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HOW ROTH CONVERSIONS CAN AFFECT MEDICARE PREMIUMS

My husband and I just found out that our plans to convert our retirement funds into Roth IRAs will have a huge negative affect on our Medicare premiums!  We both have pensions and planned to use our retirement funds as our insurance in case we need long term care down the road.  Otherwise we wanted to convert so the funds will be inheritable by our children as Roths without RMDs.  We also wanted to reduce our eventual RMDs that will start when we're 72.

 

In all our research about the benefits and risks of conversion, we NEVER heard of the affect this would have on our Medicare premiums.  

 

What I'm looking for is the reason why this happens, when we're already going to pay the taxes due on those funds, and are not cashing them out to use as income, but really rolling them over into the Roths to stay invested?  This really doesn't seem fair, and now we're stuck with the choice of paying extremely high medicare premiums, or discontinuing our conversions, losing the benefits of converting into Roths, and then being hit with higher RMDs and higher Medicare premiums when we're even older!  

 

I would appreciate anyone's help in understanding why this is set up to feel like we're being punished for being good savers, and being doubled-taxed on our savings.  Why aren't conversion amounts that are rolled back into savings investments exempt from counting as income?

- Shocked Susan

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Bronze Conversationalist

@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.

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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 Tab...

 

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.

 

It's Always Something . . . . Roseanna Roseannadanna
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I want to thank you for your prompt reply and appreciate that you took the time to explain what we have just come to know about this issue.  It still stings quite a bit to find this out at this point.  FYI, I'm a retired school teacher and my husband was a public inspector and neither of us made mountains of income over our 40+ years of service - so since we were good savers, it's really disappointing to feel like we're being taxed twice on the same savings.  I can only assume we are not the only people who have this situation. So, I guess I'll end with two suggestions for AARP as an organization who puts so much effort in standing up for the welfare of older folks who all work hard and try to be good citizens.

1) Please consider adding in articles and spotlighting this potential impact for those who have tax-deferred retirement funds and are planning on converting them after retirement. If we had known about this earlier on, we could have started converting even sooner before age 65 when Medicare is a mandatory expense.  I reread all the articles I found about Medicare through AARP and could not find any mention of this risk anywhere.  

2) Since our particular situation involves funds that are being converted to Roths in order to pay the taxes rightly due to the government, but NOT to be used as monthly income but rather rolled back into savings accounts,  I would like AARP to consider raising this issue as one to possibly change for future seniors.  We worked a long time and saved instead of spent,  we think that these conversions should be allowed as exceptions to the IRMAA surcharges.  

I thank you again for your consideration.

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@SusanA657950 

 


I still don't think you understand that you do not have to take any distributions from a ROTH.  Once you have met the timeline for the ROTH earnings, you can withdraw at will and NO income taxes are assessed on the principal of the ROTH nor the earnings of it - it isn't even reported on your tax documents.  THERE ARE NO RMD ON A ROTH IRA.

You said yourself in the OP, not withstanding having to use the ROTH for somelong-term care - "we wanted to convert so the funds will be inheritable by our children as Roths without RMDs. "

 

You are not being taxed twice on the ROTH IRA - it is once and done - as long as you meet the timetable on the earnings, there is no more income tax on the ROTH principal (you paid the taxes when you did the conversion) nor the earnings - ROTH earnings are tax-FREE.

 

RMD are for Traditional IRAs or something equivalent - tax deferred retirement accounts - Those you will pay income tax on when you take a distribution - RMD or otherwise scheduled.

 

Yes, doing a ROTH conversion reduces the amount in your tax deferred retirement account and thus keep down the RMD figure.  But you pay income taxes on all of it - only one time - 

1.  ROTH CONVERSION amount - tax is due when it is converted and the taxes should NOT come out of the converted amount - you must pay it out of other funds - otherwise the amount of tax will be considered a distribution rather than a conversion.

2.  Trad IRA or equivalent tax deferred retirement account - ordinary income taxes are due on distributed amounts - RMD or otherwise scheduled distribution amounts, age regulated.

 

You don't have to do anything with the ROTH once it is established - no distributions are required from this type of retirement account.  It can just sit there and grow and be sent on to your heirs - with rules as to how long they have to get it all out - in most cases, no tax is due from them either.

 

I had to look a bit but AARP does have at least a couple of FAQ on the subject we are discussing - there could be others.

 

AARP.org - 09/21/2021 - How to Convert Retirement Savings From a 401(k) Into a Roth IRA

 

AARP.org - 10/22/2021 - Take Withdrawals From Your Traditional IRA First

 

I would have thought that your financial advisor or CPA should have clued you in on the IRMAA Medicare surcharges. 

 

The other thing that confuses people is that the Medicare sign up age is 65 but their SS retirement age could be long after that - FRA or even 70 for delayed retirement credits - so they get confused as to when to do the conversion.  It has to be 3 years BEFORE age 65 OR if one keeps working and has employer coverage - then 3 years before they lose this coverage or 3 years before they are signing up for Medicare Part B.

 

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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You are really sweet to keep trying to understand my point.  Everything you just wrote is correct and understood.  We know that Roths will not be taxed after we convert and pay the taxes using other funds - that's why we're doing it.  However, it FEELS like a double tax because we pay the income taxes owed AND then we just found out that our Medicare premiums will be twice as much as the base rate - that feels like another tax for us - yes, I know it's technically a "surcharge."  And. because we started to do this 2 years ago and didn't find out about the Medicare impact until now, we're going to have this surcharge for at least 2 years. What feels bad is that we know many other people who have much more wealth than we do, and spent and own more than we do, but they are paying the base premium because they don't have these tax-deferred funds.  And it would indeed have been good if someone had clued us in to this potential impact of converting, but alas, no one mentioned it all.  

I must say that there is a common issue that the people who you deal with are generally younger and may not be well versed with this very "senior" detail.  Truthfully, until we got here to this moment (turning 65), Medicare was just someone else's issue.  We do our own taxes, and have no real "financial advisor" who should have made us aware of this.  

We also were never made aware that the savings that we were building up throughout our working years would present us with the RMD reality which lead us (too late obviously) to our plan to convert and reduce our eventual RMDs.

Anyway, thank you again for your interest and support.  I do still hope AARP can put more out there on this topic to help folks like us.

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@SusanA657950 

Just a suggestion but why don't you consult with a tax advisor on doing the ROTH movement by doing a conversion contribution - 

IRS.gov Publication 590 A - Contributions To A Individual Retirement Arrangement

under the heading of:  

Converting From Any Traditional IRA Into a Roth IRA

(about middle ways down the page)

The way it works is (simply put)

1.  When you begin your RMD from your Traditional IRA, you take more than the RMD as a distribution.  

2.  You pay taxes on the whole amount that is distributed to you in any given year.

3.  Then you take the excess distribution (the amount in excess of the calculated RMD) and do a conversion contribution into your ROTH IRA account.

That way, you can move some of the Trad IRA amount to the Roth IRA yet you get to control the amount of the conversion contribution to stay below the Medicare IRMMA surcharge income limits.  

It will take longer but will save you these Medicare surcharge fees if you keep your income amount less than the surcharge limits. 

  • The government gets their income taxes,
  • you build up your ROTH IRA,
  • your Traditional IRA gets lowered to reduce RMD going forward
  • and you can control the distribution amount so that you don't get hit with the Medicare IRMAA surcharges.

WIN-WIN - but do consult a tax professional so that everything is set up correctly, and done correctly.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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The IRMAA premium surcharge income thresholds are going up in 2023 -

CMS.gov - 2023 Medicare Premiums - Medicare Part B Income-Related Monthly Adjustment Amounts

 

Just posting this to keep you informed.  

It's Always Something . . . . Roseanna Roseannadanna
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Here's an article that I found to be quite useful - just thought I'd pass this on as well.

 

https://www.financialalternatives.com/financial-alternatives-inc/2022/5/8/should-you-consider-a-roth....

 

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Honored Social Butterfly

That is a pretty good article - 

But the author said this:

If this happens on a one-time basis (as opposed to every year), Clients can request a Medicare premium adjustment. There are no guarantees the adjustment will be granted and lower premiums reinstated, but it is possible.

 

I disagree with him here - There are only some reasons why SSA would/could modify the Medicare premium surcharges - A ROTH conversion isn't one of them because it is more of a tax planning event than a qualifying life changing event. 

Here are the details to an appeal:

HHS.gov Medicare Part B Premium Appeals

You can try it if you want - all they could say is NO - which most likely, they will.    But wait until you get the actual Notice.

To add to your knowledge on this - Here is the actual SSA Program Operations Manual System (POMS) on the appeals process -

The appeals process is similar to other government / legal appeals - in steps up the appeals legal ladder, you can take it as high as you want to go in the legal process - maybe even the SCOTUS  😉

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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Great minds think alike!  Yes, I agree that moving forward, it looks like we can just keep converting smaller amounts as we approach 72, then continue on converting amounts, but keeping our income within a Medicare premium level that works for us.  

And yes, the article gives some hope of appealing to reduce the surcharge, but for one thing, people converting are probably using multiple years to do so, and as it stands right now, the conversion rule is very clearly stated as not being an exception.  

I'll give the resources you mentioned a look, and thank you so much for all your encouragement.  Perhaps the SCOTUS should indeed consider this matter!

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@SusanA657950 wrote

 

 Perhaps the SCOTUS should indeed consider this matter!

===================================================

Oh, I was being factious -  a Roth IRA conversion is just a glorified tax deferred retirement account distribution that ends up in a tax advantage account - when one takes it is a personal choice.

It is all in the planning.

 

But you bring up an interesting point - How do people find out about things in government rules and regs that affect their lives?

  • Some people hire others to keep up with all this stuff.
  • Others just research and research and get a kick out of learning things related to government 
  • Others just accept whatever happens - OH Well !

For me, I hang around some people from all walks of life with various expertise in all things related to money, taxes, government programs - 

I find government and what comes from it - fascinating.

I don't get it right all the time but learn from it none the less.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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