Govt got me again. Hidden tax in IRA to ROTH conversion

[whitestick]

Did the conversion from IRA to ROTH in 2010, and elected to spread over two years for tax purposes, to pay the taxes. Nobody told me, that Medicare Part B and D had an adjustment to raise the amount of costs to you based on the MAGI on your tax 1040. Even though its moving an asset from one class to another, and NO income is taken out, only declared and taxed, they raise the charges you have to pay for each year of the higher MAGI on your 1040. So penalty of Income tax paid, and double penalty of higher Medicare B/D costs. What a racket.

 

[Original Wally]

The "Law of Unintended Consequences" strikes again. Deepest sympathy.

 

[audreyh1]

Well, I can understand your frustration with the unintended consequences, but moving assets from one investment to another can cause these kinds of taxable consequences all the time. If you had withdrawn it permanently, it would have been the same - it makes no difference that you were able to move it to a different kind of tax-deferred vehicle (and at least you won't owe future taxes). A withdrawal from a traditional IRA is treated the same way tax-wise whether converted to a Roth or not. You have the benefit of being able to reinvest it in a Roth, not the benefit of the withdrawal being treated differently tax-wise just because it was converted to a Roth.

Folks have to be very careful about consequences of conversion - it's not that simple.

I don't think this is a case of "unintended consequences", I think it's a case of complex tax law - i.e. potential consequences being far more complex than people might realize when they choose to do a Roth conversion because so many things are based on MAGI.

 

[JoeWras]

When I ER, I plan on using the years before SS and required withdrawals to do conversions, while living off my non-taxed accounts.

It seemed like an easy plan, just looking at income tax rates. But now my unintended consequence is the 400% poverty cliff in the ACA. (I'll probably be getting ACA health insurance.) So, I'll have to weight in that number too in order to get the subsidy.

Sounds like a similar problem to what you had.

 

[teejayevans]

When I ER, I plan on using the years before SS and required withdrawals to do conversions, while living off my non-taxed accounts.

It seemed like an easy plan, just looking at income tax rates. But now my unintended consequence is the 400% poverty cliff in the ACA. (I'll probably be getting ACA health insurance.) So, I'll have to weight in that number too in order to get the subsidy.

Sounds like a similar problem to what you had.

My back of envelope calcs that will come to about 30% (15% tax, 15% reduced subsidy).
TJ

 

[gerntz]

Bumped my MAGI as high as I could safely estimate & thus stay below the extra Medicare payments thru taking cap gains.

 

[Amethyst]

Whitestick,

Thanks for posting - although your particular situation doesn't apply to us at this time, it might in future. It's an important reminder of the old saw about "you don't know what you don't know," which has stuck me where it hurts time after time.

I don't know any solution, except to do all the research we can, consult paid experts, and have a decently extensive network of like-minded folks to consult before making decisions that smell like they could have tax consequences. Which would include anything to do with Roth IRAs, although like you, I never would have thought to associate it with health insurance!

Sorry you had this bad experience.

Amethyst

 

[bUU]

I've always chosen to consider Roth conversion to be taking money that was not declared as income in the year it was earned and declaring it as income in the year of the conversion. I think that manner of regarding it would serve me well. Having said that, I'm souring on the idea of Roth conversions just because of the complexity and my apparent inability to juggle a hundred balls in the air at the same time.

 

[whitestick]

Whitestick,


I don't know any solution, except to do all the research we can, consult paid experts, and have a decently extensive network of like-minded folks to consult before making decisions that smell like they could have tax consequences. Which would include anything to do with Roth IRAs, although like you, I never would have thought to associate it with health insurance!

Amethyst

I thought that I had done as much of that as i could think of. It just never crossed my mind, and apparently, none of the "experts" that I consulted with either, that it would impact the Medicare. But it certainly didn't cross my mind that Part D, which I am not taking as my company's plan provides prescription coverage, would levy a high income charge against me. I still don't understand how this works, "a higher charge for something I'm not even taking from them anyway". I think it must be time for a tax revolt. [mod edit]

 

[GrayHare]

If you've had that IRA invested mostly in stocks since 2010, given how much stock prices have risen since then, despite higher Medicare costs your 2010 conversion probably put you "ahead of the game" on an after-tax basis.

 

[youbet]

whitestick,

If you go to the "Political" thread area and open the thread on Obama's State of the Union Speech, near the end (beginning with post #68) you'll find an interesting discussion on this subject. Some board members feel your (or anyone's) MAGI being at $170k MFJ or $85k single means that you're earning enough that you're wrong to mind paying the higher premiums. I don't agree with those folks. I think it's fine for you to feel unhappy about it. But you might want to go to that area and read the comments just to hear the points of view.

My sympathy regarding your situation, especially the Part D part. I think the friendly and professional folks at the IRS were adequately clear that dollars moved from a TIRA to a Roth would be taxable as ordinary income. I don't think the friendly and professional folks at SS/Medicare advertised the Part B and Part D income related penalties adequately. I recall that in the announcements they frequently mentioned that those penalties would only impact 5% of the population and that there was therefore little need to worry. Politics and spin got in the way of good communication. What a surprise.

 

[whitestick]

whitestick,

If you go to the "Political" thread area and open the thread on Obama's State of the Union Speech, near the end (beginning with post #68) you'll find an interesting discussion on this subject. Some board members feel your (or anyone's) MAGI being at $170k MFJ or $85k single means that you're earning enough that you're wrong to mind paying the higher premiums. I don't agree with those folks. I think it's fine for you to feel unhappy about it. But you might want to go to that area and read the comments just to hear the points of view.

I'll check it out, but in the old adage about walking a mile in another's shoes comes to mind. The MAGI may be higher then others, but that ignores the need to cover much higher expenses, like medical - not covered by insurance, support of children and grandchildren when son-in-law cannot find a job to cover their expenses, et.al. and other costs that surprise to the upside. 'buff said.

 

[Lisa99]

When I ER, I plan on using the years before SS and required withdrawals to do conversions, while living off my non-taxed accounts.

We're planning to do the same thing, but won't finalize the strategy until we know what the "income thresholds" are for Obamacare.

Right now, the calculator indicates that at $60,000 income our monthly healthcare premium would be about $400. At $60,001 income, the monthly premium jumps to >$1200/month. I know it's all estimated right now, but just know that you need to know where those income thresholds.

 

[queeneev]

When I ER, I plan on using the years before SS and required withdrawals to do conversions, while living off my non-taxed accounts.

It seemed like an easy plan, just looking at income tax rates. But now my unintended consequence is the 400% poverty cliff in the ACA. (I'll probably be getting ACA health insurance.) So, I'll have to weight in that number too in order to get the subsidy.

Sounds like a similar problem to what you had.

100% ditto! So frustrating...

 

[haha]

These Medicare backdoor taxes are certainly not new. I went on Medicare in 2006, and they existed then or shortly after as I had to pay them the first few years. The Part D boost might not have existed at first, but the B did.

I don't remember any trumpets; I think it was kind of a stealth move. I finally built a spreadsheet to let me know where I was wrt this tax.

Ha