One MAGI budget: why Roth conversions and ACA subsidies fight

Last reviewed July 2026 · 5 min read

Early retirees quickly discover that two of their best tax strategies want the same scarce resource. Roth conversions want income to be recognized in cheap years; ACA premium subsidies want income to stay low in those same years. Both are keyed to one number — modified adjusted gross income — and every low-income year hands you exactly one MAGI budget to spend.

One number, many programs

For ACA purposes, MAGI is essentially your adjusted gross income plus a few add-backs (tax-exempt interest, untaxed Social Security, excluded foreign income). The details matter less than the punchline: a Roth conversion lands in MAGI dollar-for-dollar, realized capital gains land in MAGI, but withdrawing Roth contributions or spending cash does not. The same MAGI concept (with minor variations) later drives Medicare’s IRMAA surcharges — so this budget doesn’t disappear at 65, it just changes landlords.

The subsidy side of the ledger

With the enhanced pandemic-era credits expired after 2025, the premium tax credit reverted to its statutory shape, cliff included: subsidies phase down as income rises and vanish entirely once MAGI exceeds 400% of the federal poverty level. For 2026 coverage (which uses the 2025 poverty guidelines), the line for a two-person household in the 48 contiguous states is 4 × $21,150 = $84,600. One dollar over and the entire credit is gone — for an older couple paying age-rated premiums, that single dollar can cost well over ten thousand dollars. Below the cliff the math is smoother but still real: near the top of the scale you’re expected to contribute up to roughly 9.96% of MAGI toward the benchmark plan for 2026, so each extra dollar of income also claws back a slice of subsidy on its way up.

The conversion side of the ledger

The case for converting in exactly these years is just as strong. Between the last paycheck and the start of Social Security and RMDs, the standard deduction ($32,200 for a couple filing jointly for 2026) and the 10% and 12% brackets sit empty. Conversions done now, at low rates, defuse the forced income that arrives at 73 or 75 and compounds tax-free forever after. The window is finite — skip enough cheap years and the pre-tax balance simply grows into a bigger problem.

Why they fight — and what a conversion really costs

Every converted dollar raises MAGI, and below the cliff each dollar of MAGI claws back subsidy. That clawback behaves like a surtax stacked on top of your bracket: a conversion nominally taxed at 12% can effectively cost 25–30% once the lost premium credit is counted — and approaching the 400% line, the marginal cost of the last dollar is effectively unbounded. After 65 the same fight continues under different rules: IRMAA looks at MAGI from two years earlier and, for 2026, starts adding surcharges once a joint return shows MAGI above $218,000 ($109,000 single) — so conversions at 63 set premiums at 65.

Spending the budget deliberately

There is no universal answer, only arithmetic. Common patterns: pick a lane each year (convert hard in years without marketplace coverage — before it starts, or between 65 and the IRMAA thresholds — and protect the subsidy in years you need it); convert up to a MAGI target rather than a bracket top when the subsidy is in play; or deliberately sacrifice the subsidy in a few years because the RMD problem is the bigger monster. Which pattern wins depends on portfolio size, ages, and premiums — it is a numbers question, not a principles question.

Try it in Deorbit Plan

The dashboard’s Taxes & MAGI vs ACA cliff and IRMAA chart draws your simulated MAGI against both sets of thresholds year by year, so a conversion plan that grazes the cliff is visible immediately. In the Strategy panel, the fill-bracket conversion strategy includes a cliff-aware option — Stay this far below the nearest cliff — that caps each year’s conversion short of the ACA or IRMAA line by a margin you choose. Then run Strategy Lab Tool 2 — Strategy sweep & frontier (open the Lab): it compares conversion strategies on identical market draws and prints a cliff-margin readout showing how close each one comes to giving your MAGI budget away.

Educational content only — not financial, tax, or investment advice.

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