In Part 1 of this series, we talked about how Roth conversions should be used to equalize your lifetime tax rate — converting just enough to smooth out your taxable income over time without pushing yourself into unnecessarily high brackets.
But even that careful planning can go awry if you ignore one critical reality: your effective marginal tax rate is often much higher than the one printed on the IRS tables.
Why? Because the tax code is full of hidden cliffs, thresholds, and phaseouts that quietly raise your true tax cost when you add income — and Roth conversions count as income.
Let’s look at some of the most common (and costly) examples.
The Social Security Tax Trap
For retirees with moderate incomes, few surprises are as unpleasant as discovering that adding income can make more of their Social Security taxable.
Here’s how it works: Social Security benefits are tax-free at low income levels, but as your “provisional income” (half of your benefits plus other income) rises, up to 85% of your benefits can become taxable.
This creates an invisible tax multiplier. For someone in the 12% bracket, each additional dollar of income may cause more Social Security to be taxed — effectively pushing the marginal rate to 18% or even 22.2%.
That means a Roth conversion you thought would be taxed at 12% could really cost you 50% to 85% more in taxes.
Careful modeling is essential to see where these thresholds hit — and sometimes, the best move is to stop conversions before triggering this effect, or to do a larger conversion that moves you cleanly through the range in one year.
IRMAA: The Medicare Premium Cliff
Once you reach age 63, another tax-like cost enters the picture: IRMAA, the Income-Related Monthly Adjustment Amount.
IRMAA isn’t a tax, but it feels like one. It’s a surcharge on Medicare Part B and D premiums that kicks in when your modified adjusted gross income (MAGI) crosses certain thresholds.
Here’s the catch: the government looks at your tax return from two years earlier to determine your IRMAA level. So a big Roth conversion at age 63 will affect your Medicare premiums when you’re 65.
And IRMAA isn’t gradual — it’s a series of cliffs, not slopes. Go even one dollar over a threshold, and your annual Medicare premiums can jump by thousands of dollars.
That’s why tax planning around IRMAA isn’t just about minimizing income — it’s about precision. Either stay comfortably below a threshold or, if you must go past it, go far enough to make it worthwhile before stopping short of the next cliff.
The ObamaCare (ACA) Premium Tax Credit Cliff
For taxpayers under age 65 who buy health insurance through the Affordable Care Act marketplace, the Premium Tax Credit (PTC) can make coverage much more affordable — but it comes with its own brutal income cutoff.
First, there’s the PTC phaseout, between 133% and 300% of the federal poverty level. For each extra dollar of income you have, you lose a small portion of the PTC that subsidizes the cost of your health insurance. This increases your marginal tax rate by anywhere from 2 to 9 percentage points – and in the case of the PTC phaseout, that rate increase applies not just to the additional income, but to your entire income, making the increase to your marginal tax rate much higher than 2-9%.
But here’s the real kicker: If your income exceeds 400% of the federal poverty level, the credit disappears entirely. For a couple in their early 60s, that can mean losing $10,000–$15,000 or more of subsidies because of just one extra dollar of income.
A Roth conversion, capital gain, or even a required distribution from an inherited IRA can trigger this. That’s why for pre-Medicare retirees, tax planning must account for the PTC cliff — often deferring or carefully controlling conversions until after reaching Medicare age.
Capital Gains Interactions: Stacking Brackets
If you have long-term capital gains, the picture gets even more complex. Capital gains stack on top of ordinary income, so adding ordinary income (like from a Roth conversion) can push gains that were taxed at 0% into the 15% range — or from 15% to 20%.
That means your “12% bracket” Roth conversion could really cost 27% on those dollars when you include the new tax on the gains it displaces.
Understanding how your capital gains and ordinary income interact is key to optimizing conversions. Sometimes, it’s better to harvest gains first in a low-income year, or plan conversions in years when capital gains are minimal.
Other Phaseouts and Credits
The tax code has dozens of other thresholds that can quietly change your marginal rate — from the Child Tax Credit to education credits, Qualified Business Income (QBI) deductions, and more. While these phaseouts don’t affect every retiree, they can make your effective marginal rate much higher than expected in certain income ranges.
The key is knowing which ones apply to you — and building them into your projections before deciding how much to convert.
Putting It All Together
In theory, Roth conversions are simple: move money from pre-tax to Roth at a reasonable rate. In practice, the ripple effects across the tax system can make “reasonable” far from obvious.
Each of these factors — Social Security taxation, IRMAA, ACA subsidies, capital gains stacking, and various phaseouts — changes the real marginal cost of adding income. And because many of them operate in bands or cliffs, they require precise coordination.
That’s why lifetime tax planning isn’t just about aiming for an even tax rate — it’s about understanding what each extra dollar really costs you.
Sometimes the right move is to stop short of a threshold. Other times, it’s to leap over it decisively. But every time, it should be an intentional, data-driven decision grounded in a clear view of your lifetime tax picture.
Bottom Line
You can overdo Roth conversions — not just by paying too much tax now, but by triggering hidden tax accelerators that make your “marginal rate” far higher than you think.
In the end, the best Roth conversion strategy isn’t about avoiding taxes — it’s about avoiding surprises. A well-planned conversion takes into account not only your tax bracket, but also the invisible forces that can quietly multiply it.