Why your Roth IRA conversions could have 'unintended' tax consequences But the strategy can trigger other consequences, experts say
Roth individual retirement account conversions can save on future taxes
As year-end approaches, you may be eyeing Roth individual retirement account conversions.
The strategy, however, boosts your income, which can have other tax consequences, experts say.
Roth conversions shift pretax or nondeductible IRA funds to a Roth IRA, which provides future tax-free growth. But the converted balance boosts your current-year adjusted gross income.
Additionally, increasing your AGI can have "completely unintended" ramifications, said certified financial planner JoAnn May. She is also a certified public accountant and the principal and co-founder at Forest Asset Management in Riverside, Illinois.
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Whether you're making Roth conversions or incurring other income, you need to monitor your AGI throughout the year, experts say. Otherwise, you could lose eligibility for certain tax breaks or unexpectedly trigger tax hikes.
For example, once earnings pass a certain threshold, Social Security recipients can owe taxes on up to 85% of benefit income, May said.
Higher AGI also makes it harder to claim the medical expense deduction, she said. For 2024, you can deduct unreimbursed costs above 7.5% of your AGI, assuming you itemize tax breaks.
Here are a couple of other major tax issues to watch, experts say.
You could pay 'excess premiums' for Medicare
If you're approaching Medicare age or already enrolled, boosting your AGI could also impact income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums.
The income used to determine IRMAA is based on your modified adjusted gross income, which is your AGI plus tax-exempt interest. There's a two-year lookback for IRMAA, meaning your 2024 MAGI could impact IRMAA for 2026.
"That's a big piece," Ashton Lawrence, CFP and director at Mariner Wealth Advisors in Greenville, South Carolina previously told CNBC. "No one likes paying excess premiums."
For 2024, the standard monthly Medicare Part B premium is $174.70. But that could be higher if your 2022 MAGI was above $103,000 as an individual or $206,000 as a married couple.
Those earnings thresholds are a cliff and Roth conversion income could push you into the next bracket, experts warn.
"The last thing you want is to peak right over that bracket by $1," Lawrence said. "Now your Medicare premiums have just jumped up substantially."
You could lose marketplace tax credits
Another reason to watch your AGI is the marketplace health insurance tax break, known as the premium tax credit, which is currently enhanced through 2025.
In 2024, some 92% of marketplace enrollees, or 19.7 million people, were eligible for the advance payments of the premium tax credits, which reduce yearly health insurance premiums by $700 on average, according to the U.S. Centers for Medicare and Medicaid Services.
However, calculating credit eligibility can be complicated because it's based on the difference between a benchmark premium — the cost of the second-lowest-cost silver plan available in an area — and a maximum contribution based on a percentage of income.
To avoid eligibility issues, Forest Asset's May said she skips Roth conversions for a client claiming the premium tax credit.
This story originally appeared on: CNBC - Author:Kate Dore, CFP®
