He Retires at 61 on an ACA Plan and Converts $80,000 to a Roth. His Premium Tax Credit Shrinks, and the Bill Comes Due at Tax Time

A retiree who buys marketplace health coverage before Medicare runs into a problem with Roth conversions: every taxable dollar converted also counts as income for the Affordable Care Act premium tax credit. Starting with the 2026 tax year, crossing the income line can wipe out the credit entirely, and there is no cap on how much of the advance credit has to be paid back. Any shortfall shows up on the tax return in April.

Conversion Dollars Count Toward Credit Income

Under the tax code, a conversion is treated as a distribution (26 U.S.C. § 408A(d)(3)(C)). The amount that would have been taxable “shall be included in gross income” (§ 408A(d)(3)(A)(i)). Treasury Regulation 1.408A-4, A-7(a), notes that the converted amount is taxable under the rules of section 408(d)(1) and (2) in the year the money leaves the traditional IRA, minus any portion that is a return of basis. A-9 says the taxable conversion amount is “included in income for all purposes.”

For the credit, modified adjusted gross income means AGI plus three add-backs: excluded foreign earned income, tax-exempt interest, and the untaxed portion of Social Security benefits (26 U.S.C. § 36B(d)(2)(B)). Conversion income is not removed anywhere in that formula, so all of it feeds straight into the number the credit is based on.

2026 Rules Turn a Smaller Credit Into Zero

IRS Publication 505 for tax year 2026 lists two changes. Beginning in 2026, if household income is “more than 400% of the federal poverty line, you are no longer eligible for the premium tax credit.” There is also “no longer a limit on the amount you will have to pay back” for extra advance credit, even for households below 400%. One year earlier, the rule was different. Publication 974 says that for tax year 2025, households above 400% of the poverty line may be allowed a PTC. Premiums may keep going up, too: Georgetown University researchers expect more ACA premium spikes in 2027 amid federal policy changes.

Hypothetical: A 61-Year-Old Converts $80,000

Take a hypothetical single retiree, age 61. He expects $40,000 of other income in 2026, and his marketplace application shows that amount. Based on that estimate, the exchange sends $700 a month in advance credit to his insurance company. Later in 2026, he converts $80,000 from a traditional IRA that has no basis.

1. Credit MAGI: $40,000 + $80,000 = $120,000.
2. Eligibility: For this example, assume $120,000 is above 400% of the poverty line for a household of one. Confirm the current figure in the Form 8962 instructions.
3. Credit allowed: Under the 2026 rule, his household income is over the line, so his credit is zero.
4. Advance credit received: $700 × 12 = $8,400.
5. Repayment: When advance payments are larger than the credit allowed, the tax owed “shall be increased by the amount of such excess” (§ 36B(f)(2)). With no repayment cap for 2026, he notes the full $8,400 to his tax bill, on top of the income tax on the $80,000.

Form 8962 Settles the Bill at Filing

Each year the marketplace sends Form 1095-A showing the advance payments. Filers then complete Form 8962 to compare those payments with the credit they actually qualify for. In the current Form 1040 instructions, extra advance payments appear on Form 8962, line 29 and carry to Schedule 2, line 1a. Treasury Regulation 1.36B-4(a) requires taxpayers to reconcile the amount of credit allowed under section 36B with advance credit payments on the return. Line numbers can change, so check the 2026 form.

Planning Moves to Make Before December 31

• Size the conversion to fit under the line. Work out base income first, then the room left below 400% of the poverty line. Converting only that amount each year before Medicare keeps the credit.
• Save larger conversions for the year Medicare starts. Once the marketplace credit is no longer involved, a bigger conversion costs less. Medicare has its own income test, though. In 2026, IRMAA surcharges begin above $109,000 for single filers. In the first surcharge tier, the monthly Part B premium rises from $202.90 to $284.10.
• Update the marketplace income estimate during the year. Report a planned conversion right away. Lower advance payments for the rest of the year mean a smaller bill when you reconcile.
• Remember the calendar-year cutoff. Conversion income counts in the year the money is distributed or transferred from the traditional IRA.

Who Should Skip Conversions Before Medicare

These questions can help you decide:

• Is the credit you would lose bigger than the tax you expect to save later by converting now?
• Do you have cash outside the IRA to pay both the conversion tax and any credit repayment?
• Will your tax bracket after Medicare starts be lower than it is now?
• Will a large conversion later push you into IRMAA surcharges?

Big conversions during marketplace years are usually a poor fit for retirees who depend on a large credit, have little cash outside retirement accounts, or expect lower brackets later. They can work for retirees whose income is already above the eligibility line, or who are paying full price for coverage anyway. For many people, the cheapest conversion years are the quiet stretch between the last paycheck and the first required withdrawal, which is the whole subject of our free Roth window guide.

Things to keep an eye on: the 2026 Form 8962 instructions, which will list the current poverty-line figures, and 2027 marketplace premium notices.

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