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As the end of the year approaches, you may be looking at individual Roth retirement account changes.
The trick, however, is to increase your income, which can have other tax consequences, experts say.
A Roth conversion converts taxable or tax-free IRA funds into a Roth IRA, providing tax-free growth in the future. But the adjusted balance increases adjusted gross income for the current year.
Additionally, increasing your AGI can have “totally unintended” consequences, says certified financial planner JoAnn May. He is also a certified public accountant and principal and founder of Forest Asset Management in Riverside, Illinois.
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Whether you’re making Roth conversions or receiving other income, you need to monitor your AGI throughout the year, experts say. If not, you may lose eligibility for certain tax breaks or incur unexpected tax increases.
For example, once earnings exceed a certain threshold, Social Security recipients can owe up to 85% of their earnings in tax, May said.
A higher AGI also makes it harder to claim the medical expense deduction, she said. In 2024, you can deduct refundable expenses in excess of 7.5% of your AGI, assuming you take tax breaks.
Here are a few other big tax issues to watch, experts say.
You may pay ‘excess premiums’ to Medicare
If you are approaching Medicare age or already enrolled, increasing your AGI may also affect the income-related monthly adjustment amounts, or IRMAA, for Medicare Part B and Part D premiums.
The income used to determine the IRMAA is based on your adjusted gross income, which is your AGI and tax-exempt interest. There is a two-year lookback for the IRMAA, meaning your 2024 MAGI could affect the 2026 IRMAA.
“That’s a big piece,” Ashton Lawrence, CFP and director at Mariner Wealth Advisors in Greenville, South Carolina previously told CNBC. “No one likes to pay exorbitant premiums.”
In 2024, the average monthly payment for Medicare Part B is $174.70. But that would be higher if your 2022 MAGI is more than $103,000 as an individual or $206,000 as a married couple.
Those income limits are falling and the income from a Roth conversion could put you in the next bracket, experts warn.
“The last thing you want is to go over that bracket by $1,” Lawrence said. “Now your Medicare premiums just skyrocketed.”
You may lose market tax credits
Another reason to watch your AGI is the marketplace health insurance tax break, known as the premium tax credit, which is currently being phased out in 2025.
By 2024, about 92% of marketplace enrollees, or 19.7 million people, would be eligible for the prepayment tax credit, which reduces annual health insurance premiums by $700 on average, according to the US Centers for Medicare and Medicaid Services.
However, calculating credit eligibility can be complicated because it is based on the difference between the rate premium — the cost of the second lowest-priced silver plan available in the area — and the maximum contribution based on a percentage of income.
To avoid eligibility issues, Forest Asset’s May said it skips Roth conversions for clients seeking premium tax credits.