The Roth Conversion Mistake That Can Cost $50,000 to $90,000 (And When to Do It Right)

What a Roth conversion actually does

A Roth conversion is simple on paper. Money moves from a traditional IRA, or sometimes a 401(k), into a Roth IRA. That amount is taxed as ordinary income in the year it moves. After that, qualified withdrawals come out tax free, and so does the growth. There is no dollar cap. Since 2018, a conversion cannot be undone. There is no recharacterization. Once the year closes, that income is on the return.

The mistake late starters make is treating the conversion like a one-time cleanup. They hear that Roth is better. They look at a traditional IRA of $300,000 or $400,000. They convert a large slice in a single year, often the same year something else is already inflating income. A pension starts. A property sells. Social Security begins. Or they are still working, and the conversion stacks on top of a full salary.

The bracket table is not a suggestion. It is a set of cliffs. Medicare has its own cliffs sitting right next to them.

Where $50,000 to $90,000 comes from

Picture a married couple, both in their early sixties, filing jointly. Other ordinary income, before any conversion, is about $70,000. They take the 2026 standard deduction, $32,200 on a joint return. If both are 65 or older, there is also the extra age add-on, $1,650 per spouse, and for 2025 through 2028 a separate $6,000 senior deduction per qualifying spouse. That senior piece phases out. Before any conversion, taxable income is modest. A good chunk sits in the 12 percent bracket.

For joint filers in 2026, in the illustration used here:

• 12 percent ends at $100,800 of taxable income.
• 22 percent runs from there to $211,400.
• 24 percent runs up to $403,550.
• Then the rate is 32 percent.

Suppose they convert $200,000 in one year, because someone told them to get it done before rates change, or before required distributions begin. That $200,000 lands on top of the $70,000. Adjusted gross income jumps. The standard deduction still helps, but taxable income is now well up into the 24 percent bracket.

The part people skip: the first slice of that conversion is cheap. It fills whatever is left of 12 percent. The next slice is 22 percent. The slice after that is 24 percent. The household does not pay 24 percent on the whole conversion. It pays 24 percent on the portion that crossed the line. That is still a real bill. Rough federal tax on a conversion sized like that, stacked on $70,000 of other income, can land in the mid-$40,000s once the brackets stack.

Spread the same $200,000 over four years, filling toward the top of 22 percent and stopping, and the federal tax can come in 8 to 12 points lower on a large part of the money. Eight points on $200,000 is $16,000. Twelve points is $24,000. That is only the federal piece.

State tax is a separate bill

State tax sits on top in most states. At 4 or 5 percent, that is another $8,000 to $10,000 on a conversion of this size. Some states do not tax retirement income the same way. Illinois generally does not tax it, which changes the math for people who live there. If the state does tax the conversion, the one-year dump costs more.

Bracket jump plus state tax alone does not get a household to $50,000 or $90,000. The rest comes from three places people do not put on the same page.

Medicare IRMAA: the cliff with a two-year lookback

This is the one that surprises people who are 63 or older, or who will be on Medicare within two years. IRMAA is the income-related monthly adjustment amount. It is a surcharge on Part B, and a separate one on Part D. Social Security looks at modified adjusted gross income from two years earlier. A conversion in 2026 can raise premiums in 2028.

In the 2026 table used in this illustration, based on 2024 income, the first threshold starts above $218,000 joint and above $109,000 single. Cross that line by a dollar and the full first tier applies. These are cliffs, not slopes. One dollar over costs the same as $50,000 over.

In 2026 dollars, that first tier is about $81 a month extra on Part B, plus about $14.50 on Part D, per person. Roughly $2,300 for a couple for the year. The next tier, above $274,000 joint, is about $5,800 for the couple. Premiums and thresholds move, so the current table belongs in the file before any line is treated as fixed.

A $200,000 conversion on top of $70,000 of other income puts a joint return near $270,000 of adjusted gross income, before deductions finish their work. That can mean one year, sometimes two if the timing straddles, of elevated premiums. Five thousand to twelve thousand dollars is a common range for a couple that clips the first or second tier. It is not the conversion tax. It is a second bill, and it arrives later, in the premium notice.

The senior deduction a large conversion can erase

For 2025 through 2028, someone 65 or older can claim an extra $6,000, or $12,000 if both spouses qualify. It phases out once joint modified adjusted gross income passes $150,000, and it is gone by $250,000. A large conversion can erase it. Erasing $12,000 of deduction, in the 22 or 24 percent bracket, is another $2,600 to $2,900 of federal tax that a simple bracket calculator never shows.

How the tax is paid is the mistake inside the mistake

If the tax is withheld from the IRA, or extra money is pulled from the traditional account to cover the bill, that extra withdrawal is also taxable, and it never lands in the Roth. On a $200,000 conversion, if 30 percent comes out for taxes, only $140,000 actually arrives. The account meant to grow tax free is smaller from day one.

Over 15 or 20 years, the compounding given up on that $60,000 can be another $20,000 to $40,000, depending on the return assumed. That is not a promised return. The opportunity cost is real, and it compounds in the wrong direction. A direct transfer is not subject to the early-withdrawal penalty. Withholding is a separate conversation for someone under 59 and a half. Have the cash set aside before the conversion, from checking, brokerage, or savings, if the budget can carry it.

Add the leaks

In a less careful year, the pieces stack:

• Extra federal tax from jumping brackets, versus a staged plan: $15,000 to $25,000.
• State tax: $0 to $10,000.
• IRMAA for a couple over one or two years: $5,000 to $12,000.
• Lost senior deduction: a few thousand.
• Compounding surrendered by paying the tax from the IRA: $20,000 to $40,000 over a long retirement.

A household can get to $50,000 without trying very hard. It can get to $90,000 if the conversion was larger, the state rate was real, and the tax came out of the account. That is the range Linda heard. It is not a guarantee. It is what the leak looks like when several leaks open at once. The relief, when someone sees it before they file, is practical. They needed a smaller number in a better year.

When the conversion is the right move

The cleanest window for a lot of late starters is the gap years. Work has slowed or stopped. Required distributions have not started. Social Security has not started, or only one spouse has filed. Ordinary income is low on purpose. That is the year the 12 percent bracket, and sometimes the bottom of 22 percent, is sitting there half empty.

Filling a bracket means converting up to a line that was chosen, and then stopping. For a joint return in 2026, the top of 12 percent is $100,800 of taxable income. The top of 22 percent is $211,400. Pick the line where the rate paid now is still lower than the rate expected later, including what a surviving spouse may pay filing single.

That last point gets skipped. Joint brackets are wide. Single brackets are not. The same withdrawal that sat in 22 percent as a couple can sit in 24 or 32 percent for a surviving spouse. Converting some money while the joint brackets are still available can be a gift to the spouse who outlives the other. Not a reason to convert everything. A reason to look.

A few rules for sizing the year

• Convert in a low-income year, not a high one. The year a rental sold, a lump sum was taken, or a pension started is probably not the year for a large conversion.
• Size it to a bracket, not to a feeling. Forty or sixty thousand dollars that stays inside 22 percent is often cleaner than $200,000 that finishes in 24 percent and clips Medicare.
• Pay the tax from a taxable account if the cash is there. Using IRA money to pay the tax shrinks the Roth.
• Watch the two-year lookback at 63 or older, or if a spouse is. Leave a cushion under the IRMAA line, not a dollar.
• Do not convert money needed in the next five years if paying the tax strains the budget. A Roth is a long asset. It is a poor place to park next year’s property tax.
• Remember the pro rata rule if there is after-tax basis in a traditional IRA. Pre-tax dollars cannot be cherry-picked if other IRAs hold basis.

None of this is a recommendation for a particular return. Brackets move. A qualified professional who can see the forms is the right person to size it.

What the dollars do after they land in the Roth

Once money is inside a Roth, what it earns can come out qualified and tax free, if the five-year rule and the age rule are met. That can include income from a note held inside the Roth, if the custodian allows the asset and the note was acquired properly. A performing seller-financed note in the 8 to 12 percent range, backed by real property, throws off a payment every month. Inside a taxable account, that interest is ordinary income. Inside a Roth, once qualified, it is not. The borrower still handles the taxes and the roof.

This is not a reason to convert so a note can be bought. The two decisions are related, though. If tax is being paid now to move money into a Roth, it helps if the dollars that land there are aimed at something that pays. Some people use a small note, or a partial, inside a self-directed Roth for that reason. Modest capital. A defined payment. No landlord work.

Notes have their own risks: borrower default, property value, servicing. A result will not match someone else’s, which is why the underwriting has to be personal, and why a custodian and a tax professional both belong in the conversation before retirement money goes anywhere unusual. The same discipline shows up in both decisions. With the conversion, underwrite the year, demand a rate that can be lived with, and stop if the next slice stops working. With a note, underwrite the borrower and the property.

Late starters do not have a long runway to absorb a sloppy year. A quiet decision, made with the brackets in front of you, beats a large one made because a headline said Roth is always better.

A practical next step

If the practical side of finding and evaluating notes is the next question, be sure to explore this site. Bona fide leads are at noteinvestors.com/leads. The broker opportunity is the path for starting without tying up personal capital. The upcoming Note Investing Formulas program walks through the calculations and due diligence steps.

This article is an illustration drawn from a general discussion of Roth conversions. It is not tax, legal, or investment advice, and it is not a recommendation to convert, to buy a note, or to use retirement money for any particular asset. Thresholds, brackets, and premiums change. Run the year with a qualified professional before any conversion or any unusual retirement-account investment.