Roth Conversions - Impact on Medicare B Premiums

Background:

Starting in 2010 the compensation cap will be lifted from the Roth conversion requirements thereby enabling everyone to complete a conversion from a Traditional IRA or Employer Qualified Retirement Plan to a Roth IRA.

The amount converted will be included in the taxpayer’s income for the year of conversion unless they convert in 2010 and make an election to spread the taxes between 2011 and 2012 (50% each year) instead of paying all the taxes in 2010.

Issue:

According to a recent article in the Wall Street Journal, any individual that will soon be eligible for or is on Medicare and has Part B coverage may have an unexpected impact on their Medicare Part B premiums.

Result:

Any individual considering a Roth conversion should consult with their tax advisor to determine the impact a conversion might have on their Medicare Part B premiums. To determine the annual premiums, Social Security Administration looks at ‘modified adjusted gross income’ from their most recent tax return provided by IRS. For example, 2009 premiums, Social Security generally uses information from tax returns filed in 2008 for 2007.

So a conversion done in 2010 where the taxpayer files his/her return in 2011 and elects to pay all of the taxes in 2010 would see an increase in premiums in 2012. That is when Social Security Administration will receive information for the 2010 return filed in 2011. Likewise, if they spread the taxes over 2011 and 2012 the impact might be for a couple years.

Remember that in later years when the income goes back down the Medicare Part B premiums would also be adjusted accordingly.

A similar impact might be felt if funds remain in the Traditional IRA or employer qualified plan and the taxpayer is required to begin Required Minimum Distributions(RMDs); the larger the RMD the larger the impact on Medicare Part B premiums. Once the conversion is completed, RMDs would not be required from the Roth IRA so, again, the taxpayer needs to determine what works best for them both in the near and long term.

Action:

If you have clients that are considering a Roth conversion and are near or at Medicare age make them aware of this issue so they can work with their tax advisor to make an informed decision considering all of the tax impacts.

Bottom line…changes in taxpayer’s modified adjusted gross income can impact them beyond income taxes.