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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 2023 MAGI of $106,000 or less, or taxpayers filing as married couples with 2023 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 $5,326.80 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.