Many people who currently have “traditional” IRAs but not Roth IRAs are thinking about converting them into Roth IRAs under special rules that will permit this during 2010. One thing about these conversions is that whatever gains you had on your original IRA investments will be taxed as ordinary income. And there are many complications about this feature of the conversion process that are cause for concern even though, after you have made your conversion, your Roth IRAs live happily “tax free ever after.” One is that if you go through the conversion, your tax bracket may increase, and you may even get into an Alternative Minimum Tax situation. I am not a CPA and can’t give any advice about this process, other than there is a Medicare angle which I have not seen mentioned in the press and which you need to discuss with your CPA. When you convert, the gains you have made will count as income, and it is possible that they will so increase your income that you will have to pay a surcharge on your Part B Medicare premium, or that, if you are already doing so, it might raise it still higher. (The government euphemistically refers to these high-income surcharges as “subsidy reductions.”) While this is covered in some detail in section 9 in the very first chapter of my book, an individual with an income over $85K (this includes married persons filing separately), or a couple (filing jointly) with an income over $171K, will have their premiums boosted by up to $243.10 a month. (Of course, each of the couple, if they have both have Part B of Medicare, must pay this.) If the income from your conversion is the only reason you go above these thresholds, you will only have to pay this surcharge for one year (typically the year two years after the tax year involved). Again, as you can spread out your conversion income to two years (to 2011 and 2012, instead of 2010, I believe), this could be longer. Again, these conversions are quite complex and you undoubtedly need an accountant to guide you, but for a couple it’s possible to increase your Part B premiums by up to almost $6,000 in one year! That might make anyone think twice about doing this, or perhaps how they go about doing it.
And, just so you know, the Health Care Reform legislation added two kickers to this. One is that it froze the income levels mentioned above to the amounts shown above. This means that even if you are not subject to a Part B premium surcharge now, this could change, even if your income goes up only a little. (Previously, the income thresholds would go up somewhat every year.)
But the second kicker is more important. Not only will your Part B premium be subject to high income surcharges, but so too will your Part D premium, beginning in 2011. So if your income increases a lot in 2010, your 2012 Part D premium may get hit with a surcharge. (Again, the legislation euphemistically refers to these high-income surcharges as Part D “subsidy reductions.”). A double-whammy! Again, I have not seen this mentioned in the Roth conversion literature, and I am still trying to calculate just how much money this would cost a Part D beneficiary. But again, discuss this with your accountant if you are or plan to be a Part D beneficiary in the next few years.
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