Navigating Medicare Costs and IRA Withdrawals: A Guide to Roth Conversions
A couple withdrawing $80,000 from a traditional IRA could incur approximately $2,000 in additional annual Medicare Part B premiums, alongside federal income taxes. Conversely, the same withdrawal from a qualified Roth IRA can prevent an increase in Medicare costs and reduce income tax liabilities throughout retirement. Establishing a Roth IRA and conducting partial Roth conversions strategically between retirement and age 73 can help individuals mitigate the financial burdens associated with traditional retirement account withdrawals. Qualified Roth distributions do not impact the Modified Adjusted Gross Income (MAGI) threshold responsible for triggering Medicare surcharges.
The Income-Related Monthly Adjustment Amount (IRMAA) applies to Medicare Part B and Part D premiums when modified adjusted gross income surpasses specific thresholds. This adjustment is based on income from two years prior, so premiums for 2026 would be influenced by 2024 tax returns. Various income sources, including traditional IRA withdrawals, 401(k) withdrawals, Roth conversions, pension income, and taxable Social Security, contribute to MAGI. However, qualified Roth IRA withdrawals do not.
On her "Women & Money" podcast, Suze Orman highlights a common oversight regarding retirement account balances, emphasizing that withdrawals from traditional IRAs are taxed as ordinary income. She advises utilizing the Roth five-year rule as a solution, which allows tax-free and surcharge-free withdrawals if certain conditions are met.
For example, a 68-year-old couple withdrawing $40,000 annually from Social Security and $80,000 from a traditional IRA could find their MAGI around $108,000 when the taxable portion of Social Security is factored in. This places them in the IRMAA second tier for joint filers, potentially increasing their Medicare premiums by approximately $2,000 annually, in addition to the federal income tax on their withdrawal. However, drawing the same $80,000 from a Roth IRA that meets the five-year rule reduces their MAGI to around $34,000, avoiding IRMAA altogether and minimizing taxes on Social Security.
Deciding whether Roth conversions are beneficial depends on the difference between current working tax rates and anticipated retirement tax rates, considering the IRMAA implications. For high earners in the 24% bracket anticipating moderate retirement withdrawals, Roth conversions may seem costly upfront but can prove advantageous in the long run. Conversely, retirees expecting lower total income with a 12% tax bracket may find Roth conversions less favorable.
Opening a Roth IRA can start the five-year clock based on the tax year of the first contribution. Individuals should compare their MAGI to current IRMAA tiers to evaluate potential impacts. Planning partial Roth conversions before required minimum distributions begin at age 73 is recommended to avoid higher tax brackets and IRMAA thresholds. Employers offering Roth 401(k) options should be considered, especially with upcoming changes under SECURE 2.0.
Ultimately, Suze Orman’s guidance on Roth accounts can ensure retirements avoid unexpected tax and premium increases. Adopting such strategies early enhances readiness and financial stability during retirement.