The Roth Conversion Versus the ACA Subsidy
Ken, age 63, retired in 2024. He and his wife, Lena, have $1.6 million in traditional IRAs, $250,000 in Roth IRAs, $200,000 in taxable brokerage, and a $45,000 annual pension. Ken delayed Social Security to age 70; Lena will claim at 67. They need about $95,000 per year before tax. They buy health insurance through the ACA marketplace until Medicare at 65. Ken wants to convert $250,000 to Roth this year because 'taxes will only go up.' Their planner estimates that before any conversion they have room in the 12% federal bracket, and that the ACA premium tax credit and IRMAA rules are both sensitive to MAGI.
1. Evaluate the proposed $250,000 Roth conversion considering the ACA premium tax credit and IRMAA.
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The $250,000 conversion cannot be evaluated by the federal income tax rate alone. The relevant cost is the marginal cost of the conversion, which includes:
- federal ordinary income tax on the converted amount;
- state income tax, if any;
- lost ACA premium tax credit caused by higher MAGI; and
- future IRMAA surcharges, because Medicare premiums use MAGI from two years earlier.
Ken is 63, so a conversion this year can affect his Medicare premiums when he reaches 65. The ACA credit can also create a very high effective marginal rate: a dollar of conversion may cost not just 12 cents of federal tax but also part of the premium credit. A full $250,000 conversion may therefore be much more expensive than the bracket alone suggests.
The planner should model several conversion amounts-$0, an amount that stays under the relevant ACA or IRMAA threshold, and a larger amount-and compare the after-tax wealth outcomes.
2. Recommend an alternative sequencing and amount.
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A reasonable approach is to fill the low brackets only up to the point where the next dollar triggers a disproportionate loss of ACA credit or an IRMAA threshold. Because Ken and Lena have a low-income window before Social Security at 70 and before RMDs, they may have multiple years to convert partially rather than doing $250,000 once.
Pay the conversion tax from the taxable brokerage account, not by withholding from the IRA, so the full amount reaches the Roth. Preserve liquidity and the emergency reserve. Revisit the plan annually: ACA rules, IRMAA thresholds, tax brackets, and their spending can change. After 65, manage conversions around IRMAA rather than abandoning them entirely. Later, qualified charitable distributions from the traditional IRA may further reduce future RMD pressure.
3. How should the planner respond to Ken's certainty that 'taxes will only go up'?
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The planner should respect the concern without treating a forecast as a fact. Future tax law is uncertain in both directions. The better framing is tax diversification: they already have traditional IRA, Roth IRA, and taxable assets. Converting some traditional money creates flexibility; converting too much at a high effective cost may be irreversible and unnecessary.
Use scenario analysis: compare outcomes if tax rates rise, stay the same, or fall. Identify a conversion amount that is robust across scenarios rather than optimal only under one forecast. Document that the recommendation is based on current law and stated assumptions, and schedule annual reviews.