Roth conversions are often talked about as if they’re always a good idea. Pay the tax now, let the money grow tax-free forever, and never worry about required distributions again. For the right person in the right year, that really is how it plays out. But a Roth conversion is a bet that paying tax today will cost less than paying it later, and like any bet, it can lose. When it does, it usually isn’t the conversion itself that goes wrong. It’s what the conversion touched that nobody looked at first.
That’s the part I want to focus on here. The question I hear most often isn’t “Should I do a Roth conversion?” so much as “Is there anything I’m missing?” Usually there is something, and it tends to sit at the intersection of taxes, Medicare, cash flow, and estate planning, which is exactly where a conversion decision made in isolation falls apart.
If you’re still deciding whether a conversion fits your situation at all, my broader guide to when Roth conversions make sense for high earners in California is a good place to start. This article picks up where that one leaves off and looks at what happens when the plan doesn’t go the way you expected.
Can a Roth Conversion Actually Cost Me Money?
Yes, and it’s worth being clear about how. When you convert money from a traditional IRA or 401(k) to a Roth, the converted amount is added to your taxable income for the year. You’re voluntarily paying tax on money you could have left alone. That only works out if the tax you pay now is lower than the tax you (or your heirs) would have paid on that same money later.
A conversion goes wrong when that math flips. Maybe you convert at a high rate and end up in a lower bracket in retirement than you assumed. Maybe the conversion quietly raised your Medicare premiums, eliminated a deduction, or pulled other income into a higher bracket. Maybe the money ends up going to a charity that would never have paid tax on it anyway. None of these show up when you’re looking at a conversion as a single line item. They show up when you look at your whole return, and often your next two or three returns too.
The tax rate on the conversion is only half the story. The other half is everything that conversion income touches.
What Happens If I Convert Into a Higher Tax Bracket Than I Expected?
This is probably the most common misstep, and it’s an easy one to make. Conversion income stacks on top of everything else you earn that year, so the conversion is taxed at your highest marginal rate, not your average one. If the rest of your income turns out to be higher than you planned, the conversion lands in a more expensive bracket than you intended.
It happens more than you’d think. An executive might plan a conversion in a year they expected to be quiet, then receive a larger bonus or an RSU vest that pushes everything up. A business owner might convert early in the year, then have a much stronger fourth quarter than projected. A couple might do a conversion in the same year they sell a rental property, without realizing how much the gain from that sale already raised their income.
There are knock-on effects, too. Conversion income can push long-term capital gains out of a lower capital gains bracket and into a higher one. It can raise your income enough to trigger the net investment income tax on your dividends and gains. For business owners, it can reduce or eliminate the qualified business income deduction, which phases out at higher income levels for many professional service businesses. And because so many deductions and credits depend on your adjusted gross income, a large conversion can shrink benefits you didn’t even realize were in play.
This is one reason I generally prefer to look at conversions later in the year, once the rest of the income picture is clearer, rather than converting in January based on assumptions.
Will a Roth Conversion Increase My Medicare Premiums?
It can, and this one catches a lot of retirees off guard because the cost shows up two years later. Medicare Part B and Part D premiums include an income-related surcharge called IRMAA (Income-Related Monthly Adjustment Amount). It’s based on your income from two years prior, so a conversion you do at 63 can raise your Medicare premiums at 65.
What makes IRMAA tricky is that it works on thresholds rather than a gradual scale. Going even slightly over a threshold moves you into the next premium tier for the entire year. A conversion that’s sized just a little too large can trigger a surcharge that a slightly smaller conversion would have avoided completely. The thresholds also adjust periodically, so it’s worth double-checking the current numbers before you settle on a conversion amount.
Medicare isn’t the only program that looks at your income. If you retire before 65 and buy health insurance through Covered California, your premium assistance is tied to your income, and conversion income counts. A conversion that seems reasonable on its own can cost you far more in lost health insurance subsidies than it saves in future taxes. Once you start Social Security, conversion income can also increase how much of your benefit is taxable.
None of this means a conversion is wrong for someone approaching Medicare age. Sometimes paying a higher premium for a year or two is well worth it. It just means the true cost of a conversion includes more than the tax bill.
Does It Matter Where I’ll Live in Retirement?
For California residents, this may be the single biggest question to answer before converting. California taxes Roth conversions as ordinary income, with no special treatment, and our state income tax rates are among the highest in the country. If you convert while living here, you pay that state tax on top of federal tax.
Now think about someone who plans to move to Nevada, Texas, Arizona, or another lower-tax state a few years after retiring. Federal law generally prevents a state from taxing the retirement distributions of people who no longer live there. If that person converts while still a California resident, they pay California tax on money that may never have been taxed by California at all had they waited until after the move. That can be an expensive timing mistake.
The reverse can matter too. Someone who already lives in a state without an income tax and is considering a move to California may want to think about converting before they move rather than after.
If you’re seriously considering a move, it’s worth building the conversion plan around it. Just know that California takes residency seriously, so a planned move needs to be a real one, with the records to back it up.
What If the Market Drops Right After I Convert?
This is one of the more frustrating ways a conversion can go wrong, because it isn’t really a planning error. It’s just bad timing. You pay tax on the value of the account on the day you convert. If the market falls sharply a few weeks later, you’ve paid tax on value that no longer exists.
Before 2018, you could undo a conversion through a process called recharacterization. That option is gone. Once a conversion is done, it’s permanent, regardless of what the market does next.
There isn’t a way to predict short-term market moves, but there are ways to reduce the sting. Spreading conversions over several years, or even over several points within a year, keeps any single conversion from depending too heavily on one market moment. Some people also choose to convert after a market decline, since converting at lower values means paying less tax on the same number of shares. That’s not market timing so much as taking advantage of a lower price when it happens to be available.
How Should I Pay the Tax on a Roth Conversion?
How you pay the tax matters almost as much as whether you convert. The most efficient approach is usually paying the tax with money from outside the retirement account, such as cash savings. That way, the full converted amount stays in the Roth and keeps growing tax-free.
Paying the tax from the IRA itself, by withholding part of the conversion, weakens the strategy. Whatever is withheld never makes it into the Roth, and if you’re under 59½, the withheld portion is generally treated as an early distribution that can come with a penalty on top of the tax.
Selling investments in a taxable brokerage account to cover the bill is another option, but it can create capital gains that add even more income to an already high-income year. That doesn’t make it wrong. It just needs to be part of the math.
Timing the payment matters too. A large conversion can create a big balance due, and if your withholding and estimated payments haven’t kept up, you may owe an underpayment penalty on top of the tax. Conversions done in December still need to be accounted for, and there are a few ways to handle that depending on the rest of your situation. If you’re not sure how this works, my post on how quarterly estimated taxes work in California walks through the rules in more detail.
What Are the Five-Year Rule and the Pro-Rata Rule?
These two rules don’t get much attention until they cause a problem.
Each Roth conversion has its own five-year clock. If you’re under 59½ and withdraw converted money before that conversion is five years old, you may owe a penalty on the withdrawal. For anyone planning to use a conversion as an early-retirement bridge, this timing needs to be mapped out in advance.
The pro-rata rule affects people who have both pre-tax and after-tax money in their IRAs, which often comes up with so-called backdoor Roth contributions. When you convert, the IRS doesn’t let you choose to convert only the after-tax portion. It looks at all of your traditional, SEP, and SIMPLE IRA balances together and treats each conversion as a proportional mix of taxable and non-taxable money. Someone who expects a nearly tax-free backdoor conversion can end up owing tax on most of it because of an old rollover IRA they forgot about. Sometimes moving pre-tax IRA money into an employer 401(k) beforehand can help, but that has to happen before year-end.
Who Is the Money Actually For?
This is the question I think gets skipped most often, and it can change the whole answer. A conversion is a decision about who pays the tax on that money and when. If the money is likely to go to someone else, their tax situation matters as much as yours.
Many people who don’t spend their full IRA plan to leave it to their children. Under current rules, most adult children who inherit an IRA must empty it within ten years, which often pushes them into higher brackets during their own peak earning years. In that case, converting while you’re in a moderate bracket can be a real gift. You can read more about how the 10-year rule works for inherited IRAs and why it changed the planning picture for so many families.
But the reverse is also true. If your heirs are likely to be in a lower bracket than you are now, paying tax at your rate on their behalf may cost the family more overall.
Charitable giving is where this matters most. A charity pays no income tax when it inherits a traditional IRA. If part of your IRA is likely headed to a church, a donor-advised fund, or another charity, converting that portion means paying tax that never needed to be paid. For people who give regularly, it often makes more sense to leave some money in the traditional IRA and give it directly to charity later, either through qualified charitable distributions after 70½ or through beneficiary designations.
Can Not Converting Go Wrong Too?
It can, and it’s worth saying so. This article focuses on conversions that backfire, but plenty of people end up regretting conversions they never did. A retiree who lets a large IRA keep growing untouched may face required minimum distributions later that are larger than they need, push them into higher brackets, and trigger the same Medicare surcharges they were trying to avoid. A surviving spouse often pays more tax filing as a single person on the same income the couple used to share.
The goal isn’t to avoid conversions. It’s to make each conversion decision with the full picture in view, including the years that come after it.
When Does It Make Sense to Work With an Advisor?
A Roth conversion is one of those decisions that looks simple from the outside and gets complicated quickly once real numbers are involved. It’s worth having help if you’re within a few years of Medicare, planning to move out of California, retiring early and buying your own insurance, carrying both pre-tax and after-tax IRA money, running a business with income that varies from year to year, or leaving a meaningful amount to children or charity.
This is also where having your tax planning and financial planning in the same place genuinely changes the outcome. As both a CPA and a CFP®, I can see the projected return, the investment accounts, the Medicare timeline, and the estate plan at the same time, and size a conversion against all of them at once. When those pieces sit with different people who rarely talk to each other, the conversion amount usually gets chosen based on the one piece someone happened to be looking at.
A conversion done well rarely feels dramatic. It’s usually the result of a careful projection and a few years of small, deliberate steps.
Frequently Asked Questions
Can I undo a Roth conversion?
No. Since 2018, Roth conversions can no longer be recharacterized or reversed. Once the conversion is completed, it’s permanent, so it’s worth running projections before converting rather than after.
Does a Roth conversion increase my Medicare premiums?
It can. Medicare premiums are adjusted based on your income from two years earlier, so a conversion can raise Part B and Part D premiums down the road. Because the surcharges kick in at specific income thresholds, the size of the conversion matters a great deal.
Should I pay the tax on a Roth conversion from the IRA?
In most cases it’s more efficient to pay the tax from money outside the retirement account. Withholding tax from the conversion reduces how much reaches the Roth, and if you’re under 59½, the withheld amount may also face an early withdrawal penalty.
Does California tax Roth conversions?
Yes. California treats a Roth conversion as ordinary income and taxes it at regular state income tax rates. If you plan to move to a state without an income tax, the timing of a conversion relative to that move can make a significant difference.
Is it a mistake to convert if I plan to leave my IRA to charity?
It can be. Charities don’t pay income tax on inherited IRA money, so converting money that will ultimately go to charity means paying tax that otherwise would never have been owed. Many charitably minded people keep some funds in a traditional IRA specifically for giving.
What is the five-year rule for Roth conversions?
Each conversion has its own five-year waiting period. If you’re under 59½ and withdraw converted funds before that period ends, you may owe a penalty. Once you’re past 59½, this particular rule generally no longer applies to converted amounts.
Why did my backdoor Roth conversion create a tax bill?
This is usually the pro-rata rule. If you have pre-tax money in any traditional, SEP, or SIMPLE IRA, the IRS treats a conversion as a proportional mix of pre-tax and after-tax money, which can make much of the conversion taxable.
Is it a bad idea to convert when the market is high?
Not necessarily, but it does mean you’re paying tax on a higher value. Converting after a market decline lets you move more shares for the same tax cost. Spreading conversions over time also reduces the risk of converting right before a drop.
Can a Roth conversion cause an underpayment penalty?
Yes. A conversion adds income, and if your withholding and estimated payments don’t account for it, you may owe a penalty in addition to the tax. Planning for the payment ahead of time helps avoid that surprise.
Should I do a Roth conversion before I start Medicare?
The years between retirement and Medicare are often a good window for conversions, since income may be lower. Keep in mind that Medicare looks back two years, and if you’re buying insurance through Covered California, conversion income can reduce your premium assistance.
How much should I convert each year?
There isn’t a universal number. The right amount usually depends on your current bracket, your expected future income, Medicare thresholds, state residency plans, and who will eventually inherit the account. Many people find that smaller conversions spread over several years fit better than one large conversion.
Is a Roth conversion worth it if I’m already retired?
It can be, especially in years when your income is lower than it will be once required minimum distributions or Social Security begin. Whether it’s worth it depends on how the conversion affects your Medicare premiums, Social Security taxation, and the tax picture for your heirs.
In Short
A Roth conversion only works if the tax you pay now is lower than the tax you or your heirs would pay later.
Conversion income stacks on top of everything else, so bonuses, business income, and property sales can push it into a higher bracket than planned.
Conversions can raise Medicare premiums two years later and reduce health insurance subsidies for early retirees.
California residents planning to move to a lower-tax state should think carefully about converting before the move.
Conversions can’t be undone, so a market drop after converting is a permanent cost.
Paying the tax from outside the IRA is usually more efficient, and the payment needs to be planned to avoid penalties.
Money headed to charity generally shouldn’t be converted.
Not converting can be a mistake too. The goal is to decide with the whole picture in view.
About Katherine
Katherine Leonard is a CPA and CFP® who started KCL Wealth Management after years of watching people get pulled between an advisor, a CPA, and an attorney who never actually talked to each other. Roth conversions are a perfect example of why that matters, since the right answer depends on your taxes, your investments, your Medicare timeline, and your estate plan all at once. She wanted to be the person clients could bring their whole financial picture to, someone who actually has their back. If any of this feels relevant to your own situation, she’d love to talk it through. Visit kclwealth.com/contact to request an intro call.
This article is provided by KCL Wealth Management for general informational and educational purposes only. It does not constitute individualized investment, tax, legal, or accounting advice, and it should not be relied upon as the basis for any financial decision. The strategies and concepts discussed may not be suitable for every individual, and the appropriate course of action depends on each person’s specific facts and circumstances. Tax laws, regulations, contribution limits, deduction thresholds, and other figures referenced in this article are subject to change, and their application varies by individual. Readers should confirm current rules and figures and consult a qualified tax, legal, or financial professional before taking any action. Information is believed to be accurate as of the date of publication but is not guaranteed and may become outdated. Any examples are hypothetical, are provided for illustrative purposes only, and do not reflect the experience of any specific client. All investing involves risk, including the possible loss of principal, and no strategy can ensure a profit or protect against loss. Links to third-party websites are provided for convenience only, and KCL Wealth Management is not responsible for their content. Reading this article does not create an advisory, accounting, or client relationship with KCL Wealth Management or Katherine Leonard, CPA, CFP®. For additional information, please see our Privacy & Disclosures page.