Medicare Shock Wave

In 2005, when I was still working (I am now retired), my wife and I had an adjusted gross income of about $198,000 ($78,000 plus a $120,000 conversion to a Roth IRA). To set the means-tested MedicarePart B premiums in 2007, will the government use the $78,000 figure or the $198,000 figure? Also, will 2008 premiums be based on 2006 AGI and so on, or will premiums be determined some other way? -- Emil Kreider, Beloit, Wis.

Starting next year, in a move of almost seismic significance, Medicare will begin basing Part B premiums, which cover doctors' visits and outpatient services, on a recipient's income. And seniors like you are feeling the aftershock.

Couples with income of $160,000 or less in 2005, and single filers earning $80,000 or less, will pay $93.50 per month for Part B. But the monthly premium rises to $162 for individuals earning more than $200,000 and couples with income over $400,000.

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Income figures are based on your 2005 adjusted gross income, which is line 37 of Form 1040, plus any tax-exempt interest shown on line 8b of your 1040, says Mark Lassiter, of the Social Security Administration. So, yes, that would include taxable IRA conversions such as yours, plus any taxable IRA distributions.

If you still think your premium is too high, you'll be able to file an appeal if your income was affected by a "life-changing event." Regulations to be issued soon will detail what circumstances qualify. Right now, "life changing" appears to refer to events such as marriage (or remarriage) or the death of a spouse, says Mark Luscombe, of tax publisher CCH.

The government is using 2005 income to calculate 2007 premiums because that's the most recent tax return on file. In 2008, Part B premiums will be based on 2006 income, and you can still lower your income for 2006. Selling stock for a loss, limiting IRA withdrawals to required minimum distributions, or donating some of your required IRA distributions to charity (if you're over 70#189;) could lower your adjusted gross income, says Luscombe (see Cut Your Tax Bill).

Good as gold

Are gold and silver bullion solid investments to protect against a weakening U.S. dollar? -- F.D., via e-mail

In a word, yes. Historically, gold rises in value when the dollar drops because investors perceive gold to have intrinsic value versus paper money.

But gold prices swing wildly. Global insecurity and demand from emerging markets sparked a rally that propelled gold to a 26-year high of $730 per ounce in May. By mid October the price had retreated to $589 per ounce. Silver shares some of gold's characteristics as a hedge against the dollar, but it trades more like an industrial commodity, says analyst Jeffrey Christian, author of Commodities Rising.

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We'll take stocks over gold any day as a long-term investment. But if you want to own gold as a hedge against a falling dollar (or inflation or geopolitical risk), exchange-traded funds may be a better bet than bullion, which will cost you money to store and insure. In mid October, StreetTracks Gold Shares (symbol GLD) and iShares Comex Gold Trust (IAU) traded for $59 per share, one-tenth the price of gold bullion. Silver bugs can buy iShares Silver Trust (SLV), which traded for $116, or ten times the price of silver.

Grad-school bonds

I have some series EE savings bonds that qualify for college tuition without being taxed. Are they also tax-free for graduate school? -- Lisa McCormick, Finleyville, Pa.

Technically, yes, but only in very specific circumstances.

Savings-bond interest can be tax-free when used to pay for college tuition (room and board don't qualify). In order to be eligible for this tax break, the bond owner must be at least 24 years old when the bond is issued and in 2006 must have a modified adjusted gross income less than $124,700, if a married taxpayer, or $78,100, if a single filer (see IRS Publication 970, Tax Benefits for Education, at www.irs.gov).

In effect, the age-at-issue requirement means that a savings bond generally must be held in a parent's name to get the tax break. Graduate-school tuition is considered a qualified education expense, but there's another catch: The bond must be used for the benefit of the bond owner, a spouse or a dependent claimed as an exemption on the owner's tax return. If a child is no longer a dependent for tax purposes (as might be the case with an adult child attending grad school) then the bonds don't qualify for the tax break.

New Roth rollovers

I am 26 years old and recently quit my job to further my education. I have a little more than $7,000 in a 401(k). In addition, I have about $3,000 in a five-year-old Roth IRA. I'm aware of the IRA rollover options for my 401(k), but I'm wondering if it would be possible to pay the tax on the 401(k) and combine it with my Roth IRA. -- C.Y., Raleigh, N.C.

That's a great idea. Previously, you had to roll over your 401(k) to a traditional IRA first, then convert that to a Roth. A new law allows a direct rollover to a Roth IRA, although you still have to pay taxes on the converted amount.

But wait until next year to switch. Your income will be lower, so you can minimize your tax. In the 25% tax bracket, converting $7,000 to a Roth IRA would cost you $1,750 in federal taxes. But if you're in the 15% bracket next year, it will cost only $1,050 -- and just $700 in the 10% bracket.

My thanks to Tom Anderson for his help this month.