HOW ROTH CONVERSIONS CAN AFFECT MEDICARE PREMIUMS

I assume you are talking about the Medicare IRMAA (Income Related Monthly Adjusted Amount).

Everybody pays Medicare premiums for Medicare Part B and Part D.  These premiums fund these programs - 25% of the cost to keep these parts of Medicare running is paid by the beneficiary and 75% of the cost is paid by the government out of general revenues.  

We have a lot of people that make so little that they can't pay all of these premiums so somebody else has to directly help out since Medicare is a closed "Trust Fund" system - actually (2) separate ones -

1.  Part A or HI (Hospital Insurance) Trust Fund - funded by payroll deductions which you and your employer pays while you are working.  Medicare Part A is free for most people since they have made these contributions while working.  

2.  Part B or SMI (supplemental medical insurance) Trust Fund is developed based on usage of the program and the % which I described above (25%/ 75%)

To help out, in this regard, those with higher incomes (begins at $ 91,000 for a single or $ 182,000 for couple) pay a surcharge added to the monthly Medicare Part B and Part D premiums, based on your yearly income. The Social Security Administration (SSA) uses your income tax information from 2 years prior to determine if you owe an IRMAA in addition to your regular Part B & Part D monthly premium.

The income-related monthly adjustment amount (IRMAA) sliding scale is a set of statutory percentage-based tables used to adjust Medicare Part B and Part D prescription drug coverage premiums. The higher the beneficiary’s range of modified adjusted gross income (MAGI), the higher the IRMAA.

Doing a ROTH conversion takes planning to avoid this MAGI increase and thus higher Medicare premiums.  You can do it prior to this (2) year mark - in fact, it is best to do it over several years to modify any income tax liability by increasing one's income and thus tax rate.

The reason why IRMAA premiums are affected by a ROTH conversion is because that is when you have to pay regular income taxes on the amount you are converting from a tax deferred retirement (IRA) to a growing tax free retirement account (ROTH).

Any other time, you would pay ordinary income tax on just distributions from your deferred retirement account - 

Income taxes have to be paid on the deferred retirement distribution OR ROTH conversions - how this money flows to you in amount is up to you as long as you meet the RMD. 

A ROTH conversion is NOT one of the allowable exceptions to the IRMAA surcharges.

HHS.gov - Medicare Part B Premium Appeals | HHS.gov

Because you are deciding to do this - and for how much - your choice - as to when the income is reported - taxes have to be paid either at the time of conversion or if left alone when they are distributed from your IRA.

Here are the tables and the (statutory) government policy:

SSA.gov - Policy For IRMAA Medicare Part B And Prescription Drug Coverage Premiums Sliding Scale Tables

These are surcharged premiums based on your annual tax return so if you can get your income less than $91,000 (single) or $ 182,000 (joint) then the IRMAA goes away and just regular premiums remain or until you income goes back up  - remember the look back is 2-years before.

@SusanA657950 It appears that you and Gail have already discussed the pertinent factors regarding a Roth conversion and additional Medicare premiums (IRMAA). I agree that IRMAA is a "shock" for many folks. Moreover, a financial  advisor may not be helpful unless he/she is well versed with the tax code, Medicare, and Social Security, if applicable. Anyway, I will try to answer your initial question. If you are transferring assets or rollover (direct) assets from a pretax account (i.e., 401 K, 403 B, IRA, etc.) to another pretax account, that transfer/rollover is not taxable income. However, if you are converting a pretax account to an after tax account such as a Roth IRA, the amount of the conversion is taxable income. All Roth IRAs are funded with after tax dollars whether from taxable earnings or conversions. Otherwise, you will have both pretax and after tax monies in a Roth IRA which is prohibited by the Internal Revenue Code (IRC).The IRC stipulates that the value of any distribution from a pretax account is taxable income regardless if received in cash or "in kind" (i.e., stock certificates, mutual fund shares, etc.) even if converted to an after tax account such as a Roth IRA. The IRC does not care if you spend or save that distribution. It taxes the value of that distribution. And, that value is reported to the SSA  after the current tax year. Because it takes time to report, there is a two year look back. 

Based on some of the info you provided, it appears you converted to a Roth IRA in 2020 and received the IRMAA notice in 2022. I am surprised the trustee (or a representative) receiving the converted monies did not give you a "heads up" since the amount of the conversion had to be significant. To double your Medicare premium in 2022, your MAGI had to exceed $228 K in 2020. Lastly, I realize that there are many reasons for a Roth conversion. Generally, if you expect to be in a higher tax bracket in the future, it makes sense to pay taxes today at a lower tax rate. For example, if your current tax bracket is 12% and you anticipate your future tax rate will be 22%, it makes financial sense to convert today at 12% to avoid paying at 22% in the future. The strategy or difference in tax rates is less appealing when you are looking at a current  22% tax bracket and a future 24% tax rate (only 2% difference). It may be financially sound to preserve the tax savings benefits of the pretax account as long as possible and simply pay taxes on RMDs at the lower 22% tax rate. Remember, at age 72, RMDs start at about 3.8% of the prior year value at December 31st. Of course, future tax rates are subject to change. Hope this helps.

When my financial advisor did a Roth conversion projection for us, he did not take into account the higher premiums for Medicare Part B and D. If I do it, I plan on converting a larger amount than planned in the first year, so my Medicare premiums would only increase for the one year. However, you also have to be careful how that affects your tax bracket. Way too complicated. 

Hey Susan,

Yeah, that’s a tough spot to be in. I had a similar situation a couple of years ago when we started our Roth conversions. It was a shock to see our Medicare premiums go up because the conversion income pushed us into a higher bracket. It feels unfair, especially since we're just trying to be smart about our savings.

We ended up spreading our conversions out over a few years to manage the impact. It’s a bit of a hassle, but it helped keep our premiums more reasonable. I’d recommend chatting with a financial advisor if you haven’t already. They can help you figure out the best strategy for your situation.