It’s always amazing to me how one thing in life leads to another. This phenomenon is so true when it comes to the Roth IRA conversion series of blog posts that I’ve been writing and publishing since the beginning of the year, with the first post, Year of the Conversion, published six months ago on January 11th. As an example of the “one thing leads to another” phenomenon, the idea for last week’s post, Got Dormant 401(k)? Consider Converting to a Roth IRA came about as a result of writing the previous week’s post, Don’t Forget About Your SEP-IRA for Roth IRA Conversions.
This week’s post is yet another example of the “one thing leads to another” phenomenon. The second to last paragraph of Got Dormant 401(k)? Consider Converting to a Roth IRA discussed various factors to consider when contemplating the Roth IRA conversion decision. Included in the list of factors was the affect of the conversion on Medicare premiums. Since this is an important consideration for anyone 65 years of age or older who is evaluating a Roth IRA conversion, I am devoting this week and the next two week’s posts to this topic.
For those of you unfamiliar with Medicare insurance premiums and how they’re calculated by Social Security Administration (“SSA”), first some background regarding Medicare insurance premium amounts. There are two types of Medicare premiums: Part A and Part B. Both premium amounts are subject to change each year.
Part A is for hospital insurance. Most people don’t pay a monthly Part A premium because they or a spouse has 40 or more quarters of Medicare-covered employment. The amount of Part A premium is currently $254.00 per month for people having 30 – 39 quarters of Medicare-covered employment and is $461.00 per month for people who are not otherwise eligible for premium-free hospital insurance and have less than 30 quarters of Medicare-covered employment.
Part B is for medical insurance with a basic monthly premium that is currently either $96.40 or $110.50 per month for individuals who file an individual return with modified adjusted gross income (“MAGI”) of $85,000 or less or individuals who file a joint return with MAGI of $170,000 or less. The monthly premium is $96.40 for individuals who have their Part B premium withheld from their Social Security benefits and is $110.50 for all others. The 2010 Part B monthly premium for higher levels of income is as follows:
2010 Part B Monthly Premium
Individual Return With Income
Joint Return With Income
$85,001 – $107,000
$170,001 – $214,000
$107,001 – $160,000
$214,001 – $320,000
$160,001 – $214,000
$320,001 – $428,000
What’s important to keep in mind is that SSA will use the income reported on your federal income tax return from two years prior to the current year to determine the amount of your Part B Medicare premium. As an example, the income reported on your 2008 federal income tax return will be used to determine your monthly Part B premium in 2010. If your income has decreased since 2008, subject to meeting certain criteria, you may request that the income from a more recent tax year be used to determine your premium.
Part 2 will discuss the distinction between IRS’ and SSA’s definition of “modified adjusted gross income” and how this affects the Medicare Part B monthly premium amount. Part 3 will provide an example of how a 2010 Roth IRA conversion can directly impact the amount of your Part B monthly premium.