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Military Pension + 1099 Income with a high income spouse

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  • Military Pension + 1099 Income with a high income spouse

    Looking to next year, my wife will complete a 26-year career in the Navy (OB/GYN) and will start her pension (starting $90,000/yr). She will start doing some consulting work, likely 1099 income, with somewhere between $50-100k per year. I am a Pediatrician/Medical Director making $300K/yr.
    I contribute the max to my 401k ($19,500), backdoor Roth IRA ($6000), and my wife's backdoor Roth IRA ($6000). We don't need any of her pension or 1099 income for our expenses.
    What is the best way to maximize her 1099 and pension income in retirement accounts? Solo 401K (avoiding IRA options for backdoor Roth requirements)? What are the limitations for saving military pension money in retirement accounts?

  • #2
    The military pension does not have any direct path to a retirement account, but on the other hand all the income is fungible. For example, do you have the option of a mega backdoor Roth in your 401k? If so, shift some of your income into the mega backdoor Roth and replace it in spending with her pension. Similarly, she could max her solo 401k, or whatever account you set up for her 1099 income.

    Now, all that said, nothing wrong with just socking away her pension in taxable. Sure you are missing out on tax deferral, but put it in a low cost tax efficient index mutual fund and ultimately you get to withdraw it at long term capital gains rates. That money will in fact be quite valuable to you when you are managing tax brackets in retirement.

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    • #3
      Pension payments like RMDs are not rollover eligible. Also, they are not earned income and not considered compensation. So, they can not be the basis for any retirement contributions. However, all income is fungible.

      She can adopt a one-participant 401k plan and make employee deferrals and employer contributions up to the relevant limits.

      If she makes employee deferrals to the TSP the same year she make employee deferrals to the one-participant 401k, the combined total can not exceed the employee deferral limit.

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      • #4
        We had a similar situation as yours - I’m retired from both military and civilian practices, and physician spouse also retired from civilian practice. We both have minimal gig income now.

        After running the numbers, our emphasis in this phase of early retirement is:
        1) use military pension for current spending and emergency fund
        2) any other income invested in taxable accounts to maintain 60/40 asset allocation.

        With (pension + SS + RMD) that we will receive in our second decade of retirement, we will likely be in a higher tax bracket than our current early years of retirement so we are maximizing Roth conversions at least until the current TJCA tax rates expire after 2025. You would have to analyze the numbers to see if you, too, would benefit from Roth conversions when your wife retires. Also with regard to a solo-401k for the consultant work, it comes down to pay tax now or pay later, with similar future tax bracket considerations as the conversions.

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