Why a $120,000 Roth Conversion Could Also Trigger a Bigger Medicare Premium Bill

Turning a traditional IRA into a Roth can look simple on paper, but it becomes more complicated when the tax bill has to be paid from the IRA itself. In that case, a sound retirement strategy can also raise Medicare premiums.

A retiree with $60,000 of other income wants to move $120,000 from a traditional IRA into a Roth before year-end. Because he does not have extra cash to cover the tax, he plans to take another $29,000 from the same IRA to pay it. The conversion still makes sense, but the way he funds the tax pushes his income just over a Medicare threshold.

Only about 8% of Medicare Part B enrollees pay the income-related monthly adjustment amount, or IRMAA. A single filer with income at or below $109,000, or $218,000 for a married couple filing jointly, pays the standard $202.90 and avoids the surcharge entirely. People planning large Roth conversions are often already above that level.

How Paying the Tax Raises Income

Withdrawals from a traditional IRA and taxable Roth conversions are generally counted as income in the year they occur. Medicare looks at modified adjusted gross income, or MAGI, which is adjusted gross income plus tax-exempt interest. That means even municipal bond interest, while tax-free for income tax purposes, still counts for Medicare.

In this case, the extra $29,000 is added to the same income line as the conversion. It also creates its own tax bill. After the $16,100 standard deduction, taxable income rises to $192,900, which places it in the 24% bracket. Assuming no other deductions or adjustments, the additional withdrawal produces $6,960 in federal income tax.

Why the Brackets Matter

Medicare surcharges operate like cliffs: going over by even one dollar can trigger the full next tier.

Even the lower-cost approach does not avoid surcharges. At $180,000, he already pays an extra $324.60 a month for Part B because his income is above $171,000. Once income passes $205,000, combined Part B and Part D surcharges increase by $1,735.20 a year. At $209,000, his total annual surcharge reaches $6,355.20. The Centers for Medicare & Medicaid Services lists the highest Part B premium at $649.20.

Timing also matters. Medicare uses a two-year lookback, so income from one year determines premiums two years later. CMS has not yet released the brackets for that later year, and those figures will shift with inflation, so the current bracket table is the best guide available. If income later falls, the surcharge lasts only one year. Form SSA-44 does not help here because it is reserved for events such as retirement, divorce or the death of a spouse, and a voluntary Roth conversion does not qualify.

Two Ways to Handle the Tax

Pay from savings. Using existing cash to cover the $29,000 tax bill keeps MAGI at $180,000 and avoids another $6,960 in federal tax. Selling appreciated investments to raise the money, however, could create taxable capital gains.

Scale back the conversion. If the tax must come from the IRA, total IRA distributions can only reach $145,000 before crossing $205,000. That means both the conversion and the tax withdrawal have to fit within that limit. Any remaining amount can be converted later, when the lookback period resets.

Withholding tax from the conversion itself does not change the result. The withheld amount still counts as a distribution.

Three Checks Before Moving Money

1. Estimate MAGI with room to spare. Include every expected IRA withdrawal, capital gain and municipal bond coupon. Then leave a cushion below the next Medicare threshold, because a late-year dividend can push income over the line.
2. Know the tax source before converting. Decide whether the bill will be paid from savings, a taxable account or the IRA. Then run the IRMAA calculation using that choice.
3. Compare the conversion with future Medicare costs. Married couples have more flexibility: the joint bracket tied to this example runs from $342,000 to $410,000. If one spouse later dies, the survivor files as single and the thresholds are roughly cut in half. That is why converting while both spouses are alive can be more efficient, as long as the household remains below the joint cliff.

The deadline for completing the conversion is year-end. That income will affect Medicare premiums two years later, even though the final premium rates will not be known until closer to then.