She Turns $50,000 Into a Roth at 66, Then Triggers More Taxable Social Security and a Much Higher True Tax Rate

Quick Read

• Ellen's $50,000 Roth conversion pushed $74,400 into taxable income and generated $12,678 in additional tax, equal to a real rate of 25% and well above her 12% bracket.

• Because IRS thresholds have not been inflation-adjusted since they were created, a retiree in the 12% bracket can end up facing an effective conversion rate of 22% once Social Security benefits are pulled in.

• Converting before claiming Social Security, keeping income below the provisional-income cutoffs, or doing one large conversion that moves benefits past the 85% limit can each reduce the impact.

• Building a portfolio and drawing income from it are very different skills, and few people are taught the second one. The Definitive Guide to Retirement Income is designed to help with that, and it is free. (Sponsor)

Many retirees estimate the cost of a Roth conversion by looking only at their current tax bracket. But that can understate the bill if they are already receiving Social Security. Under Treasury Regulation 1.408A-4, A-7, the converted amount is included in gross income in the year it leaves the traditional IRA. A-9 says it counts “for all purposes,” including the taxable portion of Social Security benefits under section 86. Section 408A(d)(3)(C) also treats the conversion as a taxable distribution. In practice, each converted dollar can cause more of a retiree’s benefits to become taxable. Planners call this the tax torpedo.

How Provisional Income Pulls Benefits Into Taxable Income

The IRS begins with provisional income, which is modified adjusted gross income plus half of Social Security benefits. Publication 915 for tax year 2025 sets the base amount at $25,000 for single filers and $32,000 for married couples filing jointly. Above a second threshold, as much as 85% of benefits can be taxable once half of benefits plus other income exceeds $34,000 for single filers or $44,000 for married couples filing jointly. Section 86(c) fixes those dollar amounts at $25,000, $32,000, $34,000 and $44,000, so they remain unchanged for tax year 2026 as well.

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Between those thresholds, every extra dollar of income can add 50 cents of taxable benefits. Above the upper threshold, that jumps to 85 cents. In the 12% bracket, that turns one dollar of conversion into a 22.2% tax cost. In the 22% bracket, the effective rate rises to 40.7%.

Ellen Converts $50,000 at 66 and Ends Up Taxed on Much More

Before the Conversion

1. Provisional income: $20,000 + ($40,000 ÷ 2) = $40,000.

2. 85% level: 85% × ($40,000 − $34,000) = $5,100.

3. 50% level: 50% × ($34,000 − $25,000) = $4,500.

4. Taxable benefits: $5,100 + $4,500 = $9,600.

5. Taxable income: $20,000 + $9,600 − $16,100 = $13,500.

6. Tax: 10% on the first $12,400 ($1,240) plus 12% on $1,100 ($132) = $1,372. Her top bracket is 12%.

After a $50,000 Conversion

1. Provisional income: $20,000 + $50,000 + $20,000 = $90,000.

2. Formula result: 85% × ($90,000 − $34,000) + $4,500 = $52,100.

3. Cap: 85% × $40,000 = $34,000, so taxable benefits are $34,000.

4. Says taxable benefits: $34,000 − $9,600 = $24,400.

5. Taxable income: $20,000 + $50,000 + $34,000 − $16,100 = $87,900.

6. Tax: $1,240 + 12% on $38,000 ($4,560) + 22% on income above $50,400, which is $37,500 ($8,250), for a total of $14,050.

Ellen converted $50,000, but the move added $74,400 to her taxable income. Her tax increased by $12,678, which equals 25.4% of the conversion. That is more than twice the 12% bracket she started in.

Three Ways Retirees Can Avoid the Torpedo

Who Should Think Carefully Before Converting

Conversions usually make less sense for retirees who:

• would need to pay the tax from the IRA itself

• expect to be in a lower tax bracket later

• intend to leave the account to charity

• will need the money within five years

A conversion tends to make more sense when future required withdrawals or heirs’ tax rates are likely to be higher than the current rate, including the effect of the torpedo.

Medicare Surcharges Are the Next Issue to Watch

Conversion income can also increase Medicare premiums. In 2026, single taxpayers face Part B surcharges once MAGI exceeds $109,000, which raises the premium from $202.90 to $284.10. Ellen's adjusted gross income after the conversion is $104,000, which remains below that line. The 2027 schedule has not been finalized. Benefits are also rising: the 2027 cost-of-living adjustment is 3.6%, while the section 86 thresholds remain fixed. Over time, that can push more retirees into the torpedo zone. Before converting, it is worth running the Social Security worksheet both with and without the conversion.

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