The True Cost of a Roth Conversion

Under IRC §86, up to 85% of Social Security benefits become taxable once provisional income (AGI excluding SS + ½ of SS benefits + tax-exempt interest) exceeds $25,000 single or $32,000 MFJ. The conversion you add on top of other income raises provisional income directly, pushing more of your SS into the taxable 50% or 85% tier.

The effect: for every extra $1 of conversion in the phase-in zone, you can add $1.50 or $1.85 of taxable income — producing effective marginal rates as high as 22.2%, 40.7% or 49.95% on conversion dollars. That is the tax torpedo. We compute it by running your federal tax with and without the conversion and attributing the delta from incremental SS taxability to the SS component.

Medicare's Income-Related Monthly Adjustment Amount (IRMAA) is a Part B + Part D premium surcharge that kicks in when MAGI exceeds certain thresholds. The surcharge is a cliff, not a phase-in: $1 over a threshold triggers the full bracket. It is billed two years forward — your 2026 MAGI sets your 2028 premium. That's why age 63+ matters: a 63-year-old's 2026 conversion flips IRMAA for their first year of Medicare.

We use 2026 IRMAA brackets published by CMS. For a married couple where both spouses are on Medicare, we double the monthly surcharge, since each spouse pays separately. The tool reports the resulting 12-month cost that you will pay in 2028.

Because the penalty only applies if you're within two years of age 65, we only charge it when your age (or your spouse's) will be 63+ in the conversion year — otherwise it's shown as $0.

The Net Investment Income Tax (IRC §1411) is 3.8% on the lesser of investment income or MAGI over $200,000 single / $250,000 MFJ. Roth conversions are not investment income for NIIT purposes — but they count toward MAGI. So a conversion can push MAGI over the threshold, exposing your interest, dividends, capital gains, and rental income to the 3.8% tax they otherwise wouldn't owe.

We compute NIIT both with and without the conversion and charge the incremental NIIT as a conversion cost.

Long-term capital gains and qualified dividends are taxed at 0% if your taxable income (including LTCG) stays below $49,450 single / $98,900 MFJ / $66,200 HoH in 2026. Ordinary income fills the stack first. A conversion pushes LTCG out of that 0% room and into the 15% or 20% brackets.

We compute the LTCG tax with and without the conversion; the difference is charged as a conversion cost. For many retirees this single line item is the dominant hidden cost.

We apply your state's top marginal rate to the taxable portion of the conversion. Nine states (AK, FL, NV, NH, SD, TN, TX, WA, WY) have no personal income tax. Pennsylvania does not tax traditional-to-Roth conversions at any age, per PA DOR REV-636 (cost-recovery method applied to later earnings distributions). Illinois also excludes retirement income.

We use top marginal rate as an approximation; your actual state liability depends on the state's own bracket structure. For an exact number, model your state's return — but the top rate is usually within a point of truth for conversion dollars stacked on top of existing ordinary income.

The converted dollars grow tax-free in the Roth and are withdrawn tax-free (once qualified), so their future value is C × (1+r)^N. The not-converted dollars stay in the traditional IRA and grow tax-deferred; when withdrawn they're taxed at your retirement marginal rate, leaving C × (1+r)^N × (1 − tret).

Against this, the conversion costs T today. We model that T as if you'd instead invested it in a taxable account earning the same return, with 15% LTCG tax at liquidation. The difference is the net benefit of converting at year N. Break-even is where this crosses zero.

The shortcut heuristic: convert when your blended effective conversion rate (total cost ÷ conversion amount) is lower than tret. If that's false, you're paying more tax today than you'd have paid later.

We compute the largest conversion that (a) doesn't cross the next IRMAA cliff, (b) doesn't trigger NIIT, (c) doesn't push LTCG out of 0%, and (d) doesn't spill into the next ordinary-income bracket. The binding constraint wins. That's the sweet spot — the largest move you can make this year without hitting a cliff.

What it is not: an answer to whether you should convert at all. That's the break-even question above. And the sweet spot often says “partial conversion” — converting in tranches across multiple years is usually better than one big move, which is exactly what the Conversion Planner tool models.

• ACA premium tax credit phase-out (pre-65 early retirees buying on an Exchange). The ACA premium-tax-credit phase-out treatment is subject to change pending OBBBA implementation and subsequent legislation; verify current-year treatment. Model separately on healthcare.gov's calculator.
• Income-based student loan repayment changes.
• Qualified Business Income deduction interactions.
• State tax quirks beyond the top marginal rate (PA & IL retirement-income exclusions flagged; CA's AMT, OR's inheritance thresholds, NY's pension exclusion are not modeled).
• Estimated-tax underpayment penalties if you don't remit the conversion tax by the quarterly deadline.
• The 5-year clock on each conversion (IRC §408A(d)(2)(B)) — withdrawals of converted principal before age 59½ within 5 years of conversion incur a 10% penalty. If you're pre-59½ and need the converted money soon, think twice.
• Multi-year optimization — this tool answers “what does converting $X this year cost me?” For a multi-year strategy use our Conversion Planner.

• Rev. Proc. 2025-32 — 2026 inflation adjustments (brackets, standard deduction, LTCG 0%/15%/20% thresholds).
• IRC §408A — Roth IRAs generally; §408A(d)(3) governs conversions as ordinary income.
• IRC §408(d)(2) — pro-rata rule for distributions from IRAs with basis.
• IRC §86 — Social Security taxability; $25k/$32k/$34k/$44k thresholds are in §86(c).
• IRC §1411 — 3.8% Net Investment Income Tax; $200k/$250k MAGI thresholds.
• IRC §1(h) — preferential rates on LTCG and qualified dividends.
• 42 USC §1395r(i) and 42 USC §1395w-113(a)(7) — IRMAA Part B and Part D surcharges (based on 2024 MAGI, paid in 2026).
• CMS Annual Notice — 2026 IRMAA brackets and monthly amounts.
• IRS Form 8606 — reporting nondeductible contributions and basis.
• IRS Publication 590-A/B — IRA contributions and distributions.

Last reviewed: April 2026. For changes or corrections: corrections@rothirahub.com.