Two Unintended Consequences of Roth IRA Conversions
Robert Powell, CFP®
Are you thinking about doing a Roth IRA conversion?
Well, if so, you might want to consider at least two of the unintended consequences that come with Roth IRA conversions.
"I'm not sure that the full ripple effects are being considered by the public at large," said Jae Oh, author of Maximize Your Medicare.
And that's especially the case when persons are trying to get health insurance for themselves or for their families under the Affordable Care Act or ACA. Under the ACA, some individuals and families can receive subsidies, an advance payments of the premium tax credit, or APTC, that can lower premiums, deductibles, and out-of-pocket maximums, said Oh.
But that tax credit is based on income. And a Roth IRA conversion creates taxable income that could lower the premium subsidy.
Unfortunately, many people don't understand the implications of the Roth IRA conversion until the following year when they're filing their tax return and have to pay back some of the premium subsidies.
"Health care cost planning now involves taxes," said Oh.
Another unintended consequence occurs when Medicare beneficiaries do a Roth IRA conversion and the increased income subjects them to something called an income-related monthly adjustment amount or IRMAA, said Oh.
IRMAA is an amount you may pay in addition to your Part B or Part D premium if your income is above a certain level. Of note, Medicare uses your modified adjusted gross income reported on your IRS tax return from two years ago to determine your (or you and your spouse's) IRMAA.