Roth Conversion Considerations for Retirees

By Erica Eros | Case Planning/Retirement Consultant

The recent Medicare premium and deductible increase may affect retirees on a fixed income. If they make too much money, a potential investment surtax could result. A retiree who is receiving Medicare may be significantly affected because it may result in a high-income surcharge for Medicare Part B and Medicare part D. The high-income threshold is $88,000 for single filers and MAGI of $176,000 if they are married filing jointly.

  • Doing one large Traditional IRA to Roth IRA conversion may push the taxpayer into a higher tax bracket. This is especially important for retirees and IRA owners on Medicare. Partial conversions will allow for the tax payments to be spread out over several years.
  • The standard monthly Part B premium in 2020 was $144.60 but will increase to $148.50 in 2021.
  • The annual deductible for Part B is also increasing from $198 in 2020 to $203 in 2021. And the Part A deductible per hospital benefit period is increasing, too, from $1,408 to $1,484.
  • Use non-IRA funds to pay for income tax on conversion.
  • There is no income limit on eligibility for converting a Traditional IRA to a Roth IRA.
  • When doing a Roth conversion of any nondeductible retirement account, you must consider what the client has in any pre-tax Traditional IRA, SEP, or SIMPLE IRA accounts. Any pre-tax balances in these accounts would require the use of Pro Rata Rules on the conversion.
  • Married tax filers have the most favorable tax bracket. Couples should consider a Roth conversion before the first spouse’s death.
  • Married tax filers who have separate IRAs should do Roth conversions in different tax years. This will reduce the total income for the year and could result in lower Medicare premiums.
  • Upon conversion, pre-tax contributions are taxed as ordinary income and after-tax contributions are not taxed. The pro-rata formula is used to determine how much of a conversion is taxable when the account holds both pre-tax and after-tax contributions. The rule combines all SEP, SIMPLE, and Traditional IRAs as if they are one.
  • Pro-rata is calculated by taking the sum of all after-tax dollars in all Traditional IRAs. Divide the sum of after-tax dollars by the 12/31 balance of all Traditional IRAs. Then multiply that percentage by all Traditional IRA distributions. The following example illustrates the pro-rata calculation:

    If you have $20,000 of after-tax dollars in all your IRAs and the total balance of all your IRAs is $100,000, your percentage of after-tax dollars is 20% ($20,000/$100,000 = 20%). If a distribution of $10,000 was made, the tax-free portion would be $2,000 (20% x $10,000 = $2,000). The remaining portion of the distribution ($8,000) would be taxable at ordinary rates.

While there are many benefits of doing a Roth conversion there are reasons that a conversion may not make sense:

  • Does the IRA owner need the IRA funds to meet annual living expenses? A five-year holding period applies to earnings in the account.
  • Will the conversion push the IRA owner into a higher tax bracket?
  • Calculate the Alternative Minimum Tax (AMT) implications of the conversion.
  • Will the client die with a substantial charitable bequest?
  • The Tax Cut and Jobs was passed in December 2017, which eliminated the ability to recharacterize or undo a Roth conversion.

It is always a best practice to have the taxpayer’s tax professional run the numbers to verify any tax consequences of the conversion and the optimum conversion amount.

If you have any questions, contact us in Case Planning – Qualified Plans by email at


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