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An Unexpected Result From Roth Conversion – Increased Medicare Premiums

Portrait of Increase Mather

Many folks took advantage of the one-time opportunity in 2010 to convert funds from traditional IRAs to Roth IRAs and subsequently spread the tax over the following two years, 2011 and 2012.  This was a very good option for some folks who wanted to do the conversion and reduce future tax costs.  However (and there’s always a however in life!), with the coming of 2013, many of these same folks are experiencing an unexpected result of the conversions: a significant increase in Medicare Part B premiums.

Beginning after 2003, Medicare Part B premiums have been partly determined by income – primarily higher income.  For 2013, the increased Part B premium begins for single folks with incomes above $85,000, married couples above $170,000.  The income used to calculate the Part B premium is always based on the most recent tax return, which in this case would be the 2011 tax return.

If you connect the dots, you’ll understand the reason this is now beginning to surface as an issue.  2011’s return is where the first half of those deferred Roth Conversions was reported, and so the increased income can cause a significant increase to Medicare Part B premiums.  It’s important to note that this impact is not limited to the 2010 conversions – any Roth Conversion can result in an increase to your Part B premiums in the future.

For example, let’s say Joe is an average retiree, with a pension income of $35,000 in normal years.  He’s 67 years old, having been on Medicare (Parts A & B) for the last two years.  Joe had a traditional IRA worth $200,000 in 2010, and he decided to opt for the Roth Conversion of the total account and two-year payment of the tax.  By doing this, he has to include $100,000 in his income for 2011 and 2012.  As a result, his income is increased to $135,000 for those two years; those two years are then used to determine the level of premium for Medicare Part B for 2013 and 2014.

For the past couple of years, Joe’s Part B premium has been less than $100 a month – not a pittance on his income, but still manageable.  Because of this increase to his income for 2011, his Part B premium will be increased to $209.80 per month in 2013 – double what it would have been, at $104.90.  The same will be true for 2014, and that rate will be set sometime in November, 2013.

The good news is that the increase is temporary, in these circumstances the individual’s premium should reduce again in 2015.  The bad news is that there’s nothing that can be done about it, barring a “life-changing event” that coincides with the increase in income.  If your spouse died or you left employment, for example, you could contact Social Security to have your situation reviewed and the possibly premium reduced, based upon income since 2011 (possibly projected income for 2013).

Listed below are the Medicare Part B premiums for married couples at various income levels:

Married Couples
Modified AGI is: 2013 Part B Premium
More than: But not over:
$170,000 $214,000 $146.90
$214,000 $320,000 $209.80
$320,000 $428,000 $272.70
$428,000 No Limit $335.70

And this table is for single folks:

Singles
Modified AGI is: 2013 Part B Premium
More than: But not over:
$85,000 $107,000 $146.90
$107,000 $160,000 $209.80
$160,000 $214,000 $272.70
$214,000 No Limit $335.70
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