Roth conversions are a powerful strategy for reducing long-term tax liabilities and maximizing retirement savings. Many investors believe that as long as they convert up to the limits of their current tax bracket, they are optimizing their financial future. However, for high-net-worth retirees, this approach can lead to unexpected costs—especially when it comes to IRMAA surcharges (Income-Related Monthly Adjustment Amounts).
If you’re considering a Roth conversion, it’s essential to go beyond ordinary income tax considerations. A poorly executed strategy could cost you tens or even hundreds of thousands of dollars over your lifetime. In this article, we’ll explore a common Roth conversion mistake, break down the hidden tax trap, and outline a smarter approach to conversion planning.
The Common Roth Conversion Approach (and Its Flaw)
Many financial advisors recommend filling up lower tax brackets when executing a Roth conversion. The reasoning is simple:
- You pay taxes on the converted amount now at a known rate.
- By doing so, you avoid paying higher taxes on those funds later, when required minimum distributions (RMDs) begin at age 73 or 75 (depending on your birth year).
- This can be especially beneficial for retirees with significant pre-tax assets in traditional IRAs and 401(k)s.
On the surface, this approach makes sense. Consider Bob and Sally, a hypothetical retired couple:
- They have significant savings in pre-tax retirement accounts.
- Their taxable income is currently low but will rise sharply when RMDs begin.
- They decide to convert enough to fill up the 22% tax bracket, believing this will minimize future taxes.
At first glance, the strategy appears to be working. By pre-paying taxes now, they expect to save nearly $485,000 in tax-adjusted portfolio value over time. However, a critical mistake in their planning leads to an unforeseen expense—higher Medicare premiums due to IRMAA surcharges.
The Hidden Tax Trap: IRMAA Surcharges
IRMAA surcharges apply to Medicare Part B and Part D premiums. These surcharges are based on your Modified Adjusted Gross Income (MAGI) from two years prior. That means a Roth conversion today could push you into a higher Medicare premium bracket two years from now.
Here’s how IRMAA impacts Bob and Sally:
- Before their Roth conversion, Bob’s annual Medicare Part B and Part D costs were about $6,904.
- After the conversion, their higher income pushed them into the first IRMAA threshold, increasing each of their premiums by over $2,900 per year.
- Together, they now pay an additional $5,828 annually in Medicare costs.
This might seem like a small number for a high-net-worth retiree, but consider the opportunity cost:
- To cover an additional $5,828 in expenses, they need to withdraw about $7,770 pre-tax from their IRA.
- That money is no longer growing for them in a tax-advantaged account.
- If they had left those funds invested at a 7.5% return, they could have grown to $47,000+ over the next 25 years.
By unknowingly triggering IRMAA surcharges, Bob and Sally’s Roth conversion cost them far more than they anticipated.
The Right Approach: Optimizing Roth Conversions While Avoiding IRMAA
The key lesson? Don’t just look at tax brackets when planning a Roth conversion—factor in IRMAA thresholds as well.
When Bob and Sally adjusted their strategy to convert just below IRMAA thresholds, their tax-adjusted assets increased from $485,000 to nearly $760,000—a gain of over $275,000!
How to Avoid the IRMAA Trap
- Know the IRMAA Brackets
- IRMAA surcharges increase in tiers based on income.
- Even exceeding a threshold by $1 can push you into a higher surcharge bracket.
- In 2025, individuals with a MAGI below $106,000 (or couples below $212,000) avoid IRMAA entirely.
- Plan Roth Conversions with Precision
- Instead of blindly converting to fill a tax bracket, convert up to the highest possible amount without crossing an IRMAA threshold.
- Work with a tax professional to model the impact of conversions over multiple years rather than making large, one-time conversions.
- Consider Spreading Out Conversions
- Instead of converting a large amount in a single year, spread conversions across multiple years to stay under IRMAA limits.
- Account for Other Tax Considerations
Roth conversions don’t just impact IRMAA. Be mindful of:- Social Security Taxes: Conversions can increase provisional income, making more of your Social Security benefits taxable.
- Capital Gains Tax: Higher income from conversions may push capital gains into taxable territory (instead of the 0% rate).
- Legacy Planning: If your heirs will inherit your retirement accounts, consider their future tax brackets as well.
Final Thoughts: Roth Conversions Done Right
Roth conversions can be an excellent strategy to reduce long-term tax burdens, but wealthy retirees must be mindful of IRMAA surcharges and other hidden costs. Simply filling up a tax bracket isn’t enough—you need a holistic tax strategy that considers:
✅ Ordinary income taxes
✅ IRMAA surcharges and Medicare costs
✅ Social Security tax implications
✅ Capital gains and dividend taxation
✅ Estate and legacy tax considerations
By optimizing conversions with IRMAA in mind, retirees can maximize their tax savings, preserve more wealth, and avoid costly mistakes that could reduce their financial security in later years.
For those who want to analyze their own numbers, tax planning software—like that available through the Retirement Planning Academy—can help visualize the long-term impact of different Roth conversion strategies.
Next Steps
If you’re considering a Roth conversion, don’t make the mistake of overlooking hidden tax traps. Consult a financial advisor or tax specialist to ensure you’re making informed decisions that protect your wealth.
By understanding and applying the right strategies, you can keep more of your money working for you—not going to unexpected tax and Medicare costs.
