How to Avoid Pitfalls of Roth IRA Conversions

Key Takeaways

• A Roth conversion increases your reported taxable income for that year, which reduces your eligibility for ACA premium subsidies (APTC), potentially forcing you to repay excess subsidies when filing taxes the next year
• Medicare surcharges are calculated based on your Modified Adjusted Gross Income (MAGI) from 2 years prior—a Roth conversion can trigger higher Part B premiums and Part D Income-Related Monthly Adjustment Amounts (IRMAA) years later
• Healthcare cost planning now directly involves tax planning; any strategy that raises your taxable income affects both ACA and Medicare costs, not just federal income taxes
• The reduction in ACA subsidies from a Roth conversion lasts only one year—if you don't convert the following year, the subsidy benefit returns, making timing critical if you expect lower income
• Consult a financial planner who considers comprehensive healthcare and tax implications together, and verify your own understanding before applying for health insurance subsidies on healthcare.gov or state exchanges