Health Care Reform and Roth Conversions

Converting to a Roth will increase your income and could force you to pay higher Medicare premiums.

Will health-care reform affect Medicare beneficiaries who convert their traditional IRAs to a Roth?

It certainly will. Medicare beneficiaries always have to be careful about Roth conversions because the money you convert increases your taxable income for the year. That could cause you to pay a high-income surcharge for Medicare Part B, which currently applies to people whose adjusted gross income in 2008 (the most-recent tax return the IRS has on file) was more than $85,000 (or $170,000 on a joint return). Most people who earned less than that threshold pay $96.40 per month per person for Medicare Part B in 2010. But people who earned more than that must pay $154.70 per month or more (the charge maxes out at $353 per month for the highest-income people). See What’s in Store for Medicare Part B Premiums for more information.

The new health-care-reform law freezes the high-income surcharge limit at $85,000 for single filers ($170,000 on a joint return) from 2011 to 2019, rather than increasing the income cut-offs with inflation. And, most important, it imposes a high-income surcharge on Medicare Part D premiums for people with adjusted gross incomes above the $85,000/$170,000 level.

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You can generally contest a high-income surcharge if you have a life-changing event, such as marriage, divorce, job loss or reduced work hours (including retirement), that affects your income level. See Pay Less for Medicare Part B for details. But converting a traditional IRA to a Roth doesn’t count.

If your IRA conversion gets you close to the $85,000 or $170,000 limit, be aware of the surcharge when deciding whether it’s worthwhile to convert, when the conversion might work best, and whether it helps to pay taxes on a 2010 conversion with your 2011 and 2012 returns.

But it’s also important to keep a Roth conversion’s impact on Medicare premiums in perspective when you make your decision. “If no Roth conversion occurred, the taxpayer would have to start taking required minimum distributions from a traditional IRA at age 70 ½, which could also increase Medicare premiums, only over a longer period of time,” says Mark Luscombe, principal analyst with CCH, a provider of tax information. “One would have to do a careful analysis, therefore, to determine whether the proposed Roth conversion over the long term was harmful or beneficial to Medicare premiums.”

For more help deciding whether a Roth conversion is right for you, see Should You Convert to a Roth IRA? and our Health Care Reform: What It Means for Retirees. And keep health-care reform's other tax changes in mind when timing your Roth conversion. See Health Care Reform: Tax Hikes on the Way.

How will Obama’s heath care bill affect YOUR small business? Find out by clicking here.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.