Samples · Explorable memo

Your real marginal rate in retirement

Why the next dollar of a retiree’s income can cost far more than their tax bracket says — and what that means for a Roth conversion this year.

Fictional case · Tax year 2026 · Federal income tax and Medicare premiums · Every figure recalculates as the facts change

Model scope

Tax year
2026; Medicare estimates use 2026 premium tiers
Supported situations
US federal ordinary-income planning for single or joint filers, assuming age 65 or older, Medicare Parts B and D, and the standard deduction. Uses 2026 premium tiers as a proxy for 2028 premiums.
Exclusions
State tax, qualified dividends, capital gains, itemizing, credits and net investment income tax. The future Medicare premium estimate is not a published 2028 schedule.
Last scope review
— checked against the model and its documentation; not a tax-law update.

IssueWhat does the next dollar of income really cost?

The couple are considering converting part of a traditional IRA to a Roth IRA this year. The conversion is taxed as ordinary income. The question is not just which bracket they are in, but what each extra dollar actually costs once every rule that keys off their income is counted — and whether converting now beats paying tax on the same money later.

Short answerThe bracket understates the cost

LawFour rules key off the same income

Each rule is simple on its own. The cost comes from their overlap: a single extra dollar of IRA income can move all four at once.

1. Brackets and the standard deduction

Ordinary income above the standard deduction is taxed at 10% to 37%. For 2026 the standard deduction is $32,200 for a joint return and $16,100 for a single filer, plus $1,650 for each spouse aged 65 or older on a joint return ($2,050 for a single filer).

IRC §1(j), §63(c), §63(f); Rev. Proc. 2025-32

2. Taxation of Social Security benefits

Provisional income is other income plus tax-exempt interest plus half the benefits. Above $32,000 (joint) or $25,000 (single), each extra dollar makes 50¢ of benefits taxable; above $44,000 or $34,000, 85¢ — until 85% of the benefits are taxable. These thresholds have never been indexed for inflation. In the 85¢ zone one extra dollar of IRA income adds $1.85 of taxable income.

IRC §86

3. The senior deduction and its phase-out (2025–2028)

Each taxpayer aged 65 or older gets an extra deduction of up to $6,000, reduced by 6% of modified adjusted gross income above $150,000 (joint) or $75,000 (single). For a couple who both qualify, each dollar in the phase-out range removes 12¢ of deduction. It is scheduled to expire after 2028.

IRC §151(d)(5)(C), added by Pub. L. 119-21 §70103

4. Medicare premium surcharges (IRMAA)

Medicare Part B and Part D premiums rise in steps once modified adjusted gross income (adjusted gross income plus tax-exempt interest) passes $218,000 (joint) or $109,000 (single). The steps are cliffs: one dollar over a threshold raises the surcharge for the whole year, for each enrolled spouse. Premiums are set from income two years earlier, so 2026 income sets 2028 premiums; this memo uses the 2026 tiers as the best available estimate.

42 U.S.C. §1395r(i); 42 CFR §418.115; CMS 2026 premium announcement; SSA POMS HI 01101.020

AnalysisWhere the next dollar goes

The real marginal rate across the conversion

Each band is one rule’s contribution to the tax on the next dollar, at every conversion amount from zero up. Vertical rules mark the Medicare premium cliffs. Hover or tap the chart for the figures.

Stacked step chart of the real marginal tax rate against the size of the Roth conversion. The full figures are in the table under Sensitivity.

SensitivityWhere the answer changes

Real marginal rate by range of conversion
Conversion rangeBracketSocial SecuritySenior deductionReal rate
Medicare premium cliffs
Medicare cliff at a conversion ofTierExtra premium a year

ConclusionWhat to do this year

This memo answers one question — what converting costs now. A full recommendation also weighs the future rate more carefully (required distributions, a surviving spouse filing single, heirs’ brackets), where the tax on the conversion is paid from, and state tax.

AssumptionsWhat this memo leaves out

  • Federal tax only, for tax year 2026. No state income tax.
  • All other income is ordinary (pensions, IRA distributions, interest). Qualified dividends and capital gains, which stack differently, are not modelled.
  • Both spouses are 65 or older and enrolled in Medicare Parts B and D; the single filer likewise.
  • Standard deduction, no itemizing. No credits, and no net investment income tax (IRA income is not investment income, though it raises the income that tax keys off).
  • Medicare surcharges use the 2026 tiers for income that will be measured for 2028 premiums.

SourcesResearch and authority

  • William Reichenstein and William Meyer, “Understanding the Tax Torpedo and Its Implications for Various Retirees,” Journal of Financial Planning, July 2018.
  • William Reichenstein and William Meyer, research on Roth conversions and income-related Medicare premiums, Financial Planning Association, February 2020.
  • Alex Rees-Jones and Dmitry Taubinsky, “Measuring ‘Schmeduling’,” Review of Economic Studies, 2020 — on how often people mistake their average rate for their marginal rate.
  • IRS Rev. Proc. 2025-32 (2026 inflation adjustments); IRC §§1, 63, 86, 151(d)(5)(C); Pub. L. 119-21.
  • CMS 2026 Medicare Parts B and D premiums; SSA POMS HI 01101.020 (2026 income-related monthly adjustment amounts).

Educational sample on a fictional case; not tax advice. The model is checked by tests/verify-real-marginal-rate.mjs against hand-worked cases before publication. How planning packages work →