Retirees holding less than $2,000,000 in traditional IRA and 401(k) savings face a growing chorus of advice to convert those accounts to Roth IRAs. The pitch is simple: pay taxes now, enjoy tax-free withdrawals later, and dodge required minimum distributions. But for most people in this savings range, the immediate tax hit and a chain of hidden federal surcharges can quietly erode the very nest egg a conversion is supposed to protect.
The Conversion Tax Bill Hits Harder Than It Looks
Every dollar moved from a traditional IRA to a Roth account counts as ordinary income in the year of the conversion. For a married couple already drawing Social Security and a modest pension, even a $50,000 conversion can push taxable income into a higher bracket. The tax owed is due that same year, and retirees who pay it from the converted funds shrink the balance that was supposed to grow tax-free. Each conversion also starts its own five-year clock; withdrawals of converted amounts before that clock expires can trigger an additional 10% tax for those under age 59 and a half.
Paying a known tax rate today only makes sense if the future rate will be higher. For retirees with less than $2,000,000, required minimum distributions starting at age 73 often produce annual withdrawals well within the 22% or 24% bracket. Converting a large lump sum in a single year, by contrast, can temporarily push income into the 32% bracket or above. The math reverses the supposed advantage: the retiree pays more tax now than the distributions would have generated over a decade of gradual withdrawals. Spreading smaller conversions over multiple low-income years, or avoiding them entirely, can leave more after-tax wealth than a single aggressive push into higher brackets.
Social Security and Medicare Surcharges Pile On
The IRS determines how much of a retiree’s Social Security benefit is taxable through a formula called provisional income: one-half of benefits plus all other income, including tax-exempt interest. A Roth conversion inflates the “other income” side of that equation, which can push up to 85% of Social Security benefits into taxable territory. For someone converting $60,000 who also receives $30,000 in benefits, the conversion does not just create its own tax bill; it drags thousands of dollars of previously untaxed Social Security income onto the return as well. The combined effect is that the marginal tax rate on the converted dollars can be far higher than the headline bracket suggests.
Medicare premiums deliver a second, often overlooked surcharge. The Centers for Medicare and Medicaid Services sets income-related monthly adjustment amounts, known as IRMAA, that raise Part B and Part D premiums based on modified adjusted gross income from two years prior. The 2026 CMS fact sheet lays out the income tiers that trigger these higher premiums and the dollar amounts attached to each level. A conversion done today can cause premium increases that do not surface until two calendar years later, catching retirees off guard. For a couple, the combined IRMAA surcharge across both Part B and Part D can add several thousand dollars annually, a cost that rarely appears in the simple “pay tax now, save later” sales pitch but directly reduces spendable retirement income.
Investment Income Tax Exposure Widens
Retirees who hold taxable brokerage accounts alongside their IRAs face another trap. The 3.8% Net Investment Income Tax applies to investment earnings when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly. Roth conversions do not count as net investment income themselves, but they raise MAGI. That higher MAGI figure can pull capital gains, dividends, and interest income above the threshold, subjecting dollars that would otherwise have been untouched to the 3.8% surtax. For retirees who periodically realize gains to rebalance portfolios or fund large purchases, the timing of a conversion can determine whether those gains are taxed once or effectively taxed twice.
For a retiree with $1.5 million in combined IRA and brokerage assets, a $75,000 conversion layered on top of Social Security, pension income, and portfolio dividends can easily breach the $250,000 joint-filing line. The resulting NIIT bill is not large in isolation, but it stacks on top of the conversion’s own income tax, the Social Security taxation bump, and the future IRMAA surcharge. Together, these costs can consume a significant share of the converted amount before any tax-free growth begins. When advisors model conversions without incorporating NIIT thresholds, they risk presenting overly optimistic projections that ignore the compounding effect of multiple small surtaxes.
RMD Stacking and Estimated Tax Penalties
Timing creates its own hazard. The IRS requires most retirees to begin taking required minimum distributions at age 73, with first-year recipients allowed to delay until April 1 of the following year. Choosing that delay means two RMDs land in a single calendar year, a stacking problem the IRS has explicitly warned about. Layering a Roth conversion on top of a double-RMD year can produce an income spike that vaults a retiree into a bracket far above their normal rate, magnifying every surcharge described above. Retirees who already have sizeable traditional balances often find that simply complying with RMDs uses up most of the room in their current tax bracket, leaving little space for additional conversion income without penalty.
Large conversions also create a practical headache around withholding. Retirees accustomed to predictable pension and Social Security withholding rarely adjust their quarterly estimated payments to account for conversion income. IRS guidance on estimated tax explains the safe harbor rules and penalties that apply when tax payments fall short during the year. An underpayment penalty on top of the conversion tax, IRMAA, and NIIT exposure turns a supposedly smart tax move into a costly administrative failure. Using IRA withholding to “catch up” on taxes can backfire as well, because withholding taken from the conversion reduces the amount that actually reaches the Roth and, for those under 59½, may be treated as an early distribution subject to its own 10% penalty.
SECURE 2.0 Reduces the Case for Converting
Part of the original appeal of Roth conversions was escaping lifetime RMDs. That rationale has weakened. Section 325 of the SECURE 2.0 legislation, enacted as part of the Consolidated Appropriations Act of 2023, eliminates required minimum distributions on employer-plan Roth accounts, putting them on similar footing with Roth IRAs. At the same time, the law raised the RMD starting age, first to 73 and eventually higher, which stretches out the period during which traditional IRA owners can take relatively modest, bracket-friendly withdrawals instead of front-loading income through conversions. For many households under the $2,000,000 mark, this extended runway reduces the urgency to move money aggressively into Roth accounts.
The SECURE 2.0 changes also interact with estate planning in ways that blunt the benefits of conversions for middle-tier savers. Beneficiaries of traditional IRAs generally must empty inherited accounts within a limited period, often 10 years, which can create tax spikes for adult children in their peak earning years. Roth IRAs are subject to similar distribution timelines, but withdrawals for heirs are typically tax-free. For very large estates, converting to Roth can still make sense as a way to shift tax burdens to a lower-bracket older generation. For couples with under $2,000,000, however, the combination of higher RMD ages, modest projected withdrawal needs, and multiple federal surcharges means that paying a steep conversion bill today often provides only marginal benefit to heirs while materially reducing the retirees’ own lifetime after-tax income.
None of this means Roth conversions are always a mistake. They can be powerful in narrow windows, such as early retirement years before Social Security begins, periods of temporarily depressed income, or situations where one spouse expects to outlive the other by many years and face higher single-filer brackets later. But the blanket advice that anyone with pre-tax savings should “fill up the bracket” with conversions ignores how quickly provisional income rules, IRMAA thresholds, NIIT limits, and RMD timing can turn a seemingly simple maneuver into an expensive surprise. For retirees with less than $2,000,000 saved, the safer starting point is often to map out projected RMDs, Social Security timing, and health-care costs, then consider only targeted, modest conversions that keep total income comfortably below the next major tax and surcharge thresholds.
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*This article was researched with the help of AI, with human editors creating the final content.
Nathaniel Cross focuses on retirement planning, employer benefits, and long-term income security. His writing covers pensions, social programs, investment vehicles, and strategies designed to protect financial independence later in life. At The Daily Overview, Nathaniel provides practical insight to help readers plan with confidence and foresight.
