Updated

Updated · Kiplinger's Personal Finance · Aug 26

Pension Holders Urged to Weigh Roth Conversions as 10-Year Inheritance Rules Raise Tax Stakes

Updated

Updated · Kiplinger's Personal Finance · Aug 26

Pension Holders Urged to Weigh Roth Conversions as 10-Year Inheritance Rules Raise Tax Stakes

Q: Why might converting your retirement savings just one dollar over the limit trigger a hidden Medicare penalty costing you thousands?

Because Medicare’s IRMAA surcharge works as a cliff, not a phase-in. If a Roth conversion pushes your modified adjusted gross income even $1 above an IRMAA threshold, Medicare can charge the full higher premium tier for the entire year, often costing a couple thousands more. A Roth conversion counts as ordinary income in the year you do it. Medicare then looks back two years at that income to set Part B and Part D premiums. So a conversion done at 63 can raise Medicare costs at 65. Under the 2026 CMS figures, the first IRMAA tier starts above $109,000 for single filers and $218,000 for married couples filing jointly. Crossing that line by one dollar triggers a full surcharge, not just on the extra dollar. That is why the “hidden penalty” catches retirees off guard. A couple at exactly $218,000 in MAGI pays the standard Medicare premium. At $218,001, both spouses move into the next IRMAA tier for a full year. The same pattern repeats at each higher bracket. For example, moving just over $274,000 can push a married couple from Tier 1 to Tier 2, sharply increasing combined Part B and Part D costs. Experts say this is why Roth conversions should not be judged only by federal tax brackets. A conversion can also increase Social Security taxation and state taxes. The best conversion amount is often the lower of the remaining room in your target tax bracket or the remaining room before the next IRMAA threshold.

2 articles · Updated · Kiplinger's Personal Finance · Aug 26

Pension recipients with sizable tax-deferred savings may benefit more from Roth conversions than typical retirees because pension income, Social Security and RMDs can keep them in higher tax brackets for decades.
The key test is whether the total tax cost is lower now than later, not just the current federal bracket; conversions can also affect Medicare IRMAA surcharges, Social Security taxation, capital gains and state taxes.
Current relatively low tax rates create an opening for some households, especially married couples trying to reduce future "widow's penalty" exposure when one spouse shifts from joint to single filing status.
Estate planning can also tilt the math: most non-spouse heirs must drain inherited retirement accounts within 10 years, potentially forcing children to recognize large taxable income.
The broader goal is tax diversification across traditional, Roth and taxable accounts, giving retirees more flexibility over withdrawals, premiums and lifetime after-tax income.