Retiring at 61 on Marketplace Coverage? An $80,000 Roth Conversion Can Eliminate Your Premium Tax Credit and Trigger a Tax Bill Later

A Roth conversion can quietly wipe out a retiree’s health insurance subsidy, and under the 2026 rules the full amount may have to be repaid on the tax return with no ceiling. Knowing where that income threshold falls can change the timing of a conversion completely.

A retiree who relies on marketplace coverage before Medicare may face a problem when doing Roth conversions: every taxable dollar converted also counts toward income used to calculate the Affordable Care Act premium tax credit. Beginning with the 2026 tax year, once household income crosses the limit, the credit can disappear entirely, and there is no cap on how much advance credit must be paid back. Any amount owed shows up when the tax return is filed.

Conversion Income Is Included in Credit Calculations

Under the tax code, a Roth conversion is treated as a distribution (26 U.S.C. § 408A(d)(3)(C)). The amount that would be taxable “shall be included in gross income” (§ 408A(d)(3)(A)(i)). Treasury Regulation 1.408A-4, A-7(a), says the converted amount is taxable under section 408(d)(1) and (2) in the year the money leaves the traditional IRA, minus any return of basis. A-9 adds that the taxable conversion amount is “included in income for all purposes.”

For the premium tax credit, modified adjusted gross income equals AGI plus three add-backs: excluded foreign earned income, tax-exempt interest, and the untaxed portion of Social Security benefits (26 U.S.C. § 36B(d)(2)(B)). Roth conversion income is not excluded anywhere in that formula, so it flows directly into the income figure used for the credit.

Why the 2026 Rules Can Reduce a Credit to Zero

IRS Publication 505 for tax year 2026 describes two changes. Starting in 2026, if household income is “more than 400% of the federal poverty line, you are no longer eligible for the premium tax credit.” It also says there is “no longer a limit on the amount you will have to pay back” for excess advance credit, even for households below 400%. By comparison, the rule was different a year earlier. Publication 974 says that for tax year 2025, households above 400% of the poverty line may still qualify for a PTC. Marketplace premiums may also continue rising, with Georgetown University researchers expecting more ACA premium increases in 2027 amid federal policy changes.

Example: A 61-Year-Old Converts $80,000

Consider a hypothetical single retiree age 61. He expects $40,000 of other income in 2026, and that estimate is used in his marketplace application. On that basis, the exchange sends $700 a month in advance credit to his insurer. Later in the year, he converts $80,000 from a traditional IRA with no basis.

1. Credit MAGI: $40,000 + $80,000 = $120,000.
2. Eligibility: In this example, assume $120,000 is above 400% of the poverty line for a one-person household. Check the current figure in the Form 8962 instructions.
3. Credit allowed: Under the 2026 rule, income above the line means the credit is zero.
4. Advance credit received: $700 × 12 = $8,400.
5. Repayment: When advance payments exceed the credit allowed, the tax owed “shall be increased by the amount of such excess” (§ 36B(f)(2)). With no repayment cap for 2026, the full $8,400 is added to the tax bill, in addition to the income tax on the $80,000 conversion.

Form 8962 Reconciles the Amount at Filing

Each year, the marketplace issues Form 1095-A showing the advance payments. Taxpayers then use Form 8962 to compare those payments with the credit they actually qualify for. In the current Form 1040 instructions, excess advance payments appear on Form 8962, line 29 and carry to Schedule 2, line 1a. Treasury Regulation 1.36B-4(a) requires taxpayers to reconcile the credit allowed under section 36B with advance premium tax credit payments on the return. Line numbers can change, so the 2026 form should be checked.

Planning Steps to Consider Before Year-End

• Match the conversion to the income limit. Calculate base income first, then see how much room remains below 400% of the poverty line. Converting only that amount each year before Medicare can preserve the credit.
• Save larger conversions for the year Medicare begins. Once marketplace credit is no longer at stake, a larger conversion may be less costly. Medicare has its own income test, however. In 2026, IRMAA surcharges begin above $109,000 for single filers. In the first surcharge tier, the monthly Part B premium rises from $202.90 to $284.10.
• Revise the marketplace estimate during the year. Report a planned conversion as soon as possible. Lowering advance payments for the rest of the year can reduce what must be repaid later.
• Watch the calendar-year cutoff. Conversion income counts in the year the money is distributed or transferred from the traditional IRA.

Who May Want to Hold Off Until Medicare Starts

These questions can help with the decision:

• Is the credit you would lose larger than the tax savings you expect later by converting now?
• Do you have cash outside the IRA to cover both the conversion tax and any credit repayment?
• Will your tax bracket after Medicare begins be lower than it is now?
• Could a large conversion later push you into IRMAA surcharges?

Large conversions during marketplace-coverage years are often a poor fit for retirees who depend on a sizable credit, have limited cash outside retirement accounts, or expect lower tax brackets later. They can make sense for retirees whose income is already above the eligibility threshold, or for those who would pay full price for coverage anyway. For many people, the most favorable conversion period is the quiet time between the final paycheck and the first required withdrawal, which is the focus of our free Roth window guide.

Items to monitor: the 2026 Form 8962 instructions, which will include the current poverty-line figures, and 2027 marketplace premium notices.