Fidelity warns Roth IRA conversions can backfire | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

Roth individual retirement account conversion transactions jumped 41% compared with the same period a year earlier, Fidelity’s first-quarter 2026 retirement analysis found.

The One Big Beautiful Bill Act permanently extended lower federal income tax rates, and many retirees now see a window to convert at today’s brackets.

But Fidelity Investments is urging caution, warning that rushing the move without modeling its full impact can do more harm than good.

Every dollar converted counts as ordinary income for that tax year, and the resulting income spike can trigger costs that extend beyond the initial tax bill.

The Federal Tax impact of a large Roth conversion

A Roth conversion moves pre-tax retirement savings into a Roth account, where future qualified withdrawals are generally tax-free after a five-year holding period, Fidelity stated.

The trade-off is that each dollar converted is included in the annual adjusted gross income, increasing the amount of income subject to federal taxation.

A married couple with $170,000 in combined pension, wage, and Social Security income who converts $80,000 to a Roth could see their taxable income push past the $211,400 top of the 22% bracket for joint filers in 2026, moving the excess into the 24% bracket, according to the Internal Revenue Service.

Fidelity Viewpoints notes that investors who lack the cash to cover the resulting tax bill often pay it from the converted balance, shrinking the amount that grows tax-free inside the Roth.

For individuals under age 59-and-a-half, using retirement funds to pay the resulting tax bill may also trigger a 10% early withdrawal penalty, Fidelity cautioned.

The Medicare surcharge most retirees overlook in Roth conversions

The increase in tax liability is reflected on the tax return, but a less apparent consequence can emerge through higher Medicare income-related monthly adjustment amounts (IRMAA) that may persist for years.

For 2026, Medicare charges the surcharge when modified adjusted gross income crosses $109,000 for single filers or $218,000 for married couples filing jointly, according to data from the Centers for Medicare & Medicaid Services (CMS).

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Unlike tax brackets, the IRMAA operates as a cliff, meaning a single dollar above the threshold triggers the full surcharge for the entire tier, Kiplinger reported.

“People don’t know what IRMAA is,” Nancy Gates, lead educator and financial coach at Boldin, told Kiplinger. “They could pay three times what everyone else pays for Medicare.”

The timing creates another complication, as Medicare determines premiums based on tax returns filed two years earlier, rather than income reported during the current year.

A conversion completed in 2026 would first affect premiums in 2028, when the higher income enters Medicare’s two-year lookback window.

A married couple in which both spouses are enrolled in Medicare could face about $1,949 per year in additional Part B premiums alone, based on the $81.20 monthly surcharge.

Conversions completed in 2018 or later are also irreversible, because the Tax Cuts and Jobs Act eliminated the ability to recharacterize a Roth conversion for tax years beginning after Dec. 31, 2017, the IRS confirmed.

A Roth conversion could unexpectedly increase your Medicare premiums years later if your income crosses IRMAA surcharge thresholds.

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The case for spreading Roth conversions across lower-income years

Mercer Advisors and Fidelity Viewpoints recommend smaller annual conversions during years when taxable income naturally remains lower, allowing taxpayers to manage tax exposure over time.

Bryan Strike, senior director of financial planning at Mercer Advisors, identifies the gap between retirement and required minimum distributions as the ideal conversion window.

In a Mercer Advisors example, a couple with $110,000 in base income converts $60,000 per year during that window and remains within the 22% bracket.

That approach prevents the couple from being pushed into the 32% bracket or higher once mandatory withdrawals begin at age 73, the firm’s analysis explained.

Bryan Hwang, a vice president with Fidelity Private Wealth Management, wrote in Fidelity’s Viewpoints article on Roth IRA conversions that Roth conversions can serve a dual purpose by reducing both the account holder’s future income tax burden and the taxable value of the estate passed on to heirs.

The Roth conversion can be quite valuable, not only from an income tax perspective, but also from an estate tax perspective.

Converting before mandatory withdrawals begin also shrinks the traditional balance that heirs must deplete within 10 years under the SECURE Act’s distribution rule.

What to weigh before converting a traditional IRA to a Roth

The number of years before required minimum distributions begin at age 73 can determine how much opportunity remains to spread conversions across lower tax brackets and manage taxable income over time.

A large conversion could increase modified adjusted gross income enough to cross an IRMAA threshold, potentially resulting in higher Medicare premiums beginning two years later.

The ability to pay the resulting tax bill with funds outside the retirement account is another factor.

Using separate cash reserves allows the full converted amount to remain invested in the Roth account rather than reducing the benefit of the conversion, Fidelity reported.

State tax rules can also influence the decision, particularly for individuals who expect to relocate to a state with no income tax before or during retirement.

Fidelity and Mercer Advisors both frame timing and surrounding circumstances as central to whether a Roth conversion delivers a net benefit, alongside the mechanics of the conversion itself.