The Effect Roth Conversions Have on Taxes, Medicare & Social Security

Roth IRA conversions are a powerful tax planning strategy that can improve your financial position in retirement. Converting a traditional IRA to a Roth IRA has significant benefits, particularly regarding taxes, Social Security, and Medicare. However, there are important considerations to review before making the switch.

Roth IRA vs. Traditional IRA

Unlike traditional IRAs, Roth IRAs offer tax-free withdrawals in retirement, as contributions are made with after-tax dollars. In contrast, traditional IRAs provide tax-deferred growth, meaning you pay taxes on the withdrawals in retirement.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account that allows you to contribute money on an after-tax basis. The key benefit of a Roth IRA is that, unlike traditional IRAs, the money grows tax-free, and qualified withdrawals in retirement are also tax-free.

With a Roth IRA, you don’t receive an immediate tax deduction for your contributions, but you won’t have to pay taxes on the earnings or withdrawals as long as certain conditions are met, such as reaching age 59½ and holding the account for at least five years.

A Roth IRA can be an excellent choice for individuals who expect to be in a higher tax bracket during retirement or want to avoid paying taxes on future investment gains.

What is a Traditional IRA?

A Traditional IRA is a type of individual retirement savings account that allows you to contribute pre-tax income, which means the contributions may be tax-deductible in the year they are made. The money in a Traditional IRA grows tax-deferred, meaning you won’t pay taxes on the earnings until you withdraw them in retirement.

Some key features of a Traditional IRA include:

• Contributions to a Traditional IRA may reduce your taxable income for the year, potentially lowering your current tax bill.
• You don’t pay taxes on any investment gains until you make withdrawals in retirement.
• Starting at age 72, you are required to begin withdrawing a minimum amount from your Traditional IRA each year.
• If you withdraw funds before age 59½, you may incur a penalty, plus income taxes on the amount withdrawn.

A Traditional IRA, can be a good option for individuals who want to reduce their current taxable income and expect to be in a lower tax bracket when they retire.

Comparing Tax Features of Roth vs Traditional IRAs

Roth IRA	Traditional IRA
Tax Features
Earnings: Grow tax-free	Earnings: Grow tax-deferred
Contributions: Made with after-tax dollars (not deductible)	Contributions: Made with pre-tax dollars (deductible if income-qualified)
RMDs: Not required during the account holder’s lifetime	RMDs: Required starting at age 73
Withdrawals: Tax- and penalty-free withdrawals of contributions anytime. Earnings are tax-free if IRS-qualified.	Withdrawals: Taxable. Early withdrawals may incur penalties.
Income Requirements
Eligibility: Must have earned income and fall within IRS income limits 2023 phase-out: – Less than $153,000 (single) – Less than $228,000 (married filing jointly)	Eligibility: No income limits to contribute. For deduction eligibility, must meet IRS income limits.

When Should You Consider a Roth IRA Conversion?

A Roth IRA conversion can be an effective strategy for certain individuals, but it may not be the right choice for everyone. Understanding when converting to a Roth IRA are are beneficial depends on various financial factors.

You’re in a Lower Tax Bracket

If you’re currently in a lower tax bracket, converting funds from a traditional IRA to a Roth IRA can allow you to pay income taxes at a lower rate now rather than in retirement, when you may be in a higher tax bracket. This is especially useful if you anticipate your tax rate will rise in the future.

You Have Years of Low Income

If you’re experiencing a low-income year, it’s a good time to convert. This allows you to convert assets while minimizing the tax impact, as your income will be lower and may keep you in a lower tax bracket.

You Want to Reduce Future RMDs

Roth IRAs do not have RMDs, unlike traditional IRAs, which require you to withdraw money starting at age 72. If you want to avoid RMDs or reduce the size of withdrawals from your retirement accounts in the future, a Roth conversion can help.

You’re Preparing for a Higher Future Tax Rate

If you expect tax rates to rise in the future—whether due to changes in tax laws or an increase in your income—converting some of your traditional IRA funds to a Roth IRA can lock in a lower tax rate now, while potentially saving you money in taxes later.

You Want Tax-Free Growth for Your Beneficiaries

Roth IRAs allow your beneficiaries to inherit the account, withdrawn tax free, which can be a beneficial estate planning tool if you want to pass on your retirement savings without tax liabilities. If leaving a tax-free inheritance is important to you, converting to a Roth IRA may be a smart move.

You’re Looking to Maximize Social Security Benefits

A Roth conversion can help you manage your Modified Adjusted Gross Income (MAGI). By converting to a Roth IRA, you can potentially reduce the tax burden on your Social Security benefits, as Roth conversions do not count as taxable income for Social Security purposes.

Are Roth IRA Conversions Taxable?

When you complete a Roth IRA conversion, the amount you convert is taxable as income for the year of the conversion. This means that the converted amount will be added to your taxable income, and you’ll pay taxes on it based on your ordinary income tax rate.

Do Roth Conversions Count as Income?

Yes, Roth account conversions count as income in the year of the conversion. The amount you transfer from your traditional IRA to your Roth IRA will be treated as income on your tax bill and added to your total earnings for the year. This could impact your overall tax liability depending on how much you convert.

While Roth conversions do count as income, it’s important to note that Roth conversions are not subject to Federal Insurance Contributions Act (FICA) taxes. FICA taxes include Social Security and Medicare taxes, which would typically be deducted from wages or self-employment income. Since Roth conversions do not trigger these taxes, you won’t owe additional Social Security or Medicare contributions on the conversion amount.

How Do Roth Conversions Affect Your Tax Bracket?

The amount you convert can also affect your tax bracket for the year. If you convert a large portion of your traditional IRA into a Roth IRA, it could increase your taxable income significantly, potentially pushing you from a lower tax bracket into a higher tax bracket. This means you could face a higher rates on the conversion taxes. However, the long-term benefits of a Roth IRA, such as tax-free growth and withdrawals in retirement savings, can outweigh the upfront tax cost.

Understanding how Roth conversions impact your tax situation in 2025 is crucial for effective retirement planning, potential tax savings, and reducing your taxable income.

How Much Tax Will I Pay If I Convert My IRA to a Roth?

If you’re considering converting your traditional IRA account to a Roth IRA, the amount of tax you’ll owe on the conversion depends on several factors, including the current tax rate. Let’s walk through how to estimate your tax liability and explore strategies to minimize the impact.

Estimating Taxes on Your Roth Conversion

The tax you pay on a Roth IRA conversion is based on the dollar amount of the converted funds and your tax bracket. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, and you fall into the 24% tax bracket, your tax liability for that conversion would be:

$50,000 (conversion amount) x 24% (tax bracket) = $12,000 tax

The exact amount of tax you owe depends on your specific situation, including your other sources of income for the year.

Managing Your Tax Liability with Partial Conversions

If you want to minimize or avoid taxes exceeding, partial conversions can be a smart strategy. Instead of converting the entire balance of your traditional IRA in one year, you could break the conversion into smaller chunks over several years. This way, you can manage the amount of taxable income each year and possibly stay in a lower tax bracket, reducing the overall tax burden.

For example, if you convert $50,000 in one year and it pushes you into a higher tax bracket, spreading out conversion over a few years may help you avoid the higher tax rates on that income level.

How Much Tax Will I Pay?

The exact amount of tax you will pay in if you convert your simple IRA to a backdoor Roth IRA depends on the amount converted, your current tax bracket, and your other sources of income. To get a clearer estimate for your specific situation, it’s helpful to consult with a trusted tax professional who can help you calculate your tax liability and guide you through the conversion process.

If you’re considering a Roth IRA conversion, want to minimize the tax impact, and avoid an early withdrawal penalty, contact a Raleigh tax consultant to help you make the best decision for your financial future.

Do Roth Conversions Affect Social Security Benefits?

When converting a traditional IRA to a Roth IRA, it’s important to understand how it may impact the taxation of your Social Security benefits. While Roth conversions do not affect Social Security tax rates, they can increase the taxable portion of your benefits.

Do Roth Conversions Count as Income for Social Security?

Yes, Roth conversions count as income when calculating provisional income, which determines how much of your Social Security benefits are taxable. The converted amount is added to your income, potentially increasing the taxable portion of your benefits.

Do You Pay Social Security Tax on Roth Conversions?

No, you do not pay FICA taxes on Roth conversions. However, the conversion amount can still increase the taxable portion of your Social Security benefits, even though it doesn’t affect your FICA liability.

Social Security Taxation Thresholds and Example

The IRS uses provisional income thresholds to determine how much of your Social Security benefits will be taxed.

Here are the key thresholds:

Note: If your provisional income exceeds $34,000 for individuals or $44,000 for married couples, up to 85% of your Social Security benefits may be taxable.

Example: Suppose you are single and your provisional income is $30,000 in a given year. This includes $20,000 from Social Security and $10,000 from a Roth conversion. Since your provisional income exceeds $25,000, 50% of your Social Security benefits may be taxable.

While Roth conversions can trigger more taxes on your Social Security benefits, they also offer long-term advantages, such as tax-free withdrawals from the Roth IRA in retirement.

If you’re looking to understand the impact of Roth conversions on your Social Security benefits, it’s important to evaluate your financial statements and consider how these conversions fit into your broader retirement planning.

Do Roth Conversions Affect Medicare Premiums?

Roth conversions can impact your Medicare premiums by increasing your Modified Adjusted Gross Income (MAGI), which is used to determine the amount you pay for Medicare Part B and Part D. When you convert funds from a traditional IRA to a Roth IRA, the converted amount counts as income and can trigger Income-Related Monthly Adjustment Amounts (IRMAA), resulting in higher Medicare premiums.

How Roth Conversions Impact MAGI and IRMAA

Roth conversions add to your MAGI for the year of conversion, potentially pushing you into a higher income bracket for Medicare purposes. Since IRMAA is based on the two-year lookback rule, a Roth conversion in 2025 could raise your Medicare premiums in 2027, based on your 2023 income.

Eligibility and Income Limits for Roth Contributions in 2025

Roth IRA contributions in 2025 are subject to income limits based on your Modified Adjusted Gross Income and tax filing status. These limits determine whether you can pay the conversion in full, a reduced amount, or if you’re ineligible to contribute.

2025 Contribution Limits

2025 Income Limits

Strategies for High Income Earners

If your income exceeds the limits, you can still contribute using a Backdoor Roth IRA, which involves contributing to a traditional IRA and converting it to a Roth IRA. Consult a tax advisor to discuss whether this strategy will work for you.

Contact Steward Ingram & Cooper, PLLC for Roth Conversion Guidance

At Steward Ingram & Cooper, PLLC, our Raleigh CPAs guide clients on retirement and financial planning. If you want more information on Roth IRA conversions, we encourage you to reach out to us today as make your retirement more comfortable.

We serve areas throughout North Carolina including Raleigh, Wake Forest, Wilson, Apex, Durham, and Cary. To schedule a consultation, call us at (919) 872-0866 or fill out the contact form below.