Medicare Part B Premium
A letter-to-the-editor in this month’s [i]USAA Magazine [/i]has me confused and concerned. The letter is in response to an article about the efects of a Roth conversion. The letter states:
“Starting at age 62, future Medicare premiums may be increased based on your modified adjusted gross income. MAGI consists of the IRS Adjusted Gross Income plus any tax-exempt interest income.”
Consider the case of an individual with funds in a Roth IRA. Those funds are placed into bank or credit union Certificates of Deposit, earning interest within the Roth IRA. Does that interest income contribute to MAGI, potentially requiring the owner to pay higher rates for Medicare part B?
Thanks.
Permalink Submitted by Alan Spross on Thu, 2010-03-11 01:17
No. Interest earned in a Roth IRA is either tax deferred or tax free.
What could bring the Part B surcharge into play however, is the actual conversion to the Roth IRA, which is included in AGI. For example, a 2010 conversion would typically be included in income 50% in 2011 and 2012. The year the Part B premium would be affected is two years later, ie the 2011 income would be included for the 2013 Part B premium determination and the 2012 income for 2014.
A Roth conversion can also result in more SS income being included in AGI for the year the conversion is added to income, however in all later years the reduction of TIRA RMDs due to the smaller TIRA balance could reduce the amount of SS income included, and also Modified AGI for Part B premium determination.
Permalink Submitted by Genevieve Comfort on Thu, 2010-03-11 02:00
Alan,
Thanks for responding. Your answer conforms to my understanding before this letter-to-the-editor scared me.
Indeed, it strikes me that for some (me), an advantage of a large Roth conversion in 2010, with taxes recognized for 2010, is that such a conversion would give me an unusually large income in only that year – so two years later, I would face increased Medicare costs for a single year. In my case, that appears advantageous to year-after-year of increased Medicare premiums due to RMDs from the original Traditional IRA.
Of course, one has to weigh that advantage aginst the increased income tax bracket in 2010 versus spreading the taxes across 2011 and 2012, with the potential of increased tax rates coming into effect.
Thanks again.