How to calculate the tax cost of a Roth conversion

Step 1: Project your ordinary income for the year

Start with your expected wages, pension, Social Security (taxable portion), interest, dividends, RMDs (if applicable), and any other ordinary income. This is your baseline before the conversion.

Step 2: Add the conversion

The full conversion amount (minus any after-tax basis from nondeductible contributions) gets added to ordinary income. If you're considering a $50,000 conversion and your baseline ordinary income is $80,000, your projected income for the year becomes $130,000.

Step 3: Compute federal tax

Apply the federal tax brackets to the new income level. Most importantly, identify the marginal rate on the conversion amount. If the $50,000 conversion straddles two brackets (say, the 22% and 24% brackets), part of it is taxed at 22% and part at 24%. The blended marginal rate is what matters for the conversion decision.

Step 4: Add state income tax

Most states tax Roth conversions as ordinary income at the state rate. Nine states have no income tax (AK, FL, NV, NH, SD, TN, TX, WA, WY) and pay $0 in state tax on conversions. Everywhere else, add the state marginal rate to your federal cost.

Step 5: Check IRMAA exposure

Here's the one most calculators miss. If you're between age 63 and Medicare-eligible (or already on Medicare), the conversion adds to MAGI two years out. Compare your projected MAGI to the IRMAA brackets for the relevant year. If the conversion pushes you into a new tier, add the resulting Part B and Part D surcharges (per spouse, for 12 months) to the cost.

Step 6: Check NIIT

The 3.8% Net Investment Income Tax applies to the lesser of (a) your net investment income or (b) the amount your MAGI exceeds $200,000 (single) or $250,000 (married filing jointly). A conversion pushes MAGI up, which can pull more of your investment income into NIIT range — even though the conversion itself is not investment income.

Step 7: Check Social Security taxation

If you collect Social Security, up to 85% of benefits become taxable as your "combined income" rises. A Roth conversion can push more of your Social Security from the 0% or 50% bands into the 85% band. This effective extra tax is sometimes called the "Social Security tax torpedo."

Step 8: Add it all up

True conversion cost = federal tax on conversion + state tax + IRMAA cost (per year, for years affected) + incremental NIIT + incremental SS taxation. Compare this total to the projected tax savings of having that money in a Roth instead of a traditional account during retirement. If the cost today is less than the savings later (in present value), the conversion makes sense.

Bottom line

A Roth conversion calculator that only computes federal marginal tax misses 30-50% of the real cost for most clients. The five-variable approach above is what separates a back-of-envelope conversion check from real planning.