retirement security and how to plan for them. The Long-Term Care Cost Realities Every Washington Retiree Must Know 1. Washington's Costs Exceed National Averages - A semi-private nursing home room averages $12,714 per month in Washington, while assisted living costs $9,277 monthly³. 2. Medicare Covers Almost Nothing - Medicare pays for skilled nursing care only after a hospital stay, and only for a maximum of 100 days with significant copays after day 20⁴. Long-term custodial care—help with bathing, dressing, and daily activities—isn't covered at all. 3. Geographic Location Creates Dramatic Price Variations - Monthly assisted living costs range drastically. 4. WA Cares Fund Provides Limited Coverage - Washington's WA Cares Fund provides up to $36,500 in lifetime benefits for qualifying residents1. While helpful, this covers roughly 3-4 months of nursing home care or 6 months of assisted living. Your 3-Step "Cost Reality" Assessment Step 1: Calculate Your Potential Exposure The math is straightforward but sobering. Here's what you're looking at in current Washington dollars: Nursing Home Care:
Critical insight: The average long-term care need lasts 3 years, but 20% of people need care for 5+ years, and 10% need it for over a decade6. Step 2: Understand What WA Cares Fund Actually Covers Washington's WA Cares Fund launches full benefits in July 2026 with important limitations: Eligibility requirements:
Reality check: This covers approximately:
Step 3: Evaluate Your Coverage Gap Most Washington State public employees face a significant coverage gap between their actual care needs and available resources. Example scenario: State employee Jennifer, age 64, projects her long-term care exposure: Potential costs over 4 years:
Be sure to factor in what your pension amount is and Social Security, along with how your spouse will maintain their standard of living. Strategic Approaches for Different Situations The "Self-Insurance" Strategy Set aside $300,000-500,000 in dedicated long-term care reserves. Best for high-net-worth retirees who can afford to self-fund without compromising spouse's security. The "Hybrid Insurance" Approach Combine WA Cares benefits with private long-term care insurance or hybrid life insurance policies. Best for middle-income retirees seeking comprehensive coverage. Case Study: Retired fire captain Mark and his wife Lisa analyzed their options at age 63: Their situation:
Long-term care costs in Washington aren't just expensive—they're potentially catastrophic for unprepared retirees. But with proper planning, you can protect your retirement security while ensuring quality care when needed. The key is understanding that WA Cares Fund, while valuable, is just the starting point for comprehensive long-term care planning. Long-term care in Washington costs vary depending on the type of care. WA Cares Fund provides valuable but limited coverage. Most public employees need additional planning to avoid financial devastation from extended care needs. Sources and Resources A 65-year-old retired Washington State employee, signed up for Medicare and thought he was done. Three months later, he received a hospital bill that shocked him.
"I thought Medicare covered everything," he told me during a call. The reality hit hard: Medicare Part A required a $1,676 deductible, and Medicare Part B only paid 80% of his outpatient costs, leaving him responsible for the remaining 20%. His mistake? He skipped Medicare Supplement Insurance, assuming it was unnecessary. That one decision cost him thousands in unexpected medical bills and left him financially vulnerable. If you're a Washington State public employee approaching Medicare eligibility, choosing the right Medicare Supplement plan isn't optional—it's essential. Here's how to avoid a costly mistake and select the coverage that protects both your health and your wallet. The Medicare Supplement Rules Every Washington Retiree Must Know 1. Original Medicare Leaves Significant Gaps Medicare Part A has a $1,676 deductible per benefit period in 2025¹. Medicare Part B requires a $257 annual deductible plus 20% coinsurance on all approved services². These gaps can create thousands in unexpected costs. 2. Medicare Supplement Plans Are Standardized All Plan G policies provide identical benefits regardless of which insurance company sells them³. The only difference between companies is the premium price and customer service quality. 3. Washington Has Unique Advantages Washington is one of the few states where you can switch between Medicare Supplement plans (Plans B-N) without medical underwriting at any time⁴. This provides flexibility other states don't offer. 4. Timing Matters for Best Rates Your Medigap Open Enrollment Period lasts 6 months from when you enroll in Medicare Part B⁵. During this period, you cannot be denied coverage or charged higher premiums due to health conditions. 5. Plan G Has Replaced Plan F as the Gold Standard Plan F is no longer available to people who became eligible for Medicare after January 1, 2020. Plan G provides nearly identical coverage for a lower premium in most cases. Your "Coverage Protection" Strategy Step 1: Compare Plan G vs Plan N These are the two most popular Medicare Supplement plans for new Medicare beneficiaries, and for good reason. Plan G Coverage:
Step 2: Shop Washington's Competitive Market Washington has multiple insurance companies offering Plan G with significant price differences⁷. Price range for 65-year-old non-smoking woman:
Unlike most states, Washington allows Medicare Supplement policyholders to switch between Plans B-N without medical underwriting. Strategic advantage: You can start with Plan N to save on premiums, then switch to Plan G later if your healthcare needs increase, without answering health questions. Example strategy: Start with Plan N at age 65 to save $40+ monthly in premiums. If you develop health conditions requiring frequent doctor visits, switch to Plan G to eliminate copays. Step 4: Consider High-Deductible Options Some companies in Washington offer High-Deductible Plan G with a $2,870 deductible in 2025. When it makes sense: If you're healthy and rarely use medical services, the lower monthly premium ($69-80 range) might save money annually even if you hit the deductible. Break-even analysis: Compare the annual premium savings against the deductible amount to determine if this option fits your situation. Three Scenarios for Different Needs The "Comprehensive Coverage Seeker" Choose Plan G for predictable costs and maximum coverage. Best for retirees who want peace of mind and can afford higher premiums for complete protection. The "Budget-Conscious Optimizer" Choose Plan N for lower premiums with minimal cost-sharing. Best for healthy retirees comfortable with small copays in exchange for monthly savings. The "Minimal User Strategy" Consider High-Deductible Plan G if you rarely use healthcare services. Best for very healthy retirees who want catastrophic protection at the lowest monthly cost. Maria chose Plan G because she visits specialists regularly and the comprehensive coverage saves her money despite higher premiums. Don't let Medicare's gaps create financial hardship in retirement. The right Medicare Supplement plan provides predictable costs and comprehensive protection when you need healthcare most. Bottom line: Medicare Supplement Insurance isn't optional—it's essential protection against Medicare's significant coverage gaps. Plan G and Plan N offer the best value for most retirees, but the right choice depends on your health needs, budget, and risk tolerance. Sources and Resources Karen, a 65-year-old Washington State teacher, thought she had everything figured out for retirement. She'd had health coverage for 28 years and assumed she could just keep her coverage when she retired at the end of the school year.
Three months into retirement, Karen got a letter that made her stomach drop. SEBB/PEBB was terminating her retiree coverage because she hadn't enrolled in Medicare Parts A and B. The cost? She'd have to pay COBRA premiums while waiting to re-enroll. All because she didn't understand one critical rule: PEBB/SEBB retirees must enroll in Medicare Parts A and B to keep their health coverage. If you're a Washington State public employee approaching 65 or retirement, you're facing a Medicare enrollment decision that could save—or cost—you thousands. Here's the critical information about navigating this transition without losing coverage or paying unnecessary penalties. The Medicare-PEBB Rules Every Pre-Retiree Must Know 1. Medicare Enrollment Is Mandatory for PEBB Retiree Coverage - You and your covered dependents are required to enroll in both Medicare Part A and Part B as soon as eligible to stay enrolled in a PEBB retiree health plan¹. No exceptions. 2. Apply 3 Months Before You Turn 65 - Social Security is currently experiencing longer processing times for Medicare enrollment requests. PEBB strongly encourages applying three months before your Medicare start date². Missing this window can create coverage gaps. 3. Medicare Becomes Primary, PEBB Becomes Secondary - Once you enroll in Medicare, Medicare becomes primary coverage, and PEBB medical becomes secondary coverage³. This coordination reduces your out-of-pocket costs significantly. 4. PEBB COBRA Bridge Coverage Is Available - If you're unable to provide proof of Medicare enrollment due to Social Security delays, you can enroll in PEBB COBRA to ensure coverage until you can provide proof of Medicare⁴. Coverage becomes retroactive once Medicare proof is provided. 5. Working Past 65 Changes the Rules - You're not required to enroll in Medicare while still working if your employer has 20 or more employees. PEBB medical remains primary coverage with Medicare as secondary if you choose to enroll⁵. Your "Coverage Protection" Strategy Step 1: Calculate Your Medicare Timeline Here's where most PEBB members make their first mistake: they think Medicare enrollment is automatic. Real scenario: Fire Captain Mike turns 65 in July and plans to retire in August. He needs to apply for Medicare by April (3 months before) to ensure his coverage starts July 1st. The timing breakdown:
Step 2: Understand Your Coverage Coordination Options Once you have both Medicare and PEBB retiree coverage, you're not paying double for duplicate coverage—you're getting enhanced benefits. How the coordination works:
Here's something most don't know: Social Security processing delays can jeopardize your PEBB retiree coverage. The safety net strategy: If you can't get Medicare proof in time, enroll in PEBB COBRA as temporary bridge coverage. Real numbers:
Three Scenarios for Different Situations The "Standard Retiree" (Most common) Retire at 65, enroll in Medicare Parts A and B three months before birthday, transition seamlessly to PEBB retiree coverage with Medicare coordination. The "Early Retiree" (Age 62-64) Retire before Medicare eligibility, continue PEBB employee coverage through COBRA until 65, then switch to Medicare + PEBB retiree coverage. The "Working Senior" (Working past 65) Stay on PEBB employee coverage as primary, optionally enroll in Medicare as secondary, or delay Medicare until retirement (must enroll within 8 months of stopping work). Master Class Case Study: Police Sergeant Linda, age 64, retires December 31st and turns 65 February 15th. Her timeline:
Critical deadlines to remember:
This strategy works best when coordinated with your overall retirement income planning, pension timing, and Social Security optimization decisions. Bottom line: Medicare enrollment isn't optional for PEBB retirees—it's required. When timed correctly, Medicare and PEBB work together as coordinated benefits. Missing the deadlines can result in coverage loss and lifetime Medicare penalties. Critical Resources Tom, a retired firefighter, discovered something that made his stomach drop when reviewing his tax situation.
At 73, Tom was required to take $25,000 from his traditional IRA. He also donated his usual $8,000 to the food bank where he volunteers. He handled both transactions the way most people do—took his RMD as income, then wrote a separate check to charity. The result? Tom paid $1,900 in federal taxes on money he gave away, plus faced higher Medicare premiums due to the increased income. All because he didn't know about the three letters that could have saved him $1,900+: QCD. If you're a Washington State DRS member over 70 ½ with a traditional IRA, you're sitting on one of the most powerful tax strategies in the code. Yet many retirees never learn about Qualified Charitable Distributions until it's too late to maximize the benefit. The QCD Rules Every DRS Retiree Must Master 1. The Magic Number Unlocks Everything - Once you reach age 70 ½, you can send money directly from your traditional IRA to qualified charities¹. This counts toward your Required Minimum Distribution but never touches your tax return as income. 2. It's Not Just About Federal Taxes - In Washington State, every dollar of federal tax savings goes directly to your pocket². But QCDs also reduce your Adjusted Gross Income, triggering cascading consequences. 3. The $108,000 Annual Limit (2025) Per Person - You can donate up to $108,000 annually via QCD³. Married couples filing jointly can each do $108,000 from their respective IRAs—that's $216,000 in tax-free charitable giving power. 4. It Must Go Direct From IRA to Charity - The money cannot touch your bank account⁴. Your IRA custodian must send the check directly to the qualified charity, or you lose the tax benefits entirely. Your "Stealth Income Reduction" Strategy Step 1: Calculate Your RMD Tax Damage Here's the math most retirees ignore until December. Real scenario: Captain Sarah, age 73, has $850,000 in her traditional IRA. Her RMD this year: $34,600. At the 22% tax bracket, that's $7,612 in federal taxes she can't avoid. But Sarah donates $12,000 annually to local charities. Using the QCD strategy, she can eliminate taxes on $12,000 of her RMD. Her tax savings: $2,640 in federal taxes alone. The cascade effect beyond basic tax savings:
Step 2: Audit Your Charitable Giving Pattern Most retirees give the same amount to the same organizations every year. That's actually perfect for QCD optimization. The QCD advantage: Instead of writing checks from your bank account (using after-tax dollars) and itemizing deductions (assuming you are over the standard deduction), send the money directly from your IRA. Why this works: You get the same charitable impact but eliminate the income that would have triggered taxes and Medicare premium increases. Example breakdown:
Here's where it gets sophisticated. You don't have to make your entire RMD a charitable distribution. You can split it strategically based on your charitable giving goals and tax situation. Advanced scenario: Mike, age 74, has a $40,000 RMD but only donates $15,000 annually. His split strategy:
This works best when coordinated with your overall retirement income strategy, Social Security timing, and Medicare planning. Bottom line: If you're over 70½ and donate to charity, QCDs can save you thousands annually while supporting the same causes. Sources and Resources Meet Captain Sarah Martinez, a 30-year veteran firefighter in Washington State. At 57, she's eligible for LEOFF Plan 2 retirement with a solid pension and $650,000 in her deferred compensation account. As a LEOFF Plan 2 member, Sarah didn't pay into Social Security during her career. She recently learned that her Medicare premiums could increase dramatically based on her retirement income. For Department of Retirement Systems (DRS) members, understanding how retirement income affects Medicare premiums is crucial for accurate retirement planning. Your pension, Social Security, and investment withdrawals all factor into a calculation that could significantly impact your healthcare costs. Core Principles Understanding Medicare premium calculations starts with these fundamental principles: 1. Income-Related Monthly Adjustment Amount (IRMAA) Rules¹ Medicare Part B and Part D premiums increase based on your Modified Adjusted Gross Income (MAGI) from two years prior. Higher income means higher premiums. 2. The Two-Year Lookback Period² Medicare uses your tax return from two years ago to determine current premiums. Your 2025 premiums are based on your 2023 income. 3. Federal Income Focus³ IRMAA calculations are based solely on federal Modified Adjusted Gross Income (MAGI), making it easier to project and plan for these premium increases. 4. All Income Sources Count⁴ Your DRS pension, Social Security, investment gains, rental income, and required minimum distributions all contribute to the MAGI calculation. 5. Planning Opportunities Exist⁵ Strategic income timing and Roth conversions during lower-income years can help manage future Medicare costs. Understanding Sarah's Medicare Premium Challenge Calculating Sarah's Projected MAGI Let's examine Sarah and Tom's expected combined income sources when Sarah becomes Medicare-eligible at 65:
However, this scenario creates a major problem down the road. By not touching their retirement accounts, Sarah's $650,000 deferred compensation balance and Tom's $450,000 401(k) will continue growing. Let’s assume they grow at approximately 7% annually. The IRMAA Time Bomb: When RMDs Begin At $114,600 combined MAGI, Sarah and Tom each pay the standard $185 monthly premium. This seems manageable, but they're building toward a significant problem. By age 73, when required minimum distributions begin, their retirement accounts will have grown substantially:
When Sarah's Premiums Will Peak The Growing Problem: When IRMAA Becomes Unavoidable Sarah and Tom's Medicare premiums face escalating costs as their untouched retirement accounts continue growing: Ages 65-72: Comfortable with standard Medicare premiums while living on pension and Social Security Age 73: RMDs begin at approximately $84,000 combined, pushing their total MAGI to $202,600 - dangerously close to IRMAA thresholds Ages 75-80: RMDs continue growing, easily exceeding $100,000 annually and triggering the first IRMAA bracket ($1,786 additional annual cost for both premiums – see below) Ages 80+: Large retirement account balances generate RMDs exceeding $140,000, potentially pushing their combined income above $258,000 and into the second IRMAA bracket, costing them an additional $371.80 monthly ($4,462 annually) for both Medicare premiums The 2025 Medicare Part B IRMAA brackets for married couples filing jointly:
Sarah's Income Smoothing Strategy Here's how Sarah can manage her income to minimize Medicare premiums: Ages 57-64 (Pre-Medicare Planning Phase)
Sarah monitors their long-term strategy focusing on:
The "Do Nothing" Approach - Combined Financial Picture at Age 75:
But the story gets even more dramatic at age 80: "Do Nothing" at Age 80:
Lifetime Medicare Premium Savings: Over $50,000 The strategic approach transforms their retirement in multiple ways beyond Medicare savings: Additional Benefits of Sarah and Tom's Proactive Strategy:
Remember, Medicare premium planning requires coordination with your overall retirement income strategy. Like Sarah, you need a comprehensive approach that considers your LEOFF/PERS benefits, Social Security timing, and investment withdrawals. Sources and Resources
-Seth DealMeet David, a 58-year-old city police officer with 30 years of service. Like many Law Enforcement Officers' and Fire Fighters' (LEOFF) 2 members, David has done an excellent job saving but worries about the tax bill waiting for him in retirement. With potentially higher federal tax brackets in the future, the timing of Roth conversions could significantly impact his retirement income. David is wondering if he should convert to Roth before retiring from his law enforcement job. He earns $115,000 annually and has $950,000 in his 457(b) plus $200,000 in a taxable brokerage account. David plans to retire at 58 and can delay his LEOFF 2 pension for one year by living off his brokerage funds, creating an even better conversion opportunity. His LEOFF 2 pension will provide about $6,230 monthly starting at age 59. Core Principles Before diving into David's strategy, let’s understand these fundamental principles: 1. Tax Rate Arbitrage Convert when your current tax rate is lower than your expected retirement tax rate. This is often the sweet spot for pre-retirees². 2. Time Horizon Matters Roth conversions work best when you have at least 5 years before needing the money, allowing tax-free growth to compound³. 3. Required Distribution Planning Traditional retirement accounts force distributions at age 73, but Roth IRAs never require withdrawals during your lifetime⁴. 4. Medicare Impact Awareness Large conversions can increase your income and potentially raise Medicare premiums two years later4. David's Roth Conversion Blueprint The Pre-Pension Window Strategy David's optimal conversion period includes one year with no pension income (age 58) followed by eight years with pension income (ages 59-66) before claiming Social Security at 67. This creates both a perfect conversion year and an extended moderate-income period. David's Income Timeline:
David should focus on maximizing the 12% tax bracket opportunity rather than moving into higher brackets. This approach ensures predictable tax costs while still achieving substantial conversion benefits. The key to David's strategy is understanding how the standard deduction creates conversion space. For married filing jointly in 2025, the standard deduction is $30,000, and the 12% bracket extends to $96,950 of taxable income. This means David and his spouse can have total income of $126,950 ($30,000 + $96,950) before hitting the 22% bracket. David's Tax Bracket Math:
Coordinating with Pension Benefits As a LEOFF 2 member, David can retire and delay his pension start date, which creates a perfect conversion opportunity. His taxable brokerage account provides bridge income during his first year of retirement without creating additional taxable income. David's LEOFF 2 Coordination:
David will front-load his conversions to take advantage of the no-pension year, then maintain consistent conversions that maximize the 12% bracket thereafter. David's Execution Timeline:
For most LEOFF 2 members, the answer is no—Roth conversions before retirement generally don't make sense. While you're working and earning $115,000 like David, you're likely in the 22% tax bracket or higher. Converting during your peak earning years means paying higher tax rates on the conversion, which defeats the purpose of tax arbitrage. The magic happens after retirement when your income drops significantly. David's case demonstrates why waiting makes sense: his taxable income drops from over $115,000 while working to just $44,750 from his pension (after the standard deduction). This dramatic income reduction creates the opportunity to convert at the much lower 12% tax rate. The key insight is that "before retiring" means different things for different people. For LEOFF 2 members, the optimal conversion window typically begins immediately after retirement but before claiming Social Security—not while still working and earning a full salary. Remember, Roth conversion decisions are permanent. Work with qualified professionals who understand both federal tax law and LEOFF 2 retirement systems to ensure these strategies align with your complete financial picture. Sources and Resources -Seth DealMaria, a 58-year-old Washington State Department of Transportation supervisor, has diligently saved $400,000 across her 457(b) and Roth IRA accounts. Her husband Tom works in the private sector with his own 401(k) worth $300,000 and will retire around the same time. With retirement just three years away, they're facing a common concern: "We've done great at saving, but how do we withdraw this money without getting crushed by taxes?" If you're a Washington State public employee approaching retirement, you're in a unique position. Unlike most retirees, you won't pay state income tax on your withdrawals¹. However, federal taxes can still take a significant bite out of your nest egg if you're not strategic about your withdrawal approach. Core Tax-Smart Withdrawal Principles Understanding these fundamental principles will help you keep more of your hard-earned money: 1. Leverage Tax Diversification Having money in different tax buckets (traditional, Roth, and taxable accounts) gives you flexibility to manage your tax bracket each year². 2. Fill Your Tax Brackets Strategically Rather than withdrawing randomly, intentionally "fill up" lower tax brackets before moving to higher ones³. 3. Take Advantage of Washington's Tax-Free Status Since Washington has no state income tax, focus entirely on federal tax optimization without worrying about state tax complications⁴. 4. Consider Required Minimum Distributions (RMDs) Plan ahead for RMDs starting at age 73, which can push you into higher tax brackets if not managed properly⁵. 5. Coordinate All Income Sources Your DRS pension, Social Security, and investment withdrawals should work together as part of a comprehensive tax strategy. Your Tax-Smart Withdrawal Strategy Step 1: Create Your Annual Income Blueprint Start by mapping out all your income sources for each year of retirement. This includes your DRS pension, Social Security (when you claim it), and any part-time work income. Let's follow Maria and Tom through this process. Maria receives $48,000 annually from her PERS 2 pension when she retires at 65. Tom plans to claim Social Security at 65 for $24,000 per year (reduced from full retirement age), and Maria will claim hers for $22,000 at the same age. Together, they need an additional $25,000 annually from their combined retirement savings to maintain their lifestyle. Key considerations:
The goal is to stay within favorable tax brackets while meeting your income needs. For 2025, the 12% federal tax bracket extends to $96,950 (taxable income) for married couples filing jointly⁶. Maria and Tom both claim Social Security at 65, receiving reduced benefits but providing immediate income. Since they're claiming at 65 instead of waiting until their full retirement age of 67, their combined Social Security is $46,000 instead of the potential $53,000 they would receive at full retirement age. Claiming at 65 results in approximately a 15% reduction from their full retirement age benefits. However, this early claiming strategy reduces their need to withdraw from retirement accounts during those early retirement years. Strategic approaches:
Organize your withdrawals by creating three distinct buckets based on tax treatment: Bucket 1 - Tax-Free (Roth accounts) Use these when you're in higher tax brackets or need extra cash without tax consequences. Maria uses her Roth IRA strategically to avoid pushing their household into higher brackets. Bucket 2 - Tax-Deferred (457(b), 401(k), traditional IRAs) Withdraw from these to "fill up" lower tax brackets efficiently. Both Maria's 457(b) and Tom's 401(k) fall into this category. Bucket 3 - Taxable Accounts These offer flexibility with capital gains treatment and can provide tax-efficient income through strategic selling. Maria and Tom's joint investment account provides this flexibility. Step 4: Time Your Social Security Claiming Your Social Security claiming strategy directly impacts your withdrawal needs and tax situation. Delaying Social Security can reduce the amount you need to withdraw from retirement accounts. Maria and Tom both claim Social Security at 65, receiving reduced benefits but providing immediate income. Since they're claiming at 65 instead of waiting until their full retirement age of 67, their combined Social Security is $46,000 instead of the potential $53,000 they would receive at full retirement age. However, this early claiming strategy reduces their need to withdraw from retirement accounts during those early retirement years. Consider these factors:
Starting at age 73, you'll be required to withdraw minimum amounts from traditional retirement accounts. These RMDs can significantly impact your tax situation if not planned for properly. The RMD age is increasing to 75 over time. Planning strategies:
Now let's see how all these strategies come together in their comprehensive retirement plan: Their Situation:
Phase 1 (Ages 65-73): With $94,000 in pension and Social Security income, Maria and Tom need $25,000 annually from investments. They withdraw $15,000 from traditional accounts (split between Maria's 457(b) and Tom's 401(k)) to stay in favorable tax brackets, plus $10,000 from Maria's Roth IRA. Phase 2 (Ages 65-72): During this period, Maria and Tom strategically convert $10,000 annually from traditional accounts to Roth accounts while managing their overall tax bracket. Phase 3 (Age 73+): RMDs begin, but Maria and Tom's earlier strategic planning has positioned them well. They continue coordinating withdrawals between all account types to manage their tax bracket effectively. This coordinated approach minimizes Maria and Tom's lifetime tax burden while ensuring steady income throughout retirement, taking advantage of both Maria's public sector benefits and Tom's private sector savings. Remember, every situation is unique. While these strategies provide a solid foundation, your specific circumstances may require adjustments to optimize your tax situation. Sources and Resources
-Seth DealMeet Sarah, a married Seattle firefighter with 28 years of service. At 53, she's planning to retire at 55 with a solid financial foundation: a LEOFF 2 pension, $650,000 in her 457(b) plan, and $180,000 in a Roth IRA. But Sarah's biggest concern isn't fighting fires anymore—it's figuring out how much Uncle Sam will take from her and her spouse's retirement income. Understanding retirement taxation is crucial for Washington State employees like Sarah because your tax situation changes dramatically once you stop working. Unlike your working years where taxes were straightforward, retirement brings multiple income sources with different tax rules. Getting this right can save you thousands of dollars annually. Core Tax Principles for Washington Retirees Before diving into Sarah's strategy, here are the fundamental tax principles every Washington public employee should understand: 1. Washington Has No State Income Tax Your pension, Social Security, and retirement account withdrawals won't face state taxation—a significant advantage over retirees in other states.¹ 2. Federal Taxes Still Apply While you'll avoid state taxes, federal income tax rules remain the same for most retirement income sources.² 3. Different Income Sources Have Different Tax Rules Your pension is fully taxable, Social Security may be partially taxable, Roth accounts are tax-free, and with taxable accounts the gains may be subject to favorable capital gains rates.³ 4. Required Distributions Begin at Age 73 You must start taking money from traditional retirement accounts at age 73, whether you need it or not. This age will go up to 75 over time.⁴ 5. Tax Planning Becomes More Important With multiple income sources and potential tax bracket changes, strategic planning can significantly impact your after-tax income. Sarah's 5-Step Retirement Tax Strategy Step 1: Understanding Pension Taxation Sarah's LEOFF 2 pension will provide her with approximately $8,750 monthly ($105,000 annually) - 50% survivor option selected based on her 30 years of service at retirement and final average salary of $175,000. This entire amount is considered ordinary income and is fully taxable at the federal level. Here's what this means for Sarah:
Step 2: Navigating Social Security Taxation Unlike most retirees, Sarah won't receive Social Security benefits because firefighters in Washington typically don't pay into the Social Security system. This creates a unique situation where her family's retirement income will come primarily from her pension, retirement savings, and any income her spouse may have. Sarah’s spouse may be eligible for Social Security benefits so Sarah may be eligible for spousal benefits. This component must be factored into their calculation. Social Security will likely be taxable up to 85% for Sarah and her spouse, however depending on your situation, Social Security may be taxable at 0%, 50% or 85%. Step 3: Managing Retirement Account Withdrawals Sarah's $650,000 in her 457(b) plan represents her biggest tax planning opportunity. Every withdrawal will be taxed as ordinary income, but she has flexibility in timing and amounts. Key advantages for Sarah and her spouse:
Step 4: Planning for Required Minimum Distributions At age 73, Sarah will be required to take minimum distributions from her 457(b) plan. Based on her current balance, her first RMD would be approximately $24,528 ($650,000 ÷ 26.5 life expectancy factor). However, that’s almost 20 years away. If she doesn’t do anything with her 457(b), it could double or more, significantly increasing her tax liability. Sarah's RMD challenge: By age 73, they'll be receiving:
For Sarah, RMD’s will likely not be a significant concern because she is already withdrawing from her 457(b). However, it is incredibly important to be aware of RMD’s and think about these not just for Sarah, but also for her spouse. Step 5: Optimizing with Roth Accounts Sarah's $180,000 Roth IRA is her secret weapon for tax planning. These funds grow tax-free and can be withdrawn without affecting her tax bracket or Social Security taxation. Sarah's family Roth advantage:
Ready to optimize your retirement taxes like Sarah? Here's your next steps:
Sources and Resources
-Seth DealMeet Sarah, a 58-year-old city manager earning $200,000 annually. She has $500,000 in her deferred compensation account and plans to retire at 62. Sarah just received her annual benefits statement and wants to make sure she's maximizing her final working years to secure her retirement goals. Like many Washington State local government employees, Sarah participates in a 457(b) deferred compensation plan but isn't sure how to maximize its potential in her final working years. For Washington Department of Retirement Systems (DRS) members approaching retirement, your deferred comp plan represents one of your most powerful tools for securing financial independence. The decisions you make in these final working years can add tens of thousands of dollars to your retirement nest egg. Core Principles for Deferred Comp Success Understanding these fundamental principles will guide your strategy for maximizing your deferred compensation benefits: 1. Take Advantage of Catch-Up Contributions Employees age 50 and older can contribute an additional $7,500 annually beyond the standard limit, boosting total contributions to $31,000 in 2025.¹ 2. Leverage the Special 457(b) Catch-Up Rule Unlike other retirement plans, 457(b) plans offer a unique "final three years" catch-up that can double your contribution limit.² 3. Understand Washington State's Tax Benefits Since Washington has no state income tax, your deferred comp contributions only reduce your federal tax burden, making strategic timing crucial.³ 4. Plan Asset Allocation Based on Time Horizons Map out what funds you'll need over the next five years and keep those amounts out of the stock market to protect against volatility. 5. Consider Guardrails for Withdrawal Strategy This dynamic approach adjusts withdrawal rates based on portfolio performance, helping preserve your savings during market downturns.⁴ Your 5-Step Strategy to Maximize Deferred Comp Step 1: Calculate Your Maximum Contribution Capacity Start by determining how much you can realistically contribute. The 2025 basic limit is $23,500, but if you're 50 or older, you can add $7,500 for a total of $31,000. For DRS members in their final three years before retirement, the special catch-up rule allows you to contribute up to twice the annual limit. This means you could potentially contribute $47,000 annually if you haven't maximized contributions in previous years. Sarah's situation: At 58, she's eligible for the age 50+ catch-up and is already maximizing it by contributing $2,580 monthly ($31,000 annually). Since she's already at the maximum for her age group, her biggest opportunity lies in the special three-year catch-up provision starting at age 59. Step 2: Choose Between Catch-Up Options Strategically You can't use both catch-up provisions simultaneously, so choose the one that benefits you most:
Step 3: Optimize Your Investment Mix Using Time-Based Allocation Rather than using traditional age-based allocation, map out your spending needs for the next five years and keep those funds in stable investments:
Step 4: Plan Your Withdrawal Strategy Using Guardrails Guardrails provide a flexible withdrawal approach that adjusts based on your portfolio's performance:
The state provides valuable tools, and 457(b) plans offer unique advantages:
Starting point: Sarah, age 58, has $500,000 in deferred comp, earns $200,000, currently contributes $31,000 annually. Years 59-61 (Final three years): Using the special catch-up rule, Sarah contributes $47,000 annually instead of her current $31,000. With 6% average returns, her balance grows from $500,000 to approximately $740,000 by age 62. Asset allocation at retirement:
Tax coordination: Since Sarah will receive her PERS pension and eventually Social Security, she times her deferred comp withdrawals to minimize her overall tax burden, potentially keeping her in lower tax brackets. Your Action Plan Take these specific steps to maximize your deferred comp in your final working years:
Sources and Resources -Seth Deal |
AuthorsBob Deal is a CPA with over 30 years of experience and been a financial planner for 25 years. Archives
November 2025
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