This is a July 16, 2024 YouTube video by Craig Wear, CFP® explaining how Roth IRA conversions can affect Medicare Part B and D premiums via the IRMAA (income-related monthly adjustment) calculation. He defines Roth conversions, contrasts traditional IRAs and Roth IRAs, and explains that converting pre-tax retirement accounts (401(k), 403(b), 457, traditional IRA) increases taxable income in the conversion year, which can raise Medicare premiums because of IRMAA. He emphasizes a two-year IRMAA look-back, notes some administrative appeal possibilities, and argues that accelerated conversions (doing more conversions sooner) often produce larger lifetime tax and Medicare-premium savings—despite temporarily higher premiums—because they reduce future RMD-driven income. He references attached PDFs with income thresholds, proprietary case studies on Q3/CRAIG Wear’s site, and gives practical timing/withdrawal details (exceptions for converted principal when over 59½).
Questions this video answers
401(k), 403(b), 457, and traditional IRA.
Two years.
"Over $80,000 to $100,000" (clients' lifetime Medicare premium savings, per presenter).
An IRS exception: if you're over 59½ you may withdraw 100% of the amount converted (converted principal) without tax/penalty; earnings must remain in the Roth for five years.
Chapters
Hey there. Welcome back to the channel. This is Craig Weir and I'm glad that you're here again. So today I want to cover a subject that is somewhat controversial and we get a lot of people that call in, talk to our advisors that have got some pretty strong opinions about this. The subject is the impact of Roth conversions on Medicare premiums. And so today what I want to do is I want to help you to understand that there is an impact on your Medicare premiums. If you, if you're Medicare age and enrolled in Medicare, I want to be able to demonstrate to you that over time you're probably much better off to do the conversion sooner rather than later, and the negative of what that means to you as well as the ultimate benefits. So let's just kind of dig right in. I've got some documents that we will prepare that will give you a link to some tables that you can refer to afterwards. You don't need them during the video, but just. I'll refer to the medic here, threshold income thresholds, and we'll attach a document that you can use for that. Okay, so let's just start with the basics for those of you that are kind of brand new to Roth conversion world and you just kind of search around on it. A conversion is where you take money from your before tax account, whether it be a 401K, 403B, 457 or just a regular IRA, and you convert it to a Roth IRA. And in the process of doing the conversion, you have to pay tax on that extra taxable income this year. If extra tax is owed, and for 99.9% of people, you're going to owe the tax. Unless you use a charitable strategy to offset some of that. The differences between that traditional IRA and a Roth IRA are pretty profound and a big reason why people who are really good candidates to do Roth conversions go to them. So in a traditional ira, the deal that you made with the government was that you put money away, you save some taxes at the time you did the contribution, and then it grows totally tax deferred for as many years as you want it to. And then when you start taking money out, either through forced distributions, through required minimum distributions, or anytime you just want to take money out after age 59 and a half, you got to pay tax on it. In a Roth ira, it kind of works the opposite. You do not get a tax deduction when you make a contribution, and all the funds that are in there get to grow tax free for the rest of your life in Fact, there are no requirement of distributions even, and your heirs get the money. And it's tax free to them too. This is not a video where we talk about investment concepts inside them, but they're the same. Anything you can own in an ira, you can own in a Roth ira. And oftentimes you don't even have to change custodians. It's just a matter of opening up a new account at the custodian that is a Roth, and you instruct them to convert some of the money from the IRA to the Roth. So that's the simple part of it. It's pretty easy to do. Pretty, pretty easy to make. The actual process of moving from an IRA to a Roth is pretty simple as well. So let's talk next about kind of how Medicare premiums kind of mesh into this. So Medicare, Obviously, when you're 65 years old, you can sign up for all the different parts of Medicare. Parts A and Part C, as in Charlie, are just standard Medicare premiums. They're dictated by law and they can change anytime Congress wants them to change. However, parts B and D, Boy and David, are income based premiums. So the more income you show on your tax return, the more potential premiums you'll pay for those benefits. There's a set of laws called the Income Related Monthly Adjustment Amount. Irmaa. Irmaa Income Related Monthly Adjustment Amount. And that is a calculation that's done that you can Google that pretty simply, look that up, how that's calculated. It's for purposes of today, I'll call it your adjusted gross income. And it's not exactly that. So you want to go in and look at what that really means to you. But for most people, that's pretty close to what it is. The attached document will give you kind of an overview of the different income thresholds and how higher income affect those premiums. And so that's really where the rubber meets the road in that those income thresholds can go up pretty significantly. And so that's why most people choose not to do Roth conversions, or they do them only up to a particular income threshold because they're afraid that their Medicare Part B and D are going to get expensive. And it can get expensive. But that that increase in your income happens because you take money from your IRA that's taxable and you convert it to the Roth IRA. And so if you convert $100,000 from your IRA to a Roth IRA, that's an additional $100,000 that goes towards your taxable income. So if you get high enough to get above and it bumps you into one of these other income thresholds. Then your Medicare premiums go up. But there's a two year look back on this stuff. So you're probably not going to get tagged for two years. Let's say you finish your Roth conversions and in three years it's going to take another two years for that to drop off. Unless you call them back and let them know that you've been doing some different what you were doing. And occasionally you'll get with a rep that will understand that that was a short term thing and they'll actually lower the premiums. Now, we've had clients be very successful in making that happen. Some have not, but some have been able to go back and tell them, hey, I was doing Roth conversions for a period of time, I'm no longer doing those. And they actually lowered their premiums down. No guarantees on my part, because that has a lot to do with who you get on the phone. So the examples of the different income thresholds and how the premiums change are in that PDF that we will attach in the notes on this. So you can kind of look at that. So a lot of people are kind of very hesitant to do the Roth conversions because they're afraid that they're going to get to that higher threshold. The problem is that if you're a good candidate for Roth conversions, I should say first, then what's going to happen is the resulting required minimum distributions from your IRAs are going to push you to those higher income brackets anyway. So by the time you're 73, 74, 75, your other income plus the required minimum distributions oftentimes push you to these higher brackets. And the difference between doing it and just waiting is that if you wait, there's nothing you can do short of charitable donations every year to offset that. And that's assuming current law holds. And you have to have that desire to actually give the money away. So having the right strategy on the front end actually serves a purpose of reducing your IRA balance over time so that by the time you hit required minimum distribution age, the balance of those IRAs are significantly lower and you maybe had to take some higher Medicare premiums for Part B and D for a few years while you're doing the conversions. But then you've managed that, such that now the RMDs are minimal and your premiums drop back down. And for the rest of your life you do not have those higher premiums. So it's a short term, kind of painful situation. You got to go through paying the higher premiums for a couple years. But you can avoid those higher Medicare premiums in the long run by getting conversions done in the short run. And remember that once you get that accomplished and you need income later, then all the income that you pull out of the Roth IRAs is totally free of tax. And what a lot of people don't know, and I did another video on it, is that if you're over 59 and a half years old, when you do your conversions, you do not have the same five year rule that everybody else deals with you. Actually the IRS actually under one of their exceptions, allows you to pull 100% of the amount you converted out without any tax or penalty. You just have to leave the earnings in there for five years. And they, they assume that when you make distributions, you're pulling that converted dollars out first and you're leaving the income in over time. And again, I got another video about how all that stuff works, but hopefully that will give you some help there. It's real important to get the timing of your Roth conversions right. You want to get an optimal decision made of how fast should I do conversions, how's it going to impact my Medicare premiums, how does it impact my net worth? And if you get all those things perfectly lined up, you got, you got a great plan, you end up avoiding a lot of tax. Most of the clients that we work with actually avoid over 80 to $100,000 of Medicare premiums over lifetimes. They pay a little bit more in the first few years, but by the time you net it all out by getting the conversions done on the front end, as opposed to just leaving them in there to grow, you actually are able to, in a lot of cases, save a lot of Medicare premiums over time. The traditional advice that you'll hear is that you want to spread those conversions out over a long period of time so that you do not have those spikes in taxable income. Some other conventional advice is that you wait until you have a year of lower income and then you get up to the top of your current tax bracket by getting the conversions done then. And so they're kind of thinking about it logically, but in a very short sighted time frame. And what we've learned over all the years that we've been doing Roth conversions and validate it through proprietary software that shows US calculations, what we've learned is that the only way to truly get the biggest benefits out of doing Roth conversions for most people, if you have a larger Iraq. So if you've got 7, 8, 9 or more well into the millions, then you're much better off to accelerate your Roth conversions over a shorter period of time so that you get the real benefits. And that's where the real benefits lie is on the other side of those accelerated conversions. It really works better. Even the higher balances you have and the higher income you have, we found that it actually produces even larger benefits for you by doing the conversions sooner rather than later. We've got all kinds of different case studies we've gone through. You go to our website, craig weir, wear.com or actually Q3 advisors. You can see a variety of different case studies that we've gone through and shown you examples of how things worked out for them. In conclusion, to not make this into a real long video, there are higher Medicare premiums potentially for you to pay. If you're 65 years old and doing Roth conversions, you need to be aware of them. But we've discovered that the small cost of the added premiums for a few years is well worth the millions of dollars that you can save or avoid in taxes over a lifetime. And as we've already said, most people by doing accelerated conversions actually save and net Medicare premiums over their lifetime by getting it taken care of sooner rather than later. So I hope this has been a little bit of help. I encourage you to really consider Roth conversions as a part of of your comprehensive retirement strategy and your tax strategy. If you like stuff like this and you want to get kind of simple financial tips that are void of somebody trying to sell you products or manage your money, all we do is we give advice to people and try to help them with that. So subscribe to the channel so when we put out new stuff like this, you'll be part of it like and share the video if you have other people that you feel like need to understand the basic stuff of how the Medicare kind of works in hand in hand with doing Roth conversions, that's great. If you got any questions or comments, feel free to leave them below. And remember we've provided links to some of the additional resources to be of some help to you. So I hope that's of great help and benefit to you along your journey of getting Roth conversions and paying a lot less taxes.
