The 8 Taxes You Could Pay When Doing a Roth Conversion (Is it worth it?)
Release Date: 05/14/2025
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Today’s episode revolves around one of the biggest financial debates among pre-retirees and retirees: When should you take Social Security? Host David McKnight touches upon the recent debate of two of the smartest voices in the field – Dr. Laurence “Larry” Kotlikoff and Dr. Derek Tharp – on this exact question. Dr. Tharp, out of the University of Southern Maine, notes that economists commonly recommend delaying social security benefits until age 70. Boston University’s Dr. Kotlikoff agrees and explains that delaying can give you a 76% higher monthly benefit compared to taking...
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The Power Of Zero Show
While on the golf course with his son, David McKnight got asked a question, by a couple of men in their early 70s, every pre-retiree and retiree wonders at some point: “What’s the biggest mistake people make when preparing for retirement?” Many people spend their entire career saving money in tax-deferred accounts like 401(k)s and IRAs. As that balance grows larger every year, it’s easy to get the illusion that all that money belongs to you, while a larger portion actually belongs to the IRS. How much of that sum you ultimately get to keep depends on what tax rates happen to be...
info_outlineIn this episode of the Power of Zero Show, host David McKnight looks at every possible tax or cost that may result from a Roth conversion.
The first tax you’ll have to pay when executing a Roth conversion is federal income tax.
Whatever portion of your IRA you convert to Roth is realized as ordinary income and piled right on top of all your other income.
David is an advocate for not converting to Roth unless you think your federal tax rate in retirement is likely to be higher than it is today.
The second tax you could end up paying when doing a Roth conversion is state tax.
The situation will vary depending on where you live – in Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, you don’t have to pay state tax, including on Roth conversion.
Do you live in Illinois, Iowa, Mississippi, or Pennsylvania? Then, you’ll have to pay state tax, but Roth conversions are exempted.
If you’re thinking about moving to one of these states to avoid paying these taxes, just know that, while they may not charge income tax on Roth conversions, they do make up for it in other ways (sales and property tax, for example).
IRMAA – the Income Related Monthly Adjustment Amount – is the third cost you could end up paying when doing a Roth conversion.
IRMAA represents an additional charge you could be required to pay on your Medicare Part B and Part D premiums.
The next potential tax you could pay as a result of doing a Roth conversion is Social Security taxation.
The fifth cost you could incur because of a Roth conversion is NIIT (Net Investment Income Tax) – also known as the Obamacare surtax.
NIIT is a 3.8% surtax on the lesser of your net investment income or the amount of your modified adjusted gross income that exceeds the threshold of $200,000 for single filers and $250,000 for married filing jointly.
The sixth tax you could potentially pay as a result of doing a Roth conversion is an indirect one and results from the phase out of certain credits or deductions.
The list of credits and deductions includes child tax credits, student loan interest deductions, the saver’s credit, and education credits.
Underpayment penalties is the seventh tax you could potentially pay by doing a Roth conversion.
David explains that many people opt to pay taxes on their Roth conversion in the fourth quarter.
The problem, however, lies in the fact that when you pay the taxes on your Roth conversion out of cash in the fourth quarter, the IRS expects you to have paid taxes on that Roth conversion evenly throughout the year.
The eighth and final tax you could end up paying as a result of doing a Roth conversion applies to those who are getting health insurance through the Affordable Care Act.
Does your Roth conversion push you above the subsidy threshold? If so, know that you could have a partial or total loss of subsidies or may have to repay subsidies at tax time.
“Think of all of these additional taxes or costs as tradeoffs, not problems or unintended consequences,” says David.
For example, you may pay increased Social Security taxation during your Roth conversion period, but will then eliminate Social Security taxation altogether by the time your conversion is complete.
If President Trump extends his tax cuts, then the national debt will grow to $62 trillion by 2035.
Most experts believe that the only way we can service this massive debt load is to dramatically increase income tax rates.
According to a recent Penn Wharton study, if the U.S. doesn't right its fiscal ship by 2040, no combination of raising taxes or reducing spending will prevent the nation’s financial collapse.
Remember: while it’s true that Roth conversions do cause you to pay additional taxes and expenses in the short term, they do dramatically reduce those costs over the balance of your life, once your conversion is complete.
Mentioned in this episode:
David’s national bestselling book: The Guru Gap: How America’s Financial Gurus Are Leading You Astray, and How to Get Back on Track
PowerOfZero.com (free video series)
@mcknightandco on Twitter
@davidcmcknight on Instagram
David McKnight on YouTube
Get David's Tax-free Tool Kit at taxfreetoolkit.com