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EVERY ARTICLE ABOUT Roth conversions says the same thing: pay the tax from taxable money, not from the IRA.
That is good advice if you have taxable money.
Plenty of retirees do not. Their savings sit almost entirely in a traditional IRA, built from years of 401(k) contributions and a rollover at retirement, with little brokerage money and no cash reserve worth naming.
For them, “pay from outside money” is not advice. It is a condition they do not meet. Their real choice is a self-funded conversion or no conversion at all.
The familiar warning is that self-funding requires a gross-up. You withdraw money to pay the conversion tax, that withdrawal is itself taxable, so you have to withdraw a little more.
Less discussed is what else that withdrawal sets off. It makes more of your Social Security taxable, it raises your Medicare premiums two years later, and in a high-tax state it enlarges the amount that has to leave the IRA. Here is what those three cost, on one household.
A cautious conversion
Meet Dianne, a composite rather than a real person. She is 66, single, retired to Florida, with $1 million in a traditional IRA and nothing outside it. Social Security pays her $28,000 a year.
She is past 59 and a half and already on Medicare. Florida keeps state income tax out of the arithmetic for now.
She converts $40,000. Careful, modest, the size people choose when they are trying not to do anything dramatic.
The tax on that conversion, paid from a checking account she does not have, would be $4,234. Funding it from the IRA instead, the withdrawal that covers it is $5,125, and her tax rises to match.
That extra $891 is 17.4% of the $5,125 she withdrew. Her ordinary-income bracket is 12%.
Twelve of those points are the tax on the withdrawal itself, which is the gross-up everybody expects. The other 5.4 points come from $2,300 of her Social Security being pulled into taxable income by that same withdrawal.
Paying from cash, $21,500 of her benefit would be taxable. Self-funding, $23,800 is. The difference is caused by how she paid, not by what she converted, and nothing on her return will label it.
Not a smaller version of a large one
The effect is not linear. Run the same woman at $150,000 and 85% of her benefit, the statutory maximum, is already taxable before she funds the tax. The funding withdrawal drags in nothing further, and this particular cost is zero.
That is not an argument for converting more. It is an argument against assuming a small conversion is simply a smaller version of a large one. The one that looks cautious can carry the higher marginal rate.
What self-funding actually costs
Give Dianne the $150,000 conversion, still with no outside cash, and add the state question.
Still in Florida, $195,469 has to leave the traditional IRA to put $150,000 into the Roth. Move her to California, changing nothing else, and it is $219,751. That is $1.30 of IRA spent for every dollar reaching the Roth, against $1.47, and the gap is California income tax compounded through the gross-up. If a move across state lines is anywhere in your plan, the order of operations may matter more than the size of the conversion.
But $1.47 invites a conclusion it does not support, and I would rather correct that myself than let it travel. A conversion is taxable whichever pocket pays.
Of the $69,751 Dianne withdraws in California, roughly $44,639 replaces cash she would have spent anyway. The incremental cost of self-funding, in wealth given up, is $25,111. About 17% of the conversion, not 47.
The bill that arrives in 2028
At that $150,000 conversion, self-funding also costs Dianne $1,735 in higher Medicare premiums, a surcharge of $6,355 rather than $4,620, charged on top of the standard premium, for one year, and hers alone as a single filer.
The bill arrives two years late. Medicare sets her 2028 premiums from her 2026 income, so the cost is invisible at the moment she is deciding how to pay the 2026 tax.
When it can still make sense
Doing nothing is not free either. Money left in a traditional IRA comes out eventually, under required distributions, at whatever rates apply then, possibly to a survivor filing single, possibly to heirs facing a 10-year deadline.
Where self-funding still holds up, a few things tend to be true.
The rate gap is durable rather than a one-year accident. Whether it repays a cost this size depends on time, future tax rates and investment returns. A temporary dip in income is a thin foundation. A structural window, after retirement and before Social Security or required distributions begin, is more compelling.
There is runway, because shrinking the portfolio to change its tax character needs years of tax-free growth to earn back.
Age 59 and a half is cleanly behind you. The converted amount is not subject to the 10% additional tax on early distributions. A separate distribution taken to pay the tax generally is, unless an exception applies.
And enough is left afterward. Check the balance after the funding withdrawal, not after the conversion. Dianne’s California IRA drops to $780,249, and whether that funds the next 30 years matters more than whether the conversion was tax-efficient.
A practical warning about withholding
Withholding from the conversion is not a cheaper way to pay the tax. It reduces what reaches the Roth.
Elect 24% on Dianne’s $40,000 conversion, as this illustration does rather than as any custodian requires, and $9,600 goes to the IRS while $30,400 lands in the Roth, against $4,234 actually owed. The cash comes back next spring as a refund. The Roth room does not come back at all.
Restating the rule
Pay the conversion tax from outside cash if you have it. That remains the best answer.
It is not an answer for the retiree whose savings are almost entirely in a traditional IRA. For that person, “never pay from the IRA” skips the actual decision, which is whether a self-funded conversion, with its full marginal cost, beats leaving the money where it is.
Before deciding, count the gross-up, the Social Security effect, state tax and the Medicare bill two years later. Sometimes that arithmetic still says no. It beats applying a rule written for somebody with a different balance sheet.
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John Urban is the founder of RetireSmartIRA, a retirement tax-planning app. Earlier, he founded GT Nexus, a supply-chain software company acquired by Infor in 2015. He lives in Northern California with his wife, Kathy, and enjoys time with family, travel, reading, Bay Area sports, and the occasional deep dive into the fine print of the tax code.
I enjoyed reading your informative Humble Dollar article John. Thank you for posting.
After reading your article and the many comments I was thinking back upon my final working years as a tax preparer and the problems clients were having regarding the rule changes on inherited IRAs. Instead of writing a comment or forum post on Humble Dollar I happily found your excellent article titled “The Inherited IRA 10-Year Rule: RMDs and Tax Impact in 2026” on your website. In that article you addressed many changes from the first SECURE Act and how it impacts those who have or will inherit either a traditional or Roth IRA. Another thank you, I recommend reading your article.
I did have a few other thoughts on these topics. A short summary of my thoughts of other matters to consider follows-
Many spousal beneficiaries inheriting a IRA may be past their own full retirement age. Unfortunately sometimes a knowledgeable preparer or advisor are first engaged past the time that RMDs should have been distributed and sometimes where RMDs have not been taken for multiple years. The preparer has now been recommend to the client as a result of a letter from the IRS addressed to the widow(er) years after the death of a spouse. Plan on a lot of time to resolve the issues, have necessary distributions made, file all needed amended returns and request abatement of the penalty(s) with the appropriate form and expect to include a long statement of the reasonable cause to reduce the penalty from the 25% level to the 10% level or even a complete abatement.
When thinking about the ten year requirement planning for non-spouse beneficiaries to empty the inherited IRA I have seen still working beneficiaries with earned income who had room to increase 401(k) and/or IRA contributions and then schedule out receiving inherited IRA distributions while simultaneously increasing their contributions for ten years thus effectively extending the inherited deferrals in their own retirement accounts for the beneficiaries life plus 10 years while keeping their cash flow and taxable income approximately the same.
Getting your primary and contingent beneficiary designations as you want them is crucial to achieve your goals for passing your IRAs as you intend them to be distributed. I believe this should be a formal every year best practice and again every time there is a major life event.
If there are multiple beneficiaries of your IRA the beneficiaries need to under the requirements as explained in IRS Pub 590-B related to separate accounts –
“A single IRA can be split into separate accounts or shares for each beneficiary. These separate accounts or shares can be established at any
time, either before or after the owner’s required beginning date. Generally, these separate accounts or shares are combined for purposes of determining the required minimum distribution. However, these separate accounts or shares won’t be combined for required minimum distribution purposes after the death of the IRA owner if the separate accounts or shares are established by the end of the year following the year of the IRA owner’s death.”
If the decedent was still working past age 70.5 and still contributing to a traditional IRA there are potential limitations on QCD’s.
Per IRS Pub 590-B(2025)-
Offset of QCDs by amounts contributed after age701/2.
Beginning in tax years after December 31, 2019, the amount of QCDs that you can exclude from income is reduced by the excess of the aggregate amount of IRA contributions you deducted for the taxable year and any prior year that you were age 701/2 or older over the amount of the IRA contributions that were used to reduce the excludable amount of QCDs in all earlier years.
Again, thanks John for your article.
Best, Bill