The Hidden Cost of Roth Conversions: Avoiding Surprise Medicare Charges

Roth conversions can save thousands in taxes, but they can also trigger Medicare IRMAA surcharges that quietly add up to more than $5,000 a year. Most retirees never see it coming, because the rules for Medicare premiums don’t line up with the tax brackets everyone focuses on.

In this video, James breaks down how Roth conversions interact with Medicare Part B and Part D premiums, why modified adjusted gross income matters more than taxable income, and how crossing a threshold by even one dollar can change your costs for an entire year. The case study shows how a couple could save nearly a million dollars in lifetime taxes… but lose tens of thousands to unnecessary IRMAA charges if they convert without a plan. A small adjustment (converting up to the right tier instead of the wrong bracket) boosts their long-term wealth and avoids surprise premiums.

If you’re planning Roth conversions before RMDs begin, evaluating a 401(k)-to-Roth strategy, or trying to minimize taxes in early retirement, understanding Medicare thresholds is essential. A smart conversion plan balances tax savings with premium costs so you don’t give back what you worked so hard to save.

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Episode Transcript

SPEAKER_00 (00:00):
Most people think Roth conversions are a smart tax

(00:02):
move, and they are, until yourealize they can add thousands
of dollars per year to yourMedicare premium.
That's why today we're gonnatalk about how a
well-intentioned tax strategymay backfire on you if you're
not careful about how you'reimplementing it.
To illustrate this, I'm gonnatake you right to a case study
that shows how Medicare premiumswent from zero dollars per year
of excess premiums all the wayup to over$5,200 per year of

(00:22):
extra premiums unintentionally.
Someone thinking they wereimplementing the right tax
strategy, but in doing this, itended up costing them thousands
of dollars per year and tens ofthousands of dollars over the
course of their retirement.
Now, this might seem fairlycomplex, but I'm gonna break it
down for you in a very simpleway to understand so that as you
start implementing your Rothconversion strategies, you can
get the benefits both ofordinary income tax brackets as

(00:44):
well as being mindful of IRMAsurcharges that could cost you
thousands of dollars per year.
So let's take a look at thisworksheet here.
This shows you important numbersto know for 2025.
These numbers will be adjustedup for 2026.
But the important thing tounderstand is this most people,
when they're looking at doingRoth conversions, are only
focused on these numbers righthere.
They're looking at federalordinary income tax brackets.

(01:05):
And what you can see here isthose tax brackets range from
10% all the way up to 37% andthe highest.
Typically, the strategy is howdo we fill up those lower tax
brackets, maybe 10, 12, even 22%to avoid paying taxes at a later
date at 24% or higher.
Now, if all you're doing isthis, you're missing a big part
of the picture.
Because what I want to call yourattention to now is this.

(01:27):
What you can see here is this iswhat your IRMA surcharges or
your Medicare premium surchargesare based upon.
If you are married filingjointly, you can see here's what
your modified adjusted grossincome needs to be in order to
have these surcharges.
So Medicare Part B and part D,there's no additional surcharge
if your income, your modifiedadjusted gross income, I'm gonna

(01:48):
explain why that's so importantin a second, is$212,000 or less.
Or if you're single, if it's$106,000 or less, your Part B
and Part D premiums, you do nothave any extra surcharge.
However, as soon as you crosseven$1 over this threshold, your
new monthly surcharge for part Bis$74 and part D is$13.70.

(02:12):
So those are combined amountsthat every single month you will
pay for the year in which yourincome was about that amount.
Now, here's the detail that getspeople tripped up.
And if you know this, it couldbe the difference between tens
of thousands of dollars savedfor a very simple understanding
of how this works.
When you look at these numbershere, they are based on modified
adjusted gross income.

(02:33):
When you look at these numbersright here, these are based on
taxable income.
So what's the difference?
Well, your modified adjustedgross income, this is your total
income before you take anydeductions.
It's a little bit morecomplicated than that, but
generally speaking, yourmodified adjusted gross income
is gonna be the income you havebefore you take a standard
deduction or before you take anitemized deduction.

(02:55):
It's also gonna have a few otherthings added into it.
But generally speaking, if youhave, for example, a modified
adjusted gross income of212,000, your taxable income is
going to be lower.
Here's why that matters.
You might look at this and say212,000, that's not a big deal
because I was planning.
So I'm married, I'm filingjointly, I was planning to
convert up to the 22% taxbracket.

(03:16):
And the 22% tax bracket, that'sat$206,700.
So I'm already expecting to comeunder that$212,000 number that
my Medicare surcharges are basedupon.
Not so fast, because remember,if your taxable income is
$206,700, your modified adjustedgross income is at a minimum
$30,000 higher than that, simplydue to standard deductions.

(03:39):
So this can cause people tothink if all I do is convert up
to the 22% tax bracket, I'mavoiding Medicare surcharges.
Now I know that's a ton ofnumbers.
So let me show you anillustration, a visual of how
that actually plays out.
And I'm gonna use Michael andLisa as sample plan to
illustrate this.
Here's their assets.
They have a lot of money inpre-tax accounts, Michael's
401k, Lisa's IRA.
They know that taxes are goingto be an issue if they don't

(04:01):
start converting those assets totheir Roth IRAs.
Now here's the problem.
As I mentioned, is most peopleare only looking at the ordinary
income tax brackets.
And when they look at this, theycan see how impactful this can
be.
So, for example, if they want tofill up the 22% ordinary income
tax bracket, right off the bat,we can see that that strategy of
converting money from their401ks and IRAs into their Roth

(04:23):
IRA, that's going to result in$975,000 fewer dollars paid in
federal income taxes.
That's a huge win.
Most people stop there, butthey're still leaving lots of
money on the table.
If I go to this page right here,what you can see is in order for
them to do that, they areconverting, so they're pulling
money from their IRAs to their401ks in these years where their

(04:44):
taxable income is expected to bemuch lower.
So instead of paying 0% taxes,because maybe in these years
here, between 65 in this exampleand 70, they're in a much lower
tax bracket.
Instead of just enjoying thatand keeping taxes low, they're
smart.
They're starting to pull moneyfrom IRAs and move it to Roth
IRAs and fill up the 10%, the12%, the 22% tax bracket.

(05:06):
What you can see here is thatproposed strategy results in
over a million dollars in taxadjusted ending assets.
I know this number is differentthan the number we just saw.
We're looking at two differentthings.
One is actual dollars saved, oneis the difference in tax
adjusted ending wealth.
So some nuances there and whatthose two numbers mean, but the
bottom line is both of them arepositive.
Now here's the thing.
As I mentioned before, when welooked at that worksheet,

(05:28):
converting up the 22% tax break,it doesn't seem like it's going
to cause your Medicaresurcharges to spike, but it will
because Medicare surcharges arebased upon modified adjusted
gross income.
Ordinary income taxes are basedupon your taxable income.
Two different things.
So if instead we are a littlebit more strategic about that,
and looking at these years here,this yellow line here, this

(05:50):
represents the top of the 22%bracket.
What if we said we don'tactually want to convert up to
the top of the 22% bracket?
We want to convert up to thepoint at which we're going to be
pushed into a different tier.
So in this example, we can say,how much can we convert before
triggering any IRMA surcharges?
Just as a reminder, here's whatthose numbers are again.
If you're married finallyjointly, under 212,000.

(06:14):
If you are single, under106,000, no IRMA surcharges.
Here's tier one, here's tiertwo, here's tier three, four,
and five.
And you get progressively higherIRMA surcharges the higher you
move up in that.
So this is that threshold, noIRMA surcharges.
Just for the sake of comparison,this is the one, this tier one
is most closely approximated tothe 22% tax bracket.

(06:34):
If I look at this, so keep inmind, so far, this couple's
adding$1,057,000 to their taxadjusted ending wealth.
If I change this, what you'regonna look at is now all of a
sudden, just by making that onechange, there's an additional
$90,000 of tax adjusted endingwealth.
And here's why, and here's whythe benefit isn't even fully

(06:56):
stated here.
What you can see here is now allof a sudden they're not
converting all the way up tothat 22% tax bracket.
The 22% tax bracket for ordinaryincome might be here, whereas
that tier one Irma surchargemight be here.
So they're only converting up tothat, which means they're saving
a few thousand dollars per yearthey ordinarily would have been
paying.
And the better news is Rothconversions hurt.

(07:16):
We see the tremendous value thatthey have, but they require
converting lots of money, whichmeans paying lots of taxes
earlier than you ordinarilywould have done so.
So if by doing this, not onlyare you gaining tens of
thousands of extra dollars,you're also allowing yourself to
pay less in taxes in thoseearliers to do so, that becomes
a win-win.
So, in doing this, the Rothconversion strategy is very

(07:37):
important.
It's helpful, but a simpleadjustment, something that
actually feels better, thatworks better in the short term,
and also leads to better resultslong term.
That cannot be overstated.
Now, as you're watching this,these numbers aren't gonna be
your numbers.
If you want to run yourprojections with this, you can
get access to the same softwarein the Retirement Planning
Academy.
Link is in the show notes below.
But the important thing torealize here is Roth conversions

(08:00):
are powerful.
In the ordinary income taxbrackets, that's typically gonna
be the single largest driverdetermining how much should you
do in Roth conversions.
But if you're not careful,you're gonna miss some of the
low-hanging fruit.
You're gonna miss some of thesethings that might actually allow
you to convert less and gainmore.
The value of that, thatlow-hanging fruit, simply by
knowing what not to do, could bethe difference in tens of

(08:22):
thousands of dollars.
So, what are those things youneed to look at?
Well, quite simply, ordinaryincome tax brackets, as you can
see right here.
That's the 10, 12, 22, 24, so onand so forth.
Capital gains tax brackets.
Capital gains have three taxbrackets: 0%, 15%, and 20%.
Understanding the impact of whatyou're doing with Roth
conversions, how is thatimpacting what your qualified

(08:45):
dividends and long-term capitalgains, what rate are they being
taxed at?
So you can't do Roth conversionsin a vacuum.
You need to understand as you'redoing those over here, is it
simultaneously pushing qualifieddividends and other long-term
capital gains into a differenttax bracket?
And then finally, Medicarepremium tax brackets.
As we see right here, theseMedicare premiums, they can be

(09:05):
quite substantial.
Now you might look at this andsay, my income is not going to
be that high in retirement.
Might be if you're doing seriousRoth conversions.
Depending on the balance of yourpre-tax accounts, depending on
your strategy, you might not beearning that much or even
spending that much, but theremay be some years where your
income certainly is in theselevels because of the tax
strategy that you'reimplementing.

(09:26):
And by the way, if you want anyhelp implementing this, this is
exactly what we do at RootFinancial.
You can scan the QR code righthere or click the link to our
website in the show notes belowto schedule a time to speak with
one of our advisors.
But this is so important.
Your tax strategy could be thedifference in hundreds of
thousands or millions of dollarsover the course of your
retirement.
And when you understand thatRoth conversions aren't only

(09:46):
based upon what your ordinaryincome tax brackets are expected
to be, but they also have to dowith capital gains tax brackets,
IRMA surcharges, even taxationof Social Security.
You start to understand how onething you do with Roth
conversions here has rippleeffects across everything else.
So get this right, and it startsby understanding what impact
does a decision over here haveon everything else.

(10:08):
Once you know that and how thatimpact is calculated, you can
make the right decision thatleads to the best possible
retirement outcomes for you.