Roth retirement accounts, including Roth IRAs and Roth 401(k)s, are popular vehicles for those seeking tax-free investment growth and greater flexibility during retirement. Although contributions to these accounts do not reduce taxable income at the time of contribution, the benefit lies in the ability to withdraw earnings tax-free, without mandatory minimum distributions later in life.
For individuals who were unable to contribute directly to a Roth IRA due to income limitations or missed the opportunity altogether, a Roth conversion presents an avenue to transfer funds from traditional tax-deferred accounts into a Roth. This maneuver can reap long-term tax benefits by converting taxable retirement assets into an account where future growth and withdrawals are tax-exempt.
However, it is essential to recognize the tax consequences and other downstream effects such a conversion can engender. Although the conversion amount is taxable as income in the year the conversion occurs, there may be additional costs beyond the immediate tax bill. Specifically, substantial increases in adjusted gross income (AGI) from conversions may lead to higher Medicare premiums years later.
Medicare premiums, particularly for Part B (medical insurance) and Part D (prescription drug coverage), can be subject to surcharges tied to an enrollee’s income level, known as income-related monthly adjustment amounts (IRMAAs). These surcharges only affect individuals or couples whose modified adjusted gross income (MAGI) exceeds certain thresholds. For 2026, single taxpayers with MAGI above $109,000 and married couples filing jointly with MAGI over $218,000 will face these increased premiums.
The thresholds at which IRMAAs apply are not set at excessively high income levels, meaning even modest Roth conversion amounts may push a taxpayer into a higher premium bracket. This can lead to a significant increase in out-of-pocket Medicare expenses in the years following the conversion, typically two years after filing the tax return where the higher income was reported.
Given the cost sensitivity around Medicare premiums, retirees and near-retirees must approach Roth conversions with caution. Executing a large, lump-sum conversion in a single year might be counterproductive if it triggers IRMAA surcharges, thereby increasing healthcare costs significantly.
A more measured strategy involves spreading conversions over several years to smooth the income impact and stay below IRMAA income thresholds. This approach can help balance taking advantage of Roth benefits while minimizing unwelcome premium increases. Engaging a tax professional can provide tailored guidance on timing and conversion amounts that consider both current tax brackets and anticipated Medicare implications.
It is typically advisable to perform Roth conversions during years when overall income is relatively low to minimize taxable exposure. However, even in such cases, monitoring IRMAA thresholds remains important to avoid unexpected Medicare premium hikes.
In sum, while Roth conversions offer compelling advantages for retirement planning, an unconsidered large conversion could lead to higher Medicare premiums down the line. Careful income management and strategic planning with expert advice are critical to optimizing retirement assets without incurring avoidable additional costs.