Opinion: No do-overs: How one extra dollar on your Roth conversion triggers a tax bill you won’t see coming

Sam Huszczo | MarketWatch | May 8th, 2026

The new Roth reality: Stealth taxes and Medicare penalties make the stakes higher than ever.

Roth conversions remain one of the most powerful tax-reduction strategies available. But they’re no longer blunt instruments. They’re surgical.

Advanced tax-planning strategies for people with high incomes do not come with a practice mode. One wrong Roth conversion may quietly cost tens of thousands of dollars, and the IRS does not offer refunds for “learning experiences.”.

A smart tax strategy can turn into an expensive mistake.

On paper, Roth conversions sound elegant: Move money from a pretax account to a Roth, pay tax now, reduce future tax risk. Clean. Simple. Very spreadsheet-friendly.

In reality, especially under the Trump administration’s One Big Beautiful Bill Act that became law last year, Roth conversions are no longer a set-it-and-forget-it tax-reduction strategy. They are precision tools. Done poorly, they could trigger stealth taxes, surtaxes, lost deductions and Medicare penalties that show up years later, like a bar tab you forgot about.

Before diving into year-end tax planning, here are the often-ignored costs that can turn a smart tax strategy into an expensive mistake.

IRMAA is the Terminator of retirement tax strategies. It always comes back, and it remembers what you did.

1. Medicare IRMAA premium surcharges

This is the big one.

If you are 65 or older and on Medicare, Roth conversions interact with Medicare premiums through the Income-Related Monthly Adjustment Amount. IRMAA is not technically a tax, but it behaves like one, aggressively.

Medicare looks back two years. A Roth conversion today can raise your Part B and Part D premiums two years from now. Cross an IRMAA threshold by even one dollar, and your premiums jump for a full year.

In 2025, married couples with 2023 modified adjusted gross income above $212,000 paid IRMAA. Go higher and premiums stack in tiers. At roughly $400,000 of MAGI, Part B alone jumps to about $592 per person per month. If both spouses are on Medicare, the bill is more than $14,000 per year, purely from crossing an income line.

That means in some cases a Roth conversion in the 24% federal bracket could effectively cost closer to 29% once IRMAA is included. That extra 4% to 5% is a stealth tax is easily overlooked.

Most IRMAA damage occurs while people are “doing the right thing” — converting in the 22% to 24% brackets to reduce future risk related to required minimum distributions. The irony is thick. IRMAA often hits before RMDs even begin.

Timing matters. Convert too much within two years of signing up for Medicare and you pay IRMAA immediately. Convert earlier, or carefully cap conversions below IRMAA cliffs, and you can execute high-income tax planning without tripping the wire.

Here’s your IRMAA-aware conversion framework:

1. Project your base income for the year.
2. Identify your marginal tax bracket ceiling.
3. Calculate your MAGI, not just your taxable income.
4. Overlay IRMAA thresholds and decide which tier you are willing to land in two years from now.
5. Convert up to the line and not beyond it. There is no undo button on Dec. 31

IRMAA is the Terminator of retirement tax strategies. It always comes back, and it remembers what you did two years ago.

2. Net investment income tax

Net investment income tax adds a 3.8% surtax on investment income once MAGI exceeds $200,000 for single filers or $250,000 for joint filers. Roth conversions increase MAGI, which can suddenly expose dividends, interest income and capital gains to NIIT.

This means the conversion itself might be taxed at your ordinary rate, while your portfolio income quietly gets clipped by an extra 3.8%. Multiyear conversions often reduce this collateral damage and remain one of the most reliable, low-error strategies for reducing taxes over time.

3. Increased tax on Social Security benefits

Roth conversions count as income for Social Security taxation. If you are near the threshold, a conversion can cause up to 85% of your benefits to become taxable.

This creates the infamous “tax torpedo,” where each additional dollar of income drags more Social Security into taxation, producing shockingly high marginal rates. If your goal is to save money on taxes, detonating the tax torpedo is not ideal.

4. States with progressive income tax

Federal planning is only half the story. States with progressive tax brackets quietly take their cut, too.

A large conversion can push you into a higher state bracket or phase out retirement exclusions, senior credits or pension deductions. Year-end tax planning must account for both layers, or you are optimizing only half the equation.

5. Lost tax deductions and credits

Roth conversions inflate MAGI, and MAGI controls access to deductions.

Under the OBBBA, several benefits phase out between roughly $400,000 and $500,000 of income, including:

• Expanded SALT deductions above $10,000
• Qualified business income deductions
• Certain new labor-related deductions
• Senior deductions for taxpayers over 65

A poorly timed conversion could eliminate deductions worth tens of thousands of dollars, effectively raising your true tax rate far beyond what your bracket suggests.

6. RMDs always come first

If you are subject to RMDs, they must be taken before any Roth conversion. You cannot convert an RMD. The IRS insists you eat your vegetables before having dessert.

Breaking this rule leads to penalties and messy corrections. Always plan to have enough liquidity to pay the tax on your RMD before converting.

7. Pro-rata rule complexities

If you have after-tax money in traditional IRAs, conversions are subject to the pro-rata rule. The IRS treats all IRAs as one bucket. You cannot cherry-pick basis.

This is where many backdoor Roth attempts go sideways. If most of your IRA money is pretax, most of your conversion will be taxable. Sometimes rolling pretax funds into a 401(k) can isolate basis, but execution matters.

8. Early withdrawal penalty and the ‘five-year rule’

Converted funds carry a five-year clock. Withdraw converted principal before age 59½ and before five years, and you may owe a 10% penalty.

Each conversion has its own clock. This matters most for those who are converting in their 50s or early 60s and have potential liquidity needs.

9. ACA health insurance subsidy impact

If you not yet 65 and are using ACA coverage, Roth conversions can obliterate premium subsidies. Subsidies decline as MAGI rises, sometimes dollar for dollar.

For early retirees, losing ACA subsidies can cost more than the tax saved by the conversion. High-income tax planning here means coordinating healthcare and tax strategy, not optimizing them in silos.

10. Remember: No recharacterization (no do-overs)

Once you convert, it is permanent. Markets drop, income spikes, IRMAA triggers — tough luck. There is no recharacterization. No Ctrl+Z.

Precision matters more than ever. Roth conversions remain one of the most powerful tax-reduction strategies available. But under the OBBBA, they are no longer blunt instruments. They are surgical.

The difference between guessing and modeling can add up to hundreds of thousands of dollars over a lifetime. IRMAA, NIIT, lost deductions, healthcare costs and timing all interact in ways most calculators ignore.

Think chess, not checkers. Look two years ahead, not just to Tax Day. With thoughtful planning, Roth conversions can still work beautifully. Without it, the IRS will happily play you like a fiddle. And none of us wants to provide the soundtrack.

Sam Huszczo is founder and CIO of Detroit-based SGH Wealth Management. Follow him on Instagram @sghusz. Read his disclosures here.