IRA conversion to Roth IRA

Submitted by cynthia g green on Fri, 2013-12-13 18:00

Several of my clients converted regular IRA’s to Roth IRAs in 2012. They paid the tax out of their own funds. Now they have all received a letter from Social Security Administration regarding their increase for 2013 but also their medicare premiums increased dramatically. ie: standared medicare premium was
$104.90 and now because of the 1099R they received from the regular IRA distribution to establish a Roth Ira the premium has gone to $272.80 for 2014. Does anyone know if there is an exception since this is a one time taxable event in year 2012. They all were only paying the $104.90 prior as their incomes qualified for this standard amount. I called the Social Security Administraton and they advised to go to their local social secuity office. They do mention exceptions however none are for IRA conversion to Roth IRA. I appreciate your help. Cynthia Green, adviser PS.
Did this occur starting in 2012 or before and does OBAMA CARE have anything to do with it.



Submitted by Alan - IRA critic on Fri, 2013-12-13 18:24

  • IRMAA, the abbreviation for the surcharged Medicare Part B has been around a few years, and is not inflation adjusted so it will catch more and more people in future years (about 10% by 2020). Your surcharge should only apply to 2014 Medicare and Part D premiums. It is very possible that sizeable conversions that trigger this surcharge will save money in the long run by reducing or eliminating future surcharges due to reduced RMDs from the now smaller TIRA balance.
  • IRMAA should be viewed as additional tax costs of a conversion and factored into plans on how much to convert in a given year. As noted above, a large conversion may actually save IRMAA surcharges in the future that could hit seveal years, and that is also similar to the income tax on the conversion. You pay more in the year of the conversion to reduce your future RMDs and therefore save more in the long run.
  • Note that the ACA resulted in the termination of inflation adjustments to the surcharge tiers starting in 2011, and also the addition of the IRMAA surcharge on Part D premiums.

 



Submitted by cynthia g green on Mon, 2013-12-16 20:34

in all the info i have read from ed slott i never saw him mention that your medicare premiums would increase because of an ira to a roth conversion. he should make this known in part of planning for the client. thank you for your response.



Submitted by Alan - IRA critic on Mon, 2013-12-16 21:14

It’s not just Medicare premiums, there are other potential tax consequences such as the phaseout of personal exemptions and itemized deductions when AGI passes various thresholds. In general, a given Roth conversion can be subject to several different marginal rates due to the phase in of SS income up to 85%, increasing nominal marginal tax rates, phaseouts of certain credits, % limits on medical and misc deductions, and the total exemption and itemized deduction phaseouts. It’s complex enough to require a tax program to determine the additional taxes (and premiums) due as the result of a conversion.



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