As the year draws to a close, many individuals are considering Roth individual retirement account conversions. While this strategy can provide tax-free growth in the future, it’s essential to be aware of the potential tax consequences. Converting pretax or nondeductible IRA funds to a Roth IRA can significantly increase your adjusted gross income (AGI), leading to unforeseen tax implications.
Certified financial planner and certified public accountant JoAnn May warns that a higher AGI can have “completely unintended” consequences. For instance, it can affect Social Security recipients, who may owe taxes on up to 85% of their benefit income once their earnings exceed a certain threshold. Additionally, a higher AGI can make it more challenging to claim the medical expense deduction.
Moreover, boosting your AGI can impact income-related monthly adjustment amounts (IRMAA) for Medicare Part B and Part D premiums. This is particularly crucial for those approaching Medicare age or already enrolled, as the income used to determine IRMAA is based on modified adjusted gross income (MAGI).
Experts caution that Roth conversion income could push individuals into a higher bracket, resulting in increased Medicare premiums. Furthermore, a higher AGI can also affect eligibility for the marketplace health insurance tax break, known as the premium tax credit.
To avoid these unintended consequences, it’s crucial to monitor your AGI throughout the year. This includes considering the impact of Roth conversions and other income sources on your tax situation. By doing so, you can make informed decisions and avoid potential tax pitfalls.
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