The Health Insurance Subsidy Cliff Came Back, and It Changes the Roth Conversion Math

If you retired before 65 and you buy your own health insurance through the marketplace, the rules changed on January 1. The premium subsidy now stops completely at 400% of the federal poverty level, which for a couple in 2026 is $84,600 of income.

There is no phase-out at that line. One dollar over and the whole subsidy is gone for the year.

Two weeks ago I wrote about how to size a Roth conversion for 2026. This is the household that should think hard before doing one at all.

What changed

From 2021 through 2025 there was no upper income limit on the premium tax credit. Above 400% of the poverty level you still got help, and your share of the benchmark plan was capped at 8.5% of income. Those rules were temporary and they expired on December 31, 2025.

For 2026 the credit reverted to the structure that existed before 2021. Below 400% of the poverty level you get a sliding subsidy. Between 300% and 400% your share of the benchmark silver plan is capped at 9.96% of income. Above 400% you get nothing.

The poverty figures used for 2026 coverage are the 2025 guidelines. In the continental states that puts the cutoff at $62,600 for one person and $84,600 for a couple. Larger households get more room.

What counts as income for this

The marketplace uses a version of modified adjusted gross income that is broader than the one on your tax return. It is your adjusted gross income plus any tax-exempt interest, plus the portion of Social Security that is not already taxed, plus excluded foreign earned income.

Two things follow from that. Municipal bond interest does not help you here, because it gets added back. And a Roth conversion raises this number by the full amount converted, the same as any other IRA distribution.

Capital gains count too, so a large realization in a taxable account can do the same damage as a conversion.

What it costs to get this wrong

Take a couple, both 60, retired at 58 and living in Scottsdale. They buy a silver plan on the marketplace. Their 2026 income is $80,000, most of it from a taxable brokerage account. They have $900,000 in a traditional IRA and they would like to start moving some of it to a Roth before required distributions begin at 73.

The benchmark silver plan for the two of them runs about $2,026 a month in Arizona this year, or $24,312 for the year. At $80,000 of income they sit at 378% of the poverty level, so their required share is 9.96% of income, which is $7,968. The premium tax credit covers the difference, $16,344, and it arrives as about $1,362 a month off the premium.

Their room before the cliff is $84,600 minus $80,000, so $4,600.

Now say they convert $10,000. Income goes to $90,000, which is 426% of the poverty level. The credit drops to zero and they owe the full $24,312 themselves. They also owe income tax on the conversion, and at $90,000 of income their taxable income is $57,800 after the $32,200 standard deduction, so the conversion lands in the 12% bracket. That is $1,200 of federal tax and $250 of Arizona tax at the state's 2.5% rate.

Moving $10,000 into a Roth costs them $17,794.

Converting $4,600 instead, which is everything up to the line, costs $552 of federal tax and $115 of Arizona tax. They keep the whole subsidy. The first $4,600 is cheap. The dollar after it costs $16,344.

The subsidy gets reconciled on the return

The subsidy is usually paid in advance, straight to the insurance company every month, which is why the premium looks affordable all year. When you file, the return reconciles what you received against what you were entitled to.

If your income ends the year over 400%, you were entitled to nothing, and the whole amount you already received comes back as tax owed.

That used to be limited. Households under 400% of the poverty level had their repayment capped on a sliding scale. Those caps are gone for 2026 and later years. The full excess is repaid now, at every income level.

So a conversion done in late December reaches back and claws in the $16,344 the couple already received across the previous eleven months, and it lands on the return they file in the spring.

You cannot undo a Roth conversion

Until 2018 you could recharacterize a conversion, which meant unwinding it and putting the money back in the traditional IRA as though it had never moved. That option was eliminated for conversions. A contribution can still be recharacterized. A conversion cannot.

There is no correction available in April when your preparer works out that you crossed the line in December. The conversion stands and the repayment stands.

Congress is still arguing about this

The House passed a three-year extension of the enhanced subsidies on January 8, 2026. The Senate has not acted on it, and a bipartisan group there has been working on a shorter version. As of this writing nothing has passed, which means the cliff is the law for the 2026 coverage year.

Do not convert on the assumption that it gets fixed. If you skip a conversion this year and the subsidies come back, you convert next year and lose nothing but time. If you convert this year and the cliff is still standing in April, there is no way to reverse it.

When the cliff does not apply to you

Most households are not in this position, and for them the ordinary conversion analysis holds.

You are on Medicare. At 65 the marketplace subsidy is no longer part of the picture. Income still matters, because your 2026 return sets your 2028 Medicare premium surcharge, but that is a difference of roughly a thousand dollars per person rather than sixteen thousand.

Your coverage comes from somewhere else. Retiree coverage from a former employer, a spouse's active plan, VA or TRICARE benefits, or COBRA you are paying for directly. None of these involve the premium tax credit.

You are already well past the cliff. If your income is $160,000 there is no subsidy to lose, and a conversion is judged on brackets and Medicare surcharges like anyone else's.

You were never subsidized. Some people buy marketplace coverage and take no credit at all. Check the reconciliation section of last year's return if you are not sure.

What to do instead

Work out your headroom before you convert anything. That means a real estimate of the year's income, including interest, dividends and any capital gains you have already realized, measured against the cutoff for your household size.

Convert into the headroom and stop there. A $4,600 conversion every year for five years moves real money at a 12% federal rate and keeps the subsidy intact each time.

Do the arithmetic in November, when the year is nearly complete and you can see the dividends and the gains rather than guessing at them. A conversion takes a few days to process, so leave room before December 31.

Then look at the years after 65. Between Medicare enrollment and the first required distribution at 73 there is a stretch with no subsidy cliff and no forced withdrawals, and for most early retirees that window is where the large conversions belong. Map that window before you use up bracket space you will want later.

One caution on doing this yourself. The subsidy cliff, the bracket, the Arizona flat tax and the Medicare lookback all read from slightly different definitions of income, and it is common to optimize one and trip another.

I am an Enrolled Agent, admitted to practice before the Internal Revenue Service, and I prepare returns alongside the planning work, so the conversion and the return that reports it get handled by the same person.

If you want your 2026 headroom calculated against your actual coverage before you convert anything, that is a conversation worth having.

Aaron Randak, CFP®, EA · Golden Acre Wealth Management · Scottsdale, Arizona

Golden Acre LLC dba Golden Acre Wealth Management is an investment adviser registered with the Arizona Corporation Commission, CRD #337930. This article is educational and is not individualized tax, investment, or legal advice. Tax rules change and their application depends on your specific circumstances. Premiums vary by county, age, plan and carrier; confirm your own plan's figures through the marketplace or your insurer.