SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Currency conversion oa tax-deferred retirement account yeah Roth IRA can cause Medicare premiums for Part B and Part D to increase – dramatically in some cases – because Medicare premiums are tied to income brackets. When retirement funds are transferred to a Roth account, the converted amount is treated as income. If the converted amount is large enough, it can potentially push the Medicare recipient into a higher bracket and trigger a premium boost.
A number of strategies exist to manage this potential premium increase, including converting at least two years before joining Medicare and using different methods to reduce the amount of income used to calculate the brackets. A financial advisor help build financial models and run what-if scenarios to make it easier to choose the right move on a Roth conversion.
Most people on Medicare pay the standard premium for Part B, which adjusts annually based on anticipated increases in health care spending. However, for those with incomes that measure above a certain level using a benchmark called Adjusted Adjusted Gross (MAGI)the premiums are increased based on an Income Based Monthly Adjustment Amount (IRMAA).
MAGI is calculated by taking total gross income, including money converted to a Roth account as well as tax-exempt interest and some tax-free Social Security benefits, and adding back any applicable deductions . Medicare uses the MAGI figures from the tax return filed two years before the current year when setting premiums.
For example, for 2024 the standard premium is $174.70 for Part B. This is the Part B premium paid by people filing tax returns as single individuals who had 2023 MAGI of $106,000 or less, or taxpayers filing as married couples with 2023 MAGI of $212,000 or less. Here's a full breakdown of Part B premiums based on MAGI:
MAGI Single Filer
MAGI Co-Filer
Part B premium
$106,000 or less
$212,000 or less
$185
$106,000 to $133,000
$212,001 to $266,000
$259
$133,001 to $164,000
$266,001 to $330,000
$364.30
$164,001 to $500,000
$330,001 to $750,000
$469.60
$500,001+
$750,001+
$628.90
As this table shows, higher levels of MAGI can mean much higher Medicare costs. The difference in premiums between a couple earning $206,000 and a couple earning $760,000 is $443.90 per month per insured, which equals another $5,326.80 annually per insured. If two members of a couple are on Medicare, the total increase in premium costs would be more than $10,000 per year. (If you need help navigating your Medicare coverage, consider using this free tool match with a trusted financial advisor.
Medicare Part D premiums, which pay for prescription drug coverage, are also affected by IRMAA. However, these premiums are less than Part B to begin with so they don't have as much of an impact when and if they do increase.
For a single Medicare enrollee with $80,000 in MAGI before any Roth conversions, performing a $100,000 Roth conversion could result in MAGI of $180,000. This would move the single filer into the fourth bracket for IRMAA, resulting in a Part B premium of $469.60. That's $284.60 more per month than the Medicare premium before the conversion, which equals $3,415.20 for the year.
For a married couple filing jointly who had $100,000 in MAGI, a $100,000 Roth conversion would increase their MAGI to $200,000. That would keep them in the first IRMAA bracket so they would pay the standard $185 Medicare Part B premium.
Several strategies can help Medicare enrollees avoid higher premiums. I am one gradually convert a retirement account to a Roth account so that MAGI for each year remains within the current bracket or perhaps the next highest bracket. Note, however, that unlike marginal income tax brackets, the IRMAA brackets are not all or nothing. Going even $1 into the next highest bracket means that the Medicare Part B premium will increase by the full amount determined by the IRMAA. Conversely, filling a bracket with MAGI all the way to the top of the bracket results in no Medicare Part B premium increase.
Income from all sources can be difficult to predict exactly, so a conversion amount that works in a financial model may not work when final real-world income figures are available. For this reason, blades may convert slightly less than what seems safe, so there is room for error.
Also note that IRMAA looks at MAGI from two years earlier but uses tables that are updated every year. As a result, a current MAGI figure that appears likely to produce an IRMAA premium increase may actually be unfactored using the inflation-adjusted tables two years into the future.
The fact that IRMAA looks back two years suggests one strategy that can be extremely effective. That is, perform Roth conversions at least two years before joining Medicare. If done, the Roth conversion will have no effect on Medicare premiums.
Another possibility when there is a large increase in IRMAA premium is to appeal to Social Security. Certain life-changing events such as a change in employment status, marriage, divorce, death of a spouse or retirement can be cited to convince the agency that your Medicare premiums should not be increased.
Consider talk to a financial adviser who can help you navigate Medicare, Roth conversions, tax strategies and more.
Converting a large tax-deferred retirement account to a Roth account can have an impact on Medicare premiums. Depending on filing status and other income, a $100,000 Roth conversion could cause Medicare premiums to rise significantly. A number of different strategies can reduce this effect. They include converting at least two years before filing for Medicare, appealing to special circumstances and reducing income through tax loss harvesting and charitable donations.
Consider talking to a financial advisor about the prospects for a Roth conversion increasing your Medicare premiums. Finding a financial advisor doesn't have to be difficult. SmartAsset's free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, start now.
Use SmartAsset Retirement Calculator to find out if you are saving enough to fund a comfortable and secure retirement.
Keep an emergency fund handy in case you run into unexpected expenses. An emergency fund should be liquid — in an account that is not at risk of significant fluctuation like the stock market. The trade-off is that the value of liquid money can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about AMP SmartAsset.
