IRA Roth Conversion w/Tax Exempt Income

Submitted by Ed Kierce on Thu, 2020-12-31 16:55

Hello Team:

I completed a Roth IRA conversion on 12.28.20 based on the advice of my accountant/financial planner. I had left a $5k window just in case the value of the converted assets pushed us over the cliff of the IRMA threshold. However, I just realized I exceeded the 2020 IRMA threshold by $452 because I was unaware tax-exempt interest dividends of $4,550 would be added to our MAGI . Because we retired in 2018 @ age 68 and age 66 with a large buyout we had credible medical coverage through my employer through 8.31.19 We then applied for Medicare in January, 2020 and immediately appealed our IRMA premium due to a life changing event, our appeal was approved. Medicare asked us for our estimated income for 2020 we forecasted $75k as we were delaying SSRB until I turn age 70 in June, 2021. During the year my financial advisor suggested we consider a ROTH IRA conversion as approximately two-thirds of our savings are in tax free accounts. We thought this was prudent advice because of the current low tax rates as well as our low income. If the exempt-interest dividend is added to MAGI do you know if the threshold for IRMA would begin using the 2020 threshold of $174,001 or would the 2021 threshold of $176,000 apply for our 2021 Medicare Part B & D premiums?

Are there any other deductions that would offset the IRMA penalty i.e. Foreign tax paid or interest paid of $2,665 for margin loan in 2020? We were making the decision based on the standard deduction of $27,400 and also wondered because we have $10k in medical expense, $5,300 in Medicare premiums + $16k in charitable deductions + $4,300 property taxes would it be best to itemize our deductions might this help offset my oversight?

I apologize for the long winded explanation but wanted to present all the facts.

Thanks in advance, HAPPY New Year!

Flag as spam

Permalink Submitted by Alan - IRA critic on Thu, 2020-12-31 18:05

The IRMAA MAGI for 2022 has not yet been determined, but it’s 176k for 2021. It may or may not increase in 2022, but until late in the year you will not know the status of the 2022 IRMAA threshold to which your 2020 MAGI will be applied. Standard and itemized deductions do not reduce MAGI, and neither do tax credits such as the foreign tax credit. Further, because you are itemizing charitable deductions, you cannot make a last minute cash donation of 300 which WOULD reduce MAGI by 300. How much does your itemized deductions using 7.5% of AGI as the floor for medical deductions exceed your standard deduction of 27,400? In other words, if you rushed down to your local charity today and gave them a check for 300, and do not itemize, your MAGI only drops 300 and you need 452. So you might need to hope for the 2022 threshold to rise to 178k.
For your 2020 MAGI did you factor in that your taxable dividends actually paid are increased on your 1099DIV by the amount of foreign taxes paid also stated on the 1099 DIV? That adds to your MAGI, but foreign dividends look to be down in 2020 by maybe 20%.
Don’t suppose either of you has any earned income at all in 2020? If you do and are not covered by a workplace plan in 2020, you can now make a deductible TIRA contribution in and after the year you reach 70.5. Remember, that you can make a 2020 IRA contribution up to 4/15/2021, so this is not urgent for today if you qualify.
Market just closed, so it’s too late to sell a loser for a cap loss to offset cap gains or enable a cap loss up to 3k. But do you possibly have any carryover cap losses from 2019 to 2020 that would help?