Roth conversions and ACA subsidies before Medicare
Model the hidden cost of a Roth conversion when additional MAGI reduces or eliminates a Marketplace premium tax credit.
A taxable Roth conversion generally increases ACA MAGI dollar for dollar. For an early retiree near 400% FPL in 2026, the conversion can trigger both income tax and the complete loss of the premium tax credit.
Measure the subsidy tax
The cost of a conversion is not limited to the federal and state income tax on the converted amount. Additional MAGI can increase the household's expected premium contribution and reduce the credit. Crossing the 400% FPL ceiling can make the marginal cost unusually large.
Use a two-scenario comparison
- Calculate the credit before the conversion using the expected full-year benchmark premium.
- Add the proposed conversion to MAGI and calculate again.
- Treat the credit reduction as an additional cost of the conversion.
- Compare that cost with the future tax benefit of moving funds to Roth.
Coordinate the decision across years
A smaller conversion, deductible HSA contribution, or different realization date may preserve eligibility, but each move has separate tax and eligibility rules. Before Medicare, use HSAIndex's contribution calculator to test eligible contribution room. After age 65, Medicare enrollment ends HSA eligibility and higher MAGI may affect IRMAA two years later. Planning should bridge all three systems rather than optimize one number in isolation.