For retirees with significant traditional IRA balances and unclaimed Social Security benefits, the intersection of Roth conversions, Medicare IRMAA, and estate planning presents both opportunities and challenges. As one potential client noted, they need “someone at your firm personally handles Roth conversion/RMD/Medicare IRMAA planning for clients in this situation.” This guide addresses the specific planning needs of high-net-worth retirees in Virginia. Understanding Roth Conversions A Roth conversion involves moving funds from a traditional IRA to a Roth IRA, paying ordinary income tax on the converted amount. The benefit? Once in the Roth, the money grows tax-free and can be withdrawn tax-free in retirement. For retirees with $1.8 million in traditional IRAs, the question is not whether to convert—but how much and when. The Optimal Conversion Strategy The optimal conversion strategy depends on three factors: current tax bracket, expected future tax bracket, and the impact on Medicare premiums. For most retirees, the ideal approach is to fill the 12% federal tax bracket each year during the conversion window (after retirement but before RMDs begin). For a single filer in 2026, that means converting enough to bring taxable income to the top of the 12% bracket, which is $48,475 . However, the Medicare IRMAA threshold creates an additional consideration. Going even $1 over the first IRMAA tier ($109,000 for single filers, $218,000 for married filers) can trigger an additional premium of approximately $888 per person per year . This means conversions must be carefully calibrated to avoid crossing the IRMAA cliff while maximizing tax bracket utilization. Tax-Free Growth and Estate Planning The long-term benefit of Roth conversions extends beyond the retiree’s lifetime. Roth IRAs are not subject to RMDs during the owner’s lifetime, and heirs can inherit Roth IRAs tax-free—provided they follow the 10-year distribution rule for non-spouse beneficiaries . For retirees concerned about the tax impact on heirs, Roth conversions can substantially increase after-tax wealth passed to the next generation. Medicare IRMAA: The Hidden Tax on Retirement Income IRMAA is an income-based surcharge added to Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage) premiums . The surcharge applies when modified adjusted gross income (MAGI) exceeds certain thresholds. For 2026, the thresholds are: Filing Status First Tier Threshold Single $109,000 Married Filing Jointly $218,000 For 2026, there are five surcharge tiers. The surcharges range from $1,148 to $6,936 per person per year for Part B and Part D combined . The highest tier begins at $500,000 for single filers or $750,000 for married filing jointly . The Two-Year Lookback IRMAA for a given year is generally based on your MAGI from two years before . This means income decisions made in 2026 will affect Medicare premiums in 2028 . For retirees planning Roth conversions, this timing creates a planning window: conversions can be scheduled in years when income is below IRMAA thresholds, or the tax impact of crossing a threshold can be weighed against the long-term benefits of the conversion. The Widow’s Trap When a spouse dies, the surviving spouse files as Single, where IRMAA brackets are roughly half the married filing jointly thresholds. A couple comfortably in Tier 1 as MFJ filers can suddenly land in Tier 3 as a single filer with no actual change in income . This is a critical consideration for estate planning, as the tax impact on the surviving spouse can be significant. Virginia Tax Considerations for Retirees For Virginia residents, the tax treatment of retirement income has three key elements: Social Security Exemption Social Security benefits are fully exempt from Virginia income tax . This means the portion of Social Security that is taxable federally is subtracted on the Virginia return, effectively eliminating state tax on Social Security benefits. Age Deduction Phase-Out The Virginia age deduction provides up to $12,000 per person for taxpayers aged 65 and older . However, the deduction is reduced dollar-for-dollar by adjusted federal AGI above $50,000 for single filers and $75,000 for married filers . This creates a “cliff” effect similar to IRMAA: managing income around these thresholds can preserve thousands of dollars of deduction. Pension and IRA Taxation Most other retirement income—including pensions, 401(k) distributions, and IRA withdrawals—is taxable at Virginia’s graduated rates, which top out at 5.75% . Roth distributions that are tax-free federally remain tax-free in Virginia . Rental Property Tax Strategies For retirees with rental properties, depreciation is a powerful tool for reducing taxable income. A cost segregation study can accelerate depreciation deductions, potentially saving tens of thousands of dollars in a single year . Under the OBBBA, 100% bonus depreciation has been restored for qualified property placed in service after January 19, 2025 . Rental Property Example For a residential rental property with a $800,000 purchase price, the annual depreciation without a cost segregation study would be approximately $23,636 (based on a 27.5-year recovery period) . With a cost segregation study, 20-40% of the building value could be reclassified as 5-7 year property, creating significantly larger deductions in the early years of ownership. How We Can Help Developing a Roth conversion and IRMAA management strategy requires specialized expertise. At Nova Tax & Accounting Services , we work with clients to develop personalized strategies that integrate Roth conversions, IRMAA management, and Virginia tax planning. Our approach includes evaluating conversion scenarios and projecting lifetime tax savings, managing income to stay below IRMAA thresholds while maximizing conversion benefits, planning for the Virginia age deduction phase-out, coordinating with estate planning attorneys to optimize wealth transfer, and monitoring two-year lookback timing. Schedule your free consultation today to discuss your retirement tax planning needs.
For Virginia residents approaching retirement, the years between leaving the workforce and reaching Required Minimum Distribution (RMD) age present a critical window for tax planning. With traditional IRA balances, rental properties generating income, and unclaimed Social Security benefits, retirees face a complex web of tax decisions that can significantly impact their lifetime wealth and the legacy they leave to heirs. Understanding Required Minimum Distributions (RMDs) The SECURE 2.0 Act raised the RMD age to 73 for those who turn 73 after January 1, 2025 . For someone turning 73 on August 20, 2025, the first required minimum distribution must be taken by April 1, 2026, with a second RMD required by December 31, 2026 . After the starting year, RMDs must be taken by December 31 of each year. The RMD calculation is straightforward: divide the prior December 31 account balance by a life expectancy factor from IRS Publication 590-B. Most retirees use the Uniform Lifetime Table (Table III) . Notably, Roth IRAs are not subject to RMDs during the owner’s lifetime , making Roth conversions a powerful strategy for reducing future RMD exposure. For a retiree with $1.8 million in traditional IRAs, the initial RMD at age 73 would be approximately $65,000–$70,000 (depending on the exact life expectancy factor). This amount, combined with other income, can push retirees into higher tax brackets and trigger Medicare IRMAA surcharges. Roth Conversions: The Strategic Window The years between retirement and RMD age represent the most valuable period for Roth conversions. During this window, taxable income is often at its lowest, making conversions more tax-efficient. Converting traditional IRA funds to a Roth IRA now means paying tax at current rates rather than potentially higher rates when RMDs begin. A multi-year conversion strategy could involve converting $23,500–$25,000 annually to fill the 12% federal bracket without crossing the Medicare IRMAA threshold . Over a 10-year window, this could convert approximately $235,000 to Roth, creating tax-free growth and tax-free distributions for the future. The long-term benefit extends beyond the retiree’s lifetime. Roth IRAs are not subject to RMDs during the owner’s lifetime, and non-spouse heirs can inherit Roth IRAs tax-free under the 10-year distribution rule . This makes Roth conversions particularly valuable for clients concerned about the tax impact on their heirs. Social Security Taxation Social Security benefits are fully exempt from Virginia income tax . This means any portion of Social Security that is taxable federally is subtracted on the Virginia return, effectively eliminating state tax on Social Security benefits. However, Social Security is partially taxable at the federal level based on combined income (AGI + nontaxable interest + half of Social Security benefits). For a single filer with combined income between $25,000 and $34,000, up to 50% of benefits may be taxable. Above $34,000, up to 85% may be taxable. Medicare IRMAA: The Hidden Retirement Tax Medicare IRMAA (Income-Related Monthly Adjustment Amount) is a surcharge on Medicare Part B and Part D premiums for higher earners . For 2026, the first-tier IRMAA threshold is $109,000 for single filers and $218,000 for married couples filing jointly . Crossing even $1 over a threshold triggers the full surcharge tier, ranging from $1,148 to $6,936 per person per year . IRMAA uses a two-year lookback, meaning 2026 premiums are based on 2024 income . This creates a significant planning opportunity: income decisions made today affect Medicare premiums two years later. For retirees considering Roth conversions, this timing allows for strategic planning to avoid IRMAA surcharges while still maximizing conversion benefits. Virginia Retirement Tax Considerations Virginia offers a moderate tax environment for retirees. Social Security benefits are fully exempt from Virginia income tax . However, most other retirement income—including pensions, 401(k) distributions, and IRA withdrawals—is taxable at Virginia’s graduated rates, which top out at 5.75% . The Age Deduction Taxpayers aged 65 and older can claim an age deduction of up to $12,000 per person . However, the deduction is reduced dollar-for-dollar when adjusted federal AGI exceeds $50,000 for single filers and $75,000 for married filers . This means many retirees get only part of the deduction—or none at all. For a single filer with $30,000 of Social Security, $40,000 from a 401(k), and a $20,000 private pension, the Social Security is excluded, leaving $60,000 of Virginia income. This puts the filer about $10,000 over the $50,000 phase-out threshold, cutting the $12,000 age deduction to roughly $2,000 . Managing adjusted federal AGI around the $50,000 and $75,000 phase-out lines is essential for preserving the age deduction. Rental Property Depreciation For retirees with rental properties, depreciation is one of the most valuable tax benefits available. Residential rental property is generally depreciated over 27.5 years . However, a cost segregation study can identify components with shorter useful lives—carpet, appliances, landscaping, and specialty electrical systems—that can be depreciated over 5, 7, or 15 years instead . 100% Bonus Depreciation The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation for qualified property placed in service after January 19, 2025, extending through December 31, 2029 . When a cost segregation study identifies that 20–40% of a building’s purchase price consists of 5-, 7-, or 15-year property, all of that can potentially be deducted in full in year one . For a rental property purchased for $800,000, a cost segregation study could identify $162,500 (25%) of the building value as shorter-lived property. With 100% bonus depreciation, the owner could deduct $162,500 immediately, plus remaining building depreciation of approximately $17,727, for total year-one depreciation of over $180,000 . At a 32% tax bracket, this yields approximately $57,673 in federal tax savings . Cost Segregation Considerations The cost of a study typically ranges from $5,000–$15,000 depending on property size and complexity . The investment routinely generates 3–10x returns through accelerated depreciation . However, investors should model the full hold period, as accelerated depreciation reduces basis and may affect gain recognition or depreciation recapture when the property is sold . How We Can Help Developing a comprehensive multi-year tax strategy requires integrating federal tax brackets, state tax rules, RMD projections, Social Security taxation, and Medicare IRMAA thresholds. This is not a spreadsheet problem—the interactions between these variables produce results
For nonprofit organizations, financial transparency is the bedrock of donor trust and public confidence. But not every organization needs the same level of financial scrutiny. Understanding the differences between a financial statement audit, a review, and a compilation helps you choose the right level of assurance for your organization’s needs and budget. The Three Levels of Assurance Financial statement services provide three distinct levels of assurance, ranging from the highest level (audit) to no assurance (compilation). Each service serves a different purpose and is appropriate for different circumstances. Compilation: No Assurance A compilation is the most basic level of financial statement service. The CPA organizes your financial data into formal financial statements in accordance with accounting standards, but performs no verification or testing. No assurance is provided that the statements are free from material misstatement. When it’s appropriate: Internal management reporting Tax preparation Small loan applications where assurance is not required Newer nonprofits with simple operations Grant applications that do not require audited statements What it includes: Presentation of financial data in statement format No inquiry, analytical, or verification procedures A compilation report that clearly states no assurance is provided Review: Limited Assurance A review provides limited assurance, sometimes called “negative assurance.” The CPA performs analytical procedures—examining trends and relationships among financial data—and makes inquiries of management to assess whether the statements are plausible and free from material misstatement . When it’s appropriate: Nonprofits with revenue between $100,000 and $1,000,000 Board members seeking a comfort-level report without the cost of an audit Lenders or grantors who require limited assurance Organizations preparing for a future transition to an audit What it includes: Analytical procedures to identify unusual trends or unexpected differences Inquiries of management about the financial statements No testing of transactions or confirmation of balances with third parties A review report stating that nothing came to the CPA’s attention suggesting material misstatement Audit: Reasonable Assurance An audit provides the highest level of assurance—reasonable assurance that the financial statements are free from material misstatement and are presented fairly in accordance with GAAP. The CPA performs extensive testing, confirms balances with third parties, evaluates internal controls, and issues an opinion on the financial statements . When it’s appropriate: Federal grant recipients expending $1,000,000 or more in federal awards (Single Audit) Organizations required by state or local law to have audited financials Major donors or grantors requiring audited financial statements Organizations with significant financing or lender requirements Boards seeking the highest level of financial oversight What it includes: Comprehensive risk assessment Walkthroughs and testing of internal controls Substantive testing of transactions Confirmation of key balances with banks, donors, and grantors Review of contracts, grant agreements, and board minutes An audit opinion on the fairness of the financial statements Factors to Consider When Choosing a Service Stakeholder Requirements The primary driver is often external requirements. Loan agreements, grant letters, and state rules should specify the required level of service. Major donors, private foundations, and government agencies frequently require audited financial statements as a condition of receiving funds. Organization Size and Complexity Smaller organizations with simpler operations may find that a review or compilation meets their needs. As organizations grow and their operations become more complex, the need for a full audit often increases. Cost Considerations An audit is significantly more expensive than a review, and a review is more expensive than a compilation. Many organizations move between these levels over time as their needs and budgets evolve. Virginia Nonprofit Audit Requirements Organizations with income under $25,000 in Virginia may file a certified treasurer’s report containing a balance sheet and income and expense statement instead of an audit or IRS Form 990 . For organizations with higher revenue, Virginia law may require a financial review or audit, particularly when applying for or maintaining certain state tax exemptions. The Audit Program For organizations undergoing an audit, the audit program will vary with the type of nonprofit, its volume of income, and the complexity of its operations . Key areas of emphasis include: 1. Proper Authorization of Activities and ExpendituresThe budget and board of directors’ minutes are the usual source of verification of a nonprofit’s activities. Committee chairs are generally required to authorize any expenses from their budget funds. Employees often document their own timesheets and expense records, with a second party reviewing these documents each month . 2. Determination of the Physical Existence of AssetsVerification of bank balances, count of securities owned, and count of merchandise help the audit team determine physical existence of assets. Examination of deeds and tax assessments applies when real property is owned by a nonprofit . 3. Ascertaining That Returns and Reports Are Filed in a Timely FashionA nonprofit has the same obligation to file tax returns and corporate reports as a for-profit organization. Failure to comply will expose the nonprofit to possible fines or penalties . How We Can Help At Nova Tax & Accounting Services , we help nonprofits choose the right level of financial assurance and prepare for a smooth audit or review experience. Our audit and assurance services include financial statement audits, reviews, compilations, and Single Audit compliance. We also provide Form 990 preparation and nonprofit consulting to help organizations strengthen internal controls and maintain compliance. Schedule your free consultation today to discuss your organization’s needs. 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