Roth Conversion Gotcha's

Powering Your Retirement Radio

Welcome back to Powering Your Retirement Radio. I will revisit my Roth Conversions on Sale (Episode 33). I have received several calls on the episode, and in some cases, the idea of doing a conversion did not make sense.

There are a few reasons why. First, you have to have an idea of what your retirement income is going to be. If you are currently in the 24% Federal tax bracket, you want to ensure the conversion won't push you into the 32% bracket. You also have to have a feel for your retirement income. Many people see a dip in their income when they retire. If you end up in a lower tax bracket in retirement and you pay taxes at a higher tax rate now, you could be overpaying your taxes. You may avoid a giant Required Minimum Distribution later or higher tax rates, but those numbers are variables you can only guess at.

Second, Medicare assesses Income Related Monthly Adjustment Amounts (IRMAA). IRMAA charges are something that surprises many people. Because Medicare starts tracking your taxable income at age 63. Medicare sets IRMAA charges based on a 2-year look back, so when you turn 65, Medicare looks at your age 63 income. Currently, in 2022 your Part B Premium is $170.10 a person. If in 2020 you made$175,000 your Part B cost would be $544.30 a person. That is almost $375 a month or $4,490 a year more. So large Roth Conversion can have unintended consequences down the road you aren't even aware of.

Third, when you pull money from a Roth IRA, the Roth Distribution Ordering Rules come into play. The good news is contributions to a Roth are never subject to taxes or penalties. However, conversions are a different story. The converted amounts must stay in the Roth IRA for five years or until you turn 59 1/2. Finally, earnings on the money have a higher bar. If there are earnings, you have to be over 59 1/2, and the account has to be open for five years, or your earnings are subject to tax and penalties.

These 3 points are a good reminder of why even the most confident do-it-yourself investor should check with a professional to ensure they don't miss something. Imagine finding out two years from now the Roth conversion you made will cost you an additional $4,490 in Medicare premiums. Not a great feeling.

Thank you for tuning in this week. I will be back in two weeks with another episode. Until then, stay safe.

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