-
It can be beneficial to have money in a Roth account during retirement.
-
If you can’t or didn’t fund a Roth account directly, you can do a Roth conversion.
-
Since a Roth conversion counts as income, you could wind up with not just a huge tax bill, but more expensive Medicare premiums down the line.
-
The $23,760 Social Security bonus most retirees completely overlook ›
There’s a reason some people opt to save for retirement in a Roth IRA or 401(k). Even though Roth retirement plans don’t give you an immediate tax break on your contributions, investment gains in a Roth are yours to enjoy tax-free.
Plus, come retirement, you have more flexibility with your money with a Roth IRA or 401(k). You don’t have to take required minimum distributions, and you get to withdraw money from your retirement savings tax-free.
If you missed the boat on contributing to a Roth account directly, or your income was too high to fund a Roth IRA, then you may be considering a Roth conversion this year. This allows you to move funds from a traditional retirement plan into a Roth to capture the aforementioned benefits.
But while it can certainly be advantageous to have money in a Roth account for retirement, you’ll need to be careful in the course of doing a conversion. You may not realize it, but a Roth conversion could leave you with not just a large tax bill, but more expensive Medicare premiums down the line.
It’s not really a secret that doing a Roth conversion triggers a tax bill the year you move those funds over. But what you may not realize is that if a Roth conversion raises your income above a certain level, you could face surcharges on your Medicare Part B and Part D premiums two years down the line.
Those surcharges are known as income-related monthly adjustment amounts, or IRMAAs. And while they don’t affect most Medicare enrollees, they apply to single tax-filers this year with a modified adjusted gross income (MAGI) above $109,000 or married filers with a MAGI above $218,000.
As you can see, the income thresholds for IRMAAs aren’t so large. So it’s easy enough for a Roth conversion to propel you into IRMAA territory, making your Medicare premiums cost more.
Medicare is expensive enough without having surcharges tacked on. So if you’re interested in doing a Roth conversion, proceed with caution.
Rather than do a large conversion this year, you may want to move money into a Roth in smaller increments over the course of several years. It’s a good idea to work with a tax professional on the timing of your conversions to minimize the tax blow overall.
#Roth #Conversion #Beware #Pitfall