The Hidden Benefit of Doing a Roth Conversion Ahead of Retirement
Key Points
Having savings in a Roth account gives you access to tax-free withdrawals in retirement.
It also means avoiding required minimum distributions.
Roth withdrawals don't count as modified adjusted gross income, which could help keep your Medicare costs down.
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When financial professionals talk about the benefits of doing a Roth conversion ahead of retirement, they tend to focus on a couple of key benefits. Roth IRA and 401(k) withdrawals are taken tax-free. And not having to worry about taxes at that stage of life is huge.
Roth accounts also don't force you to take required minimum distributions (RMDs). That gives you more flexibility with your money and makes it easier to factor your IRA or 401(k) into your inheritance plan.
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But there's a less obvious benefit of doing a Roth conversion before you retire. You may not realize it, but moving your money out of a traditional retirement account and into a Roth could help you lower your Medicare costs down the line.
How Roth conversions keep Medicare costs more manageable
While Medicare Part A is free for most enrollees, there's a monthly premium you need to pay for Part B coverage. Each year, a standard monthly premium for Part B is set. But if you're a higher earner, you'll pay a surcharge beyond that standard premium known as an income-related monthly adjustment amount, or IRMAA.
Medicare IRMAAs are based on your modified adjusted gross income (MAGI) from two years prior. In other words, a higher income this year could leave you paying higher Medicare premiums in 2028.
What does that have to do with Roth conversions? When you take withdrawals from a Roth account, they don't count toward your MAGI. And so having your savings in a Roth account could help you avoid paying more for Medicare.
To give you an idea of when IRMAAs kick in, this year, if you're single with a MAGI of over $109,000, you'll pay more for Medicare Part B. Now, let's say you have an income of $120,000, but $40,000 of that is retirement plan withdrawals. If those distributions are coming out of a Roth account, they won't count toward your MAGI, keeping you below the IRMAA threshold.
Look at all of the things you stand to gain
Roth conversions have to be timed carefully. That's because you need to pay taxes on the money you move into a Roth.
But it's a good idea to think about the benefits of having Roth savings in retirement. Not only might you avoid taxes and RMDs, but you might also manage to avoid getting charged more for Medicare. Given that the cost of Medicare tends to go up over time, not having to pay extra could take a load off of your budget.
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