Episode Summary: The Hidden Cost of Roth Conversions: Avoiding Surprise Medicare Charges

Podcast: Ready For Retirement
Host: James Conole, CFP®
Date: December 14, 2025

Overview:

In this episode, James Conole dives deep into the often-overlooked consequences of Roth conversions, specifically how these tax-savvy moves can unexpectedly increase your Medicare premiums by thousands of dollars a year. By breaking down the distinction between taxable income and Modified Adjusted Gross Income (MAGI), and highlighting the impact of IRMAA (Income-Related Monthly Adjustment Amount) surcharges, James outlines how a well-intentioned Roth conversion strategy can backfire if implemented without a holistic tax plan. He uses a relatable case study and offers actionable advice to help retirees maximize their tax efficiency while avoiding costly Medicare surprises.

Key Discussion Points & Insights

1. Common Misconception about Roth Conversions

• Many assume Roth conversions are always beneficial for long-term tax savings.
• Quote (00:13):
  "Most people think Roth conversions are a smart tax move, and they are, until you realize they can add thousands of dollars per year to your Medicare premium." — James

2. The Hidden Link: Roth Conversions and Medicare Premiums

• When converting pre-tax accounts (like 401(k)s and IRAs) into Roth IRAs, your income in that year spikes—sometimes triggering higher Medicare premiums through IRMAA.
• In the highlighted case study, “excess” Medicare premiums jumped from $0 to over $5,200 per year—adding up to tens of thousands over retirement.

3. Understanding the Critical Numbers

(Timestamps 01:25–04:50)

• Ordinary Income Tax Brackets: People focus on filling up “lower” federal tax brackets to maximize Roth conversions (10%, 12%, 22%, etc.).
• IRMAA Thresholds for 2025:
  • Married Filing Jointly: No surcharge if MAGI ≤ $212,000
  • Single: No surcharge if MAGI ≤ $106,000
  • Go even $1 over: Part B monthly surcharge +$74, Part D +$13.70 per month.
• Quote (03:13):
  "As soon as you cross even $1 over this threshold, your new monthly surcharge for Part B is $74 and Part D is $13.70." — James

4. MAGI vs. Taxable Income

• MAGI (Modified Adjusted Gross Income) is higher than taxable income because it’s calculated before deductions (like the standard deduction).
• Roth conversion amounts feed directly into MAGI—so people can inadvertently overshoot IRMAA thresholds even when sticking to a targeted tax bracket.
• Quote (04:35):
  "Your modified adjusted gross income is going to be the income you have before you take a standard deduction or before you take an itemized deduction." — James

5. Case Study: Michael and Lisa

(Timestamps 07:10–13:00)

• Situation: They have significant pre-tax assets; want to “fill up” the 22% bracket with Roth conversions to avoid higher taxes later.
• Initial Plan Outcome: Would save ~$975,000 in taxes.
• Missing Piece: They did not account for their conversions pushing them over the IRMAA threshold, leading to an estimated $90,000 less in ending wealth due to unnecessary Medicare surcharges.

6. Optimizing the Roth Conversion Strategy

• Instead of maxing out the 22% bracket, convert only up to the point where MAGI just stays under the IRMAA threshold.

• Benefits:

  • Avoid high Medicare surcharges.
  • Accumulate more tax-adjusted ending wealth (extra ~$90,000 in the example).
  • Pay less conversion tax up-front; better short- and long-term results.

• Quote (13:30):
  "The Roth conversion strategy is very important… but a simple adjustment, something that actually feels better, that works better in the short term and also leads to better results long term, that cannot be overstated." — James

7. Taking a Holistic View:

(Timestamps 15:30–18:00)

• Important to factor in not just ordinary income tax brackets, but also:

  • Capital gains tax brackets (0%, 15%, 20%)
  • How Roth conversions might push qualified dividends or long-term capital gains into higher brackets.
  • Medicare premium brackets
  • Social Security taxation

• “Low-hanging fruit”: Sometimes converting less but in the right way can yield more after-tax wealth over time.

• Quote (16:45):
  "You can’t do Roth conversions in a vacuum. You need to understand as you’re doing those over here, is it simultaneously pushing qualified dividends and other long-term capital gains into a different tax bracket?" — James

8. Practical Advice and Takeaways

• Before committing to a Roth conversion strategy, model out the total effect: consider income, deductions, capital gains, and Medicare premiums together.
• Even well-planned conversions can backfire if IRMAA is ignored.
• Consulting a professional or using holistic planning tools is highly recommended.

Notable Quotes and Memorable Moments

• On the central pitfall:
  "If you’re not careful, you’re going to miss some of the low hanging fruit. You’re going to miss some of these things that might actually allow you to convert less and gain more." — James (14:55)
• On ripple effects:
  "Roth conversions hurt. We see the tremendous value that they have, but they require converting lots of money, which means paying lots of taxes earlier than you ordinarily would have done so." — James (12:30)
• On holistic planning:
  "Once you know that and how that impact is calculated, you can make the right decision that leads to the best possible retirement outcomes for you." — James (19:10)

Key Timestamps

| Timestamp | Segment | |-----------|---------------------------------------------------------| | 00:00 | Introduction, overview of Roth conversion “gotcha” | | 03:10 | Explaining IRMAA surcharges and thresholds | | 04:35 | Difference between MAGI and taxable income explained | | 07:10 | Case study introduction: Michael and Lisa | | 13:00 | Strategic solution: under the IRMAA tier | | 15:30 | The importance of capital gains and holistic analysis | | 16:45 | Warning about the ripple effects of conversions | | 19:10 | The power of making informed decisions |

Conclusion & Action Steps

James drives home that smart Roth conversion is about much more than “filling a low bracket.” To maximize after-tax retirement wealth and avoid IRMAA and Medicare premium surprises, retirees must account for income thresholds, deductions, and the interplay between tax and Medicare rules. A truly effective retirement distribution plan is holistic and modeled carefully.

Action tip:
Before doing a Roth conversion—especially a large one—calculate its impact on your MAGI, anticipate any IRMAA surcharges, and coordinate the move with your overall tax and retirement plan.

(For access to James’s recommended planning tools and ways to get help, see the show notes.)