What actually belongs in a Roth conversion calculation

The bracket rate is the start of a Roth conversion calculation, not the end of it. A couple in the 12% bracket can easily face a true marginal rate above 40% once you account for how a conversion triggers Social Security taxation, Medicare surcharges and capital gains stacking.

What the simple version leaves out

The standard advice is to compare your tax bracket now against what you expect it to be later. If you are in the 12% bracket today and expect to be in the 22% bracket in retirement, convert now and lock in the lower rate. The logic is clean and the arithmetic appears straightforward.

The problem is that the bracket rate is only one component of what you actually pay. A conversion is ordinary income, and ordinary income can trigger five other layers of cost that do not show up in a bracket table. Each one adds percentage points to the true rate. The cumulative effect is often large enough to reverse the conclusion.

What belongs in the calculation: the federal bracket, your state's rate, the indirect effect of the Net Investment Income Tax, the Social Security taxation torpedo, Medicare IRMAA surcharges, the ACA premium subsidy cliff if you are under 65, and capital gains stacking if you plan to realise gains in the same year. Each one is a separate rule with its own threshold and its own rate structure.

The research is solved. Advisers have tools that model all seven layers. Kitces documented a case where a couple in the 12% bracket converted $20,000 and triggered $16,100 of Social Security benefits to become taxable. The true marginal rate on that conversion was 21.66%, not 12%. An 81% understatement.

The bracket and the state

Start with the federal rate. For 2025 a married couple filing jointly pays 10% on the first $23,850 of taxable income, 12% on the next $73,100, and 22% on the bracket above that. Section 408A of the Internal Revenue Code treats a conversion as ordinary income in the year it occurs. It adds to your adjusted gross income and is taxed at whatever rate applies to the next dollar you earn.

Add your state. Florida has no income tax. California's top rate is 13.3%. New York is 10.9%. If you live in a state with an income tax, the state rate applies to the conversion the same way the federal rate does. A household in California facing a 24% federal bracket is actually starting at 37.3% before any of the other components.

The state rate you pay today is not necessarily the state rate you will pay in retirement. If you plan to move from New York to Florida, the state rate in the future-withdrawal column is zero. That difference is worth capturing. If you plan to stay, the state rate cancels out of the comparison and you are back to weighing the federal components.

The Net Investment Income Tax, indirectly

The 3.8% Net Investment Income Tax, enacted as Section 1411, applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $250,000 for a married couple or $200,000 for a single filer. Investment income means interest, dividends, capital gains, rental income and royalties. Wages do not count. Neither do Social Security benefits or distributions from a traditional IRA.

A Roth conversion is not itself investment income, so it is not directly subject to the tax. But the conversion increases your modified adjusted gross income, and that can push investment income you were already earning into the NIIT range. If you had $240,000 of MAGI and converted $30,000, your MAGI is now $270,000. The $20,000 of investment income that was previously below the threshold is now exposed to the 3.8% tax. The conversion did not create the tax, but it triggered $760 of cost that would not have existed without it.

The effect is real but not universal. It matters only if you are near the threshold and you have investment income that can be caught by it. A household with $180,000 of income and no plans to approach $250,000 does not need to model this component. A household at $245,000 with $40,000 of annual dividends does.

How a conversion makes Social Security taxable

Social Security benefits become taxable when your provisional income exceeds $32,000 for a married couple or $25,000 for a single filer. Provisional income is your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits. Section 86 of the Internal Revenue Code sets the formula. Between the first and second threshold, 50% of benefits become taxable. Above the second threshold — $44,000 for a couple, $34,000 for a single filer — up to 85% of benefits are taxable.

A Roth conversion is ordinary income, so it adds to adjusted gross income and therefore to provisional income. That can pull Social Security benefits across a threshold. The effect is sometimes called the torpedo because the marginal rate spikes and then falls back once you are through the range.

Here is how the arithmetic compounds. You convert $10,000. That is $10,000 of ordinary income, taxed at your bracket rate. But it also increases provisional income by $10,000, which can cause up to $8,500 of Social Security benefits to become taxable — 85% of the amount that crossed the threshold. You are now paying tax on $18,500 of income, not $10,000, even though the conversion itself was only $10,000. If you are in the 22% bracket, the $10,000 conversion costs $4,070 in federal tax. The effective rate on the conversion is 40.7%, not 22%.

The torpedo is not permanent. Once your Social Security benefits are fully taxable, additional income no longer triggers more of them. But for a household in the years between claiming Social Security and the point at which 85% of benefits are already taxable, the marginal rate on a conversion can be 40% to 46% depending on the bracket, even though the bracket itself is 22% or 24%.

Medicare IRMAA surcharges, two years later

Medicare Part B and Part D premiums increase when your modified adjusted gross income exceeds certain thresholds. The surcharges are called Income-Related Monthly Adjustment Amounts, and Section 1839(i) of the Social Security Act establishes the structure. For 2025 the base Part B premium is $185 per month. A married couple with MAGI above $212,000 pays an additional $74.00 per person per month. The next tier starts at $266,000, then $334,000, then $400,000, and above $750,000 the surcharge is $443.90 per person per month.

The Part D surcharge follows the same income tiers. The amounts are smaller but the structure is identical. Both premiums are per person, so a couple pays double.

IRMAA uses a two-year lookback. The 2026 premiums are determined by your 2024 modified adjusted gross income. A conversion in 2024 will not affect your Medicare premiums until 2026. That delay matters for planning, but it does not reduce the cost. If a $50,000 conversion in 2024 pushes a couple from the $212,000 threshold to the $266,000 threshold, they will pay an additional $888 per person for twelve months in 2026, or $1,776 as a couple. That is a 3.6% surcharge on the conversion, paid two years later.

The rate is not linear. IRMAA is structured as a series of cliffs. A couple at $211,000 of MAGI pays the base premium. A couple at $213,000 pays $1,776 more annually. The effective marginal rate on that $2,000 of additional income is 89%. The rate falls as you move further into the bracket, but near the threshold the cost can exceed the amount converted.

A household that converts in multiple years needs to track this across the full sequence. Three $40,000 conversions in three consecutive years will trigger IRMAA surcharges in years three, four and five. The premiums outlast the conversions.

The ACA premium subsidy cliff, if it returns

If you are under 65 and buying health insurance through the Affordable Care Act marketplace, your premium subsidy is determined by your modified adjusted gross income as a percentage of the federal poverty level. Section 36B of the Internal Revenue Code sets the formula. The American Rescue Plan Act of 2021 enhanced the subsidies and eliminated the cliff that had previously cut off eligibility at 400% of the poverty level. The Inflation Reduction Act extended the enhancement through 2025.

As of this writing, those enhancements expire on 31 December 2025. Unless Congress acts, the cliff returns for 2026. A household with income above 400% of the federal poverty level — $125,000 for a family of four in 2025 — will lose the subsidy entirely. For a couple in their early sixties paying $2,500 per month for coverage, that is $30,000 annually. If a $10,000 conversion pushes income across the threshold, the marginal rate on that conversion is 300%.

The cliff may not return. Congress has extended the enhancement twice, and there is a reasonable likelihood it will do so again. But as the law stands today, the analysis for conversions in 2026 or later would need to account for the subsidy cliff as a live possibility. The cost of guessing wrong is larger than the tax on the conversion itself.

Even if the enhancement is extended, the subsidy still phases down as income increases. A conversion that moves a household from 200% to 250% of the poverty level increases the percentage of income they are expected to contribute toward premiums. The effect is smaller than the cliff but it is not zero. A household between 55 and 65, not yet on Medicare, and relying on ACA coverage can use a subsidy calculator to show how a given conversion amount affects the premium.

When a conversion stacks under capital gains

Ordinary income and long-term capital gains are taxed separately, but the capital gains rate you pay depends on where the ordinary income lands you. Section 1(h) of the Internal Revenue Code establishes that long-term capital gains are taxed at 0%, 15% or 20% depending on your taxable income. The brackets for capital gains are wider than the brackets for ordinary income, but they are not independent. Ordinary income fills the lower brackets first, and capital gains stack on top.

A married couple in 2025 pays 0% on long-term capital gains up to $96,700 of taxable income, 15% from $96,700 to $600,050, and 20% above that. If the couple has $80,000 of ordinary income and realises $30,000 of long-term gains, the first $16,700 of gains is taxed at 0% and the remaining $13,300 is taxed at 15%. The blended rate on the gains is 6.65%.

Now add a $30,000 Roth conversion. Ordinary income is now $110,000. The entire $30,000 of capital gains is taxed at 15%, not split between 0% and 15%. The conversion itself is taxed at the couple's ordinary income rate, but it also moved $16,700 of capital gains from the 0% bracket to the 15% bracket. That is $2,505 of additional tax on gains that existed independent of the conversion. The effective cost of the conversion includes that $2,505, which is an 8.4% surcharge on the amount converted.

The effect is largest when a conversion pushes gains from 0% to 15% or from 15% to 20%. It does not apply in years when you realise no gains, and it does not apply to gains you realise in a different year. But for a household planning to sell appreciated property or rebalance a taxable account in the same year as a conversion, the stacking effect is part of the true cost.

How to calculate the true marginal rate

Start with your taxable income before the conversion. Add the amount you are considering converting. Calculate the federal tax on both figures and subtract. That is the direct federal cost. Add your state's tax on the conversion if you live in a state with an income tax.

Now the indirect effects. If the conversion moves you above $250,000 of modified adjusted gross income and you have investment income, calculate the 3.8% Net Investment Income Tax on the amount of investment income that was pushed into the taxable range. If you are receiving Social Security, calculate your provisional income before and after the conversion and determine how much additional benefit becomes taxable. Multiply that by your marginal rate. If you are on Medicare, determine whether the conversion moves you into a higher IRMAA bracket and add the annual surcharge. If you are under 65 and receive an ACA subsidy, model the change in the subsidy amount or the loss of it entirely if the cliff applies.

If you plan to realise long-term capital gains in the same year, calculate the gains tax with and without the conversion. The difference is part of the conversion cost. Add all seven components. Divide the total by the amount converted. That percentage is your true marginal rate.

The arithmetic is manual and the inputs are specific to your situation. A $50,000 conversion in a year when you are 64, still working, receiving no Social Security, and subject to IRMAA is a different calculation than the same conversion at 72 when you are fully retired and living on required minimum distributions. The latter avoids the ACA cliff and the Social Security torpedo but still faces IRMAA and possibly capital gains stacking. The order in which you layer these decisions determines the rate you actually pay.

What changes from year to year

Bracket thresholds are indexed to inflation and adjust annually. The IRMAA thresholds are also indexed, though the increases are modest. The ACA subsidy brackets are tied to the federal poverty level, which is updated each year. A conversion plan built in 2024 needs its figures refreshed for 2025, and again for 2026 if you are spreading conversions across multiple years.

Legislative risk is real. The enhanced ACA subsidies have been extended twice and may be extended again, or they may not. The TCJA provisions that set today's bracket structure expire after 2025 unless Congress acts. A household planning conversions into 2026 and beyond is forecasting policy as much as arithmetic. That does not mean the analysis is impossible. It means the assumptions need to be explicit and the plan needs to accommodate the possibility that Congress changes the terrain.

When the comparison flips

The value of a conversion depends on whether you pay less tax now than you would pay later. If your marginal rate today is 40% after accounting for all seven layers, and your rate in retirement will be 25%, the conversion costs you 15 cents on the dollar. You are better off paying the tax later. If the rates reverse, the conversion saves money.

The difficulty is that the future rate is a forecast and the present rate is a sum of components that are not all obvious. A household that estimates a 12% rate today and a 22% rate later, and converts on that basis, may discover that the 12% was actually 32% once IRMAA and Social Security taxation are included. The decision was made with the wrong input.

The second difficulty is that the indirect components do not scale linearly. IRMAA is a cliff. The ACA subsidy cliff, if it returns, is binary. The Social Security torpedo applies only in the years between when you claim and when 85% of benefits are fully taxable. A conversion that is expensive in one year may be cheap in another, not because the bracket changed but because the surcharges no longer apply.

What your CPA needs to model this

The calculations outlined above are mechanical, but they require figures a tax preparer can project more accurately than you can. Your CPA knows your effective state rate, whether you are near the NIIT threshold, how much of your Social Security is already taxable, and whether a given conversion will move you between IRMAA tiers. They also know what your income will look like in the current year, which is the input the calculation depends on.

The question to ask is what your true marginal rate is on a specific conversion amount in a specific year, accounting for IRMAA, Social Security taxation, capital gains stacking if you plan to realise gains, and the ACA cliff if applicable. The answer is a percentage. If that percentage is higher than the rate you expect to face on withdrawals in retirement, the conversion has a cost. If it is lower, the conversion has value. The comparison is the decision.

A conversion cannot be undone. Treasury Regulation § 1.408A-4 permitted recharacterizations — unwinding a conversion by moving the amount back to a traditional IRA — until the Tax Cuts and Jobs Act eliminated that option for conversions made after 31 December 2017. A conversion made in 2025 is permanent. The cost you pay is the cost you pay, which is why the calculation matters before you file.

Bottom line

The bracket rate is one input. The true rate includes your state, the indirect effect of the Net Investment Income Tax, Social Security taxation, IRMAA surcharges, the ACA subsidy cliff if you are under 65, and capital gains stacking if you plan to realise gains in the same year. Each component applies in specific situations, and not all of them apply to every household. The common error is treating the bracket as the full cost when it is often a third of it.

A Roth conversion is a permanent decision with a cost that varies by year and by circumstance. The rate you pay depends on facts your CPA can project more reliably than you can. This article describes the components that belong in the analysis. It is not a calculation of what your own marginal rate is or whether a specific conversion is worth making in your situation. That determination requires your current income, your expected future income, the documents that govern your accounts, and a projection of how each indirect component applies to the amount you are considering. A CPA who works with individuals approaching or in retirement can model the full cost and compare it against the rate you expect to face later. That comparison is the decision.

Written to the law as it stood in January 2026.