A few times a year, we get new clients coming into our office a little stunned due to a conversation that they never had with anyone before coming to meet with us. They’ve just opened a letter from Medicare. Their monthly premium went up by a couple hundred dollars, and they cannot figure out why. Nothing changed for them this year. Same income, same withdrawals, same everything.
That is the thing, though. It was not this year that did it. It was two years ago.
If you did not catch Bain’s post on Roth conversions from earlier in this series, it is worth going back to. He laid out why we bring them up as often as we do, and where they really shine. This post picks up where he left off, because Roth conversions come with a specific tripwire that catches a lot of retirees, and it does not show up until a couple years later.
Let’s break it down.
The letter and the surcharge
The letter is called an IRMAA notice. IRMAA stands for the income-related monthly adjustment amount, and it is an extra charge added to your Medicare Part B and Part D premiums once your income crosses certain thresholds.
Tracey wrote a full piece on how IRMAA works back in June of last year, including the actual bracket table and the appeal process. If you want the numbers side, go read that one. What I want to talk about here is smaller and sharper, the way IRMAA reshapes the math on a Roth conversion.
The two-year problem
Medicare does not look at your current year’s income to decide your current premium. It looks two years back.
So the premium showing up in your mailbox today reflects what your tax return said two Aprils ago. If you did a big Roth conversion in 2024, that is what Medicare is billing you for now. And whatever you do this year is what will show up in the mail in 2028. The delay is what catches people. It is also the reason the planning discipline matters so much.
The cliff, not the slope
Regular tax brackets step up gradually. IRMAA does not. It is a cliff.
Cross a threshold by a single dollar and you jump into the next tier for the entire year. Both spouses on Medicare pay the higher premium. For a couple, that can add up to hundreds of dollars a month. Which means a Roth conversion of the wrong size does not just cost you the tax on the last few dollars converted. It can push you past a line you did not know was there and add hundreds of dollars a month to your Medicare bill down the road. The whole cost of the conversion just moved.
What actually goes into the math
When a client is thinking about a conversion for a given year, this is what we look at.
First, where they are in their current tax bracket, not the top of the marginal bracket, but the room they have left before they push into the next one. Then, where the IRMAA threshold is likely to sit two years from now, and what their income will look like at that point. Then everything else that adds to their taxable income for the year: Social Security, RMDs if those have started, interest, dividends, capital gains. The conversion stacks on top of all of it.
There is one more piece that catches families later, and it is worth talking about because many people never even consider it. IRMAA thresholds for a married couple are roughly double the single amounts. So, if one spouse passes, the surviving spouse moves to the single-filer thresholds the following year. That shift alone can push the survivor into a higher IRMAA tier on exactly the same income they had the year before. It is one of the harder conversations we have with widowed clients, and it is one we would rather have before the fact than after.
How to size a conversion
The thread that runs through this whole series has been the same, and it was Bain’s point in the first post. The goal is not the biggest possible Roth conversion. It is the right-sized one.
Right-sized means an amount that fills the room you have in your current tax bracket, stops before the next tax-bracket line, and stops before the next IRMAA line. Sometimes that number is meaningful. Sometimes it is small. Sometimes it is zero for the year, and you wait for a lower-income window down the road. None of those answers is wrong. What is wrong is not doing the math.
The Bottom Line
If you take one thing from this whole series, take this. The biggest single move usually is not the point. The point is not tripping over the small ones. A Roth conversion done in the wrong amount is still done wrong. And the way you find out is a letter you were not expecting, two years later.
If you are thinking about a conversion this year, or any year, we would love to run the numbers with you before the December deadline. It does not take long. And it beats the alternative.
Reach out at hello@nickelswealth.com or call 662.327.4607.
This is the last post in our tax-planning series. If you have read all five — Bain on Roth conversions, my piece on charitable giving, Tracey on tax-efficient investing, Bain on planning for business owners, and this one — thank you.
The point of the whole series has been one thing. Most of the best planning happens before December, not after.
You still have a few months. Go use them.
Spencer Reed, CPFA®
Disclosure: Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual
