What a Roth Conversion Costs Michigan Retirees Without a Structured Plan

Your accountant mentioned a Roth conversion, and it sounds like a smart move. But if nobody has mapped what happens to your Medicare premiums, your Social Security tax, and your Michigan deduction in the same year you convert, you can pay far more than you bargained for.

This is not a reason to avoid Roth conversions. It is a reason to do them deliberately, with a written plan that accounts for every moving part.

The Window That Opens When You Retire

The years between the day you stop working and the day your Social Security and Required Minimum Distributions begin are the cheapest tax years many people will see for the rest of their lives. Your income drops. Your tax brackets drop with it. That gap is the best chance you have to move money out of a pre-tax account and into a Roth at a lower cost.

Think of your traditional IRA or 401(k) as Uncle Sam's retirement plan. Every dollar in it belongs to you in name, but he sets the rules on when you take it and how much you pay when you do. A Roth account is yours. No Required Minimum Distributions, no forced timing, no federal tax on the growth or the withdrawals.

Converting during the gap years is how you shift money from his plan to yours. The mistake is converting without knowing how much that shift costs in a given year, or whether the cost is avoidable.

The Haphazard Conversion Problem

Here is what happens when a conversion is done without a plan. An accountant suggests converting $80,000 in one year. The client does it, pays the federal tax, and the year seems to close cleanly.

What they missed: that $80,000 pushed their Modified Adjusted Gross Income across an IRMAA threshold. IRMAA is Medicare's income-related surcharge. Cross the line by a dollar and your Medicare Part B and Part D premiums rise for the whole next year, for each spouse. For a married couple the surcharge can run into thousands of dollars, and it compounds because each spouse pays it separately.

They may also have made up to 85 percent of their Social Security benefit federally taxable. And if they paid the conversion tax from the IRA instead of a non-qualified account, they shrank the very balance they were trying to protect.

This is the Haphazard Withdrawal in another form. Pulling money from the wrong account at the wrong time costs you twice: once in tax, once in lost growth. A conversion done without a plan does the same.

How Michigan Taxes a Roth Conversion

Michigan retirees have one more layer, and it changes the math.

Under Public Act 4 of 2023 (the Lowering MI Costs Plan), Michigan is phasing out the limits on the state retirement income deduction through 2026. For the 2025 tax year, retirees born between 1946 and 1966 can deduct up to $49,422 filing single or $98,845 filing jointly. In 2026 the deduction reaches full phase-in for all retirees, regardless of birth year: $67,610 single or $135,220 joint. (Source: Michigan ORS and Treasury guidance on PA 4 of 2023.)

Michigan taxes income at a flat 4.25 percent, and retirement income above the deduction cap is still taxed at that rate. A Roth conversion adds to your income in the year you convert. Depending on how much you convert and how much other retirement income you have, part of that conversion can land above the cap and face Michigan tax on top of the federal bill. So the size of each conversion should be set with the Michigan cost in view, not the federal cost alone.

What a Structured Plan Looks Like

A structured, multi-year plan does not pick a number and execute it. It starts by counting how many low-bracket years you have before Social Security, RMDs, and pension income narrow the window. It works out which brackets, federal and Michigan, you can fill before the next dollar of conversion turns expensive.

It tracks your Modified Adjusted Gross Income against the IRMAA thresholds, which change each year. It accounts for the five-year rule, which requires converted dollars to sit for five years before you can withdraw them tax-free. And it takes the tax payment from a non-qualified account so the converted balance stays whole inside the Roth.

I build these plans as a multi-year sequence, not a single-year transaction. As a Retirement Income Certified Professional and IRMAA Certified Planner, I work to move as much as possible into your own tax-free account during the gap years without triggering surcharges, provisional taxes, or needless Michigan tax. For many Michigan retirees, the 2026 full phase-in changes how much income can come out at a lower state cost. If your current plan was built before that change, it is worth another look.

See What Your Conversion Window Looks Like

If you have been told a Roth conversion makes sense but nobody has built a year-by-year plan, you are working with half the information. In a Discovery Session we map your window: how many gap years you have, which brackets you can fill, where the IRMAA cliffs sit against your income, and how Michigan's deduction phase-in affects the math in your household.

You will leave with a clear picture of what a structured conversion could look like for you, and what it costs to convert without one.

Book a Discovery Session: https://www.newhorizonretirements.com/book