Converting a traditional IRA to a Roth IRA sounds straightforward: pay taxes now, enjoy tax-free growth later. But for retirees and pre-retirees, the real costs are often hidden in Social Security taxation, Medicare surcharges, and capital gains interactions.
A Roth IRA conversion is the process of moving funds from a traditional IRA or other pre-tax retirement account into a Roth IRA. The converted amount is treated as ordinary income in the year of the conversion and taxed accordingly, but future growth and qualified withdrawals from the Roth IRA are tax-free under IRS rules.
Roth conversions are frequently evaluated in isolation — a simple "tax now vs tax later" comparison. But for pre-retirees and retirees drawing from multiple income sources, this framing misses a significant portion of the real cost.
Adding income in one area, even strategically, can unintentionally ripple into others, sometimes reducing the net benefit of the conversion or even making it counterproductive. Understanding these interactions is the difference between an effective strategy and an expensive mistake.
Keep reading or watch this video about IRA conversions in retirement.
This is especially relevant for retirees already receiving Social Security.
A Roth IRA conversion can increase provisional income, potentially making up to 85% of Social Security benefits taxable, rather than 0% or 50%. This shift can reduce the net benefit in some situations compared with a conversion analysis that doesn’t account for Social Security taxation.
Additional ordinary income from a Roth conversion may push long-term capital gains into higher tax brackets. For example, capital gains that would have been taxed at 15% may instead be taxed at 20% because of the increase in income, reducing overall tax efficiency.
This is especially relevant for individuals with significant taxable investment portfolios.
Higher income can also affect Medicare costs.
Roth conversions increase modified adjusted gross income (MAGI), which may trigger Income-Related Monthly Adjustment Amount (IRMAA) surcharges on Medicare Part B and Part D premiums. These surcharges are based on income from two years prior, meaning a single conversion can have multi-year cost implications. It's important to note that IRMAA rules/thresholds can change.
| Area Impacted | Why It Matters |
| Social Security Taxation | Additional income can cause more benefits to become taxable |
| Capital Gains | May push gains into higher tax brackets |
| Medicare Premiums (IRMAA) | Higher income can increase premiums two years later |
| State Income Taxes | Varies significantly depending on location |
| Future Tax Brackets | Conversion timing influences long-term outcomes |
For many individuals, the timing of a Roth conversion can be as important as the decision itself. Commonly considered periods include:
These windows can create opportunities to evaluate conversions under different tax conditions. However, the impact varies based on each individual’s broader financial picture.
In this example, the first portion of income falls within a range where additional ordinary income may result in little to no federal tax liability. However, as income rises beyond that range, each additional dollar can trigger multiple layers of taxation, not only on ordinary income but also on capital gains and other sources of income.
This creates what is often referred to as a “stacking effect,” in which the true marginal tax rate is higher than it appears at first glance.
As a result, a strategy that appears efficient at one income level may be less effective at another, depending on how additional income affects other tax items.
Whether you’re working with a financial advisor or evaluating this on your own, several factors are typically considered together:
A Roth IRA conversion is most likely worth it when your current tax rate is lower than your expected future tax rate. For retirees, this often occurs in the gap between leaving work and claiming Social Security or beginning RMDs when taxable income is temporarily reduced.
However, the full picture requires accounting for how the additional income interacts with Social Security taxation, Medicare IRMAA surcharges, and capital gains. A conversion that looks efficient at your marginal rate may cost more in practice due to the stacking effect of multiple tax triggers. A coordinated analysis is essential before converting.
The best time to do a Roth conversion is typically during years when taxable income is temporarily lower than usual. For pre-retirees and retirees, three windows are most commonly considered:
Timing matters as much as amount. Converting in the wrong year, or over a key threshold, can trigger outsized tax consequences that outweigh the long-term benefit.
The full amount converted is treated as ordinary income and taxed at your federal (and applicable state) marginal rate in the year of conversion. For example, converting $50,000 in a 22% federal bracket would generate roughly $11,000 in federal income tax on the conversion alone.
But the true tax cost is often higher. Additional income can make Social Security benefits taxable, push capital gains into a higher bracket, and trigger Medicare IRMAA surcharges, all of which increase the real effective cost of the conversion beyond what the marginal rate alone would suggest.
Roth conversions increase your modified adjusted gross income, which Medicare uses on a two-year lookback to determine whether you owe IRMAA surcharges on Part B and Part D premiums.
Because IRMAA uses a cliff system (not a gradual scale), crossing a threshold by even one dollar moves you into the next surcharge tier, potentially adding significant costs for two full years. Sizing conversions to stay below IRMAA thresholds is a common and important planning consideration.
The main downsides of a Roth conversion include:
Additionally, converting requires paying taxes now, reducing funds available for growth, and the benefit may not materialize if future tax rates are lower than expected. These trade-offs make the size, timing, and sequencing of conversions critically important to evaluate before proceeding.
Roth IRA conversions can be a valuable part of a long-term tax strategy, but they are rarely one-size-fits-all. For pre-retirees and retirees, the interaction among income sources, Social Security, Medicare, capital gains, and tax brackets makes coordination especially important.
The right question is not "should I convert?" but "how much, when, and at what cost?" Answering that accurately requires looking at your full financial picture, not just your marginal tax bracket in isolation.
If you're considering a Roth IRA conversion, understanding the complete range of trade-offs before the conversion occurs can provide significantly greater clarity and confidence in the decision.
Ready to explore whether a Roth conversion makes sense for you? We help pre-retirees and retirees evaluate conversions within the context of their full financial picture: taxes, Social Security, Medicare, and long-term goals. Start a conversation.
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This material is provided for general informational and educational purposes only and is not intended to provide individualized investment, tax, or legal advice. The information discussed may not be applicable to all individuals or situations. Roth IRA conversions and related tax considerations depend on individual circumstances and applicable IRS rules, which are subject to change. We are not authorized to give tax or legal advice. Readers are encouraged to consult their own tax, legal, and financial professionals before making any decisions.
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Jordan Bilodeau, CFP®, CEPA, is the Director of Planning & Strategy at Spaugh Dameron Tenny, where he leads firmwide planning initiatives and helps clients navigate complex financial decisions. With experience in portfolio design, tax strategies, and business succession planning, Jordan works with executives, physicians, dentists, and successful retirees to coordinate every aspect of their financial lives. He holds both the CERTIFIED FINANCIAL PLANNER® and Certified Exit Planning Advisor designations and has a Master’s degree in Wealth and Trust Management, providing tailored guidance for clients.
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