Skip to main content

You have been planning for retirement for years. You have been following the advice of investing as much as you can into tax saving vehicles like Traditional IRA’s and 401(k)’s. The advice is solid as you get a tax break today with the hope of being in a lower tax bracket tomorrow.

The question that you should be asking well before retirement, though, is:

Have you ever given a thought to Medicare?

There are 4 federal regulations as to why Medicare is a factor when considering a Roth Conversion:

1. In retirement, once you are 65 or older and no longer covered by creditable health insurance through an employer or spouse’s employer you must enroll into Medicare.

Failure to do so results in the immediate forfeiture of all Social Security benefits as well penalties that are compounding and perpetual.

2. Unfortunately, Medicare is not free and the cost of it happens to be based on your income through the Income Related Monthly Adjustment Amount (IRMAA).

IRMAA is a surcharge on top of any current year’s Medicare Part B and D premiums. The surcharges range from about 40% more to 240% of premiums based on the amount of income you have and are projected, like all Medicare premiums, to inflate by just over 5.80% for the next 8 years at least.

3. IRMAA defines income as, according to the Centers for Medicare Services, “adjusted gross income plus any tax-exempt interest”.

Examples of income that counts toward IRMAA are: Wages, Interest, Pension and Rental Income, Capital Gains, Dividends, Social Security benefits and any distribution from any tax-deferred investments.

What does NOT count as income: Roth IRA’s/401(k)’s, Health Savings Accounts, and Life Insurance.

4. Your Social Security benefit will not be what you think it will be as the bulk of your Medicare premiums plus any surcharges due to IRMAA are automatically deducted from it.

A Roth conversion, when factoring the federal regulation of Medicare and Social Security must be a consideration.

When you are retired you will be faced with a required minimum distribution from those Traditional assets. These distributions will count as income towards IRMAA along with your Social Security benefit.

If your income is deemed to be to be high your Medicare premiums will be increased. Once that happens your Social Security benefit will be reduced.

The result, to maintain your current income more assets will have to be withdrawn from those Traditional assets and this cycle will continue and possibly grow larger.

A Roth conversion today can help manage the costs associated to Medicare and IRMAA tomorrow while saving your Social Security benefit.

Below is a breakdown of how Traditional assets will impact Medicare costs and Social Security benefits for a 55-year-old person who plans on:

  • Retiring at age 67.
  • Earning $100,000 through employment.
  • Receiving $44,940 in Social Security at retirement with a 2% COLA from Social Security annually.
    • Having saved $650,000 in Traditional assets at retirement which will receive a 5% rate of return.

At retirement, age 67, the only income generated for this person is Social Security. With Medicare Part B and D premiums being paid for by their Social Security benefit they will experience a 11.06% less benefit for the year.

At age 74, when the required minimum distribution (RMD) takes effect their income enters the first IRMAA bracket. The result is their Medicare Part B and D premiums increase by just under 25.00% while their Social Security is reduced by Medicare premiums by 19.00%.

Unfortunately, due to the RMD continuing, they reach the 2nd IRMAA backet at age 81 and their Medicare Part B and D premium increase by over 45.00%. The result is their Social Security benefit is decreased by 33.76%.

By age 90 due to their continued income growth from their RMD and Social Security COLA’s their income enters the 3rd IRMAA bracket. Their Medicare Part B and D premiums increased by over 57.00% resulting in a 59.78% loss in their Social Security benefit.

From age 67 to age 90 they have paid $393,547.00 in just Medicare Part B and D premiums due to inflation and IRMAA surcharges while experiencing close to a 40.00% loss on average in Social Security income after age 80.

The tax benefits received today from Traditional assets must be taken advantage of, but before enrolling into Medicare a Roth conversion must be a consideration.

Below is a breakdown of the same person except for implementing a Roth conversion of $500,000.00 before enrolling into Medicare which they realize will generate, roughly, a $120,000 tax consequence.

By implementing a Roth conversion to lower the amount of Traditional assets to $150,000 from $650,000 at the point of retirement they will never generate enough income to reach an IRMAA bracket.

The reason, Medicare does not recognize Roth distributions as income for IRMAA.

The result of the Roth Conversion:

At age 74 their Medicare premiums will not increase by the surcharge and they will keep 6.00% more of their Social Security benefit.

By age 81, where they formerly entered the 2nd IRMAA bracket and their Social Security benefit was reduced by 33.76%, they can expect to receive just over 25% more in Social Security benefits as their Medicare premiums did not increase by 45.00%

The percent of retained Social Security benefits is even higher at age 90 as, again, they never reach that 3rd IRMAA bracket. Their take home Social Security benefit is 85% higher than if they did not convert those Traditional assets to a Roth.

Finally, their total Medicare Part B and D costs from ages 67 to 90 is $148,177 less than if they did not convert to a Roth, thus offsetting that tax consequence of $120,000.

With a Roth conversion you will be able to control your only mandatory expense in retirement, your Medicare premiums, while keeping more of your Social Security benefit for yourself.