It’s an approach worth trying.
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One of the biggest expenses you may face in retirement is none other than medical expenses. Part of the reason is that Medicare is never free.
Most enrollees do not pay a premium for Medicare Part A, but there is a monthly premium for Part B. You may also be charged a premium to your Part D drug plan or Medicare Advantage.
Standard monthly premiums for Medicare Part B vary from year to year. This year it’s $202.90 per month.
However, higher income earners often have to pay more for Part B in the form of an Income-Related Monthly Adjustment Amount (IRMAA). These are essentially surcharges on your Medicare premiums and can add hundreds of dollars in costs per month.
However, if you make one smart move before you retire, you may be able to keep your Medicare premiums low. You just have to plan carefully.
Why Roth conversions are important
The cost of Medicare is determined by what your modified adjusted gross income (MAGI) is. You should know that withdrawals from a traditional IRA or 401(k) plan count toward MAGI. And if your retirement plan has large balances, you could be pushed into IRMAA territory.
Now you may be thinking, “Well, why not limit withdrawals from my IRA or 401(k)?” But that may only work until you need to start taking the minimum distribution, i.e., RMDs.
At that point, you have no say, no matter how much you withdraw, because there are hefty penalties for failing to collect your RMDs. Additionally, if your RMDs are significant, you may be considering IRMAA.
That’s why it pays to consider turning Ross around before he retires.
If you are able to move funds from a traditional IRA or 401(k) to a Roth IRA, the withdrawals are not taxed and therefore do not count toward MAGI. This means you can effectively withdraw hundreds of thousands of dollars a year in retirement without exceeding Medicare’s standard monthly Part B premiums.
Timing your Roth conversion carefully
You may be ready to make a Roth conversion. But remember, the money you convert will count as taxable income in the year of conversion. If you have a $1 million IRA, it’s not a good idea to convert it all in one year.
We recommend spreading your Roth conversion over several years to minimize your annual tax bill. So if you have $1 million to cash out, you might want to try and cash it out over 10 years if possible. If you semi-retire in your 50s and get a low-paying, low-stress job and stay in that job for 10 years, you might have a chance.
Of course, you may not be able to transfer all your money from a traditional retirement plan. But it doesn’t have to be. If you can reduce your traditional $1 million IRA to $400,000 by the time you start taking RMDs, your forced withdrawals will likely be small enough to avoid IRMAA risk.
Perhaps the last thing you want to do in retirement is pay extra for Medicare. With the right strategy, that may not be necessary.
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