Last week’s blog post, Will Your Medicare Premium Increase If You Do a Roth IRA Conversion? began a discussion of how Medicare Part B (medical insurance) premiums are calculated. As discussed last week, of importance is that Social Security Administration (“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. Also of importance is the distinction between IRS’ and Social Security Administration’s definition of “modified adjusted gross income,” or “MAGI.”
IRS uses MAGI for various purposes, including calculation of allowable real estate rental losses, deductibility of IRA contributions, and qualification for certain tax credits, to name a few. Prior to 2010, it was also used to determine eligibility for Roth IRA conversions. From 1998 through 2009, only taxpayers with MAGI of less than $100,000 were eligible to convert a traditional IRA to a Roth IRA. For purposes of Roth IRA conversion eligibility determination, income attributable to the conversion was excluded from the calculation of MAGI. There are several adjustments, both negative and positive, made to “adjusted gross income,” or “AGI” to arrive at IRS’ definition of MAGI.
When SSA determines MAGI, the calculation is much simpler than the one used by IRS. SSA’s MAGI calculation increases AGI by tax-exempt interest income and that’s it. Since AGI includes income from Roth IRA conversions, unlike IRS’ pre-2010 Roth IRA conversion eligibility MAGI calculation which excluded income from the conversion, SSA includes Roth IRA conversion income in its MAGI calculation.
What does this mean if you’re a Medicare-eligible individual contemplating a Roth IRA conversion in 2010? Any income resulting from a Roth IRA conversion will be added to your other income to determine the amount of Medicare Part B monthly premium that you will pay two years after the year the Roth IRA conversion is included in your income. Your Medicare Part B premium amount could be greater for either one or two years depending upon whether you use the “default” or “election” method for reporting your 2010 Roth IRA conversion income.
Since Medicare premiums are based on SSA’s calculation of MAGI from your tax return two years prior to the current year and since the default for the reporting of 2010 Roth IRA conversion income is the deferral of 50% of the income to 2011 and 50% to 2012 (See In Which Tax Year(s) Should You Include Your 2010 Roth IRA Conversion Income? – Part 1), depending upon the amount of conversion income, your Medicare Part B annual premium assuming that you are married and both eligible for Medicare could increase by more than $6,000 in both 2013 and 2014 for a 2010 conversion. Alternatively, if you elect to report 100% of the income from your conversion in 2010, your Medicare Part B annual premium could increase by more than $6,000 in 2012.
Next week we will look at an example of how a 2010 Roth IRA conversion can directly impact the amount of your Part B monthly premium.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.