SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Converting money from a tax-deferred retirement account to a Roth IRA can cause Medicare premiums for Part B and Part D to increase – in some cases dramatically – 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 amount converted is large enough, it can potentially push the Medicare recipient into a higher bracket and trigger a premium bump.
A number of strategies exist to manage this potential premium hike, including converting at least two years before signing up for Medicare and using various means to reduce the amount of income that is used to figure the brackets. A financial advisor can help construct financial models and run what-if scenarios to make it easier to choose the right move on Roth conversion.
Most people on Medicare pay the standard premium for Part B, which adjusts annually based on projected increases in healthcare spending. However, for those with incomes that measure above a certain level using a benchmark called Modified Adjusted Gross (MAGI), the premiums are increased based on an Income-Related Monthly Adjustment Amount (IRMAA).
MAGI is calculated by taking total gross income, including funds converted to a Roth account as well as tax-exempt interest and some non-taxable Social Security benefits, and adding any applicable deductions back to it. Medicare uses the MAGI figures from the tax return filed two years before the current year when setting premiums.
For instance, 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 2023Â MAGI of $106,000 or less, or taxpayers filing as married couples with 2023Â MAGI of $212,000 or less. Here is the full breakdown of Part B premiums based on MAGI:
Single Filer MAGI
Joint Filer MAGI
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, equal to another $5,326.80Â annually per insured. If both members of a couple are on Medicare, the total increase in premium costs would exceed $10,000 annually. (If you need help navigating your Medicare coverage, consider using this free tool to match with a fiduciary financial advisor.
Medicare Part D premiums, which pay for prescription drug coverage, are also affected by IRMAA. However, these premiums are smaller than Part B to begin with so they don’t have as much impact when and if they 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, equal to $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’d pay the standard $185 Medicare Part B premium.
Several strategies may help Medicare enrollees avoid higher premiums. One is to 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 all-or-nothing. Going even $1 into the next-highest bracket means the Medicare Part B premium will increase by the full IRMAA-dictated amount. Conversely, filling a bracket with MAGI all the way to the top of the bracket results in no Medicare Part B premium increase
It can be difficult to precisely forecast income from all sources, so it’s possible that a conversion amount that works in a financial model may not work when final real-world income figures are available. For this reason, lanners may convert somewhat less than seems safe, so that there is room for error.
Note also that IRMAA looks at MAGI from two years before but uses tables that are updated each year. As a result of this, a current MAGI figure that appears likely to produce an IRMAA premium hike may actually be a non-factor using the inflation-adjusted tables of two years in the future.
The fact that IRMAA looks two years back suggests one strategy that can be highly effective. That is, to perform Roth conversions at least two years before signing up for Medicare. If that is done, the Roth conversion will have no effect on Medicare premiums.
Another possibility when a large IRMAA premium increase looms is to appeal to Social Security. Certain life-changing events such as a change in employment status, marriage, divorce, spouse death or retirement can be cited to convince the agency that your Medicare premiums should not be increased.
Other methods of managing Medicare premium focus on reducing income. Contributions to Health Savings Accounts (HSA), tax-loss harvesting and making charitable contributions can all be effective ways of reducing MAGI depending on circumstances.
Consider speaking with a financial advisor 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 effect 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 may reduce this effect. They include converting at least two years before filing for Medicare, appealing to special circumstances and reducing income by 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 hard. 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, get started now.
Use SmartAsset’s Retirement Calculator to find out whether you are saving enough to fund a comfortable and secure retirement.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash 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 SmartAsset AMP.
