One of the biggest expenses you might face in retirement is none other than healthcare. And part of the reason is that Medicare is by no means free.
Though most enrollees don't pay a premium for Medicare Part A, there are monthly premiums associated with Part B. And your Part D drug plan or Medicare Advantage may charge a premium, too.
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Medicare Part B has a standard monthly premium that changes from year to year. This year, it's $202.90 a month.
But higher earners often have to pay more for Part B in the form of income-related monthly adjustment amounts, or IRMAAs. They're basically a surcharge on Medicare premiums, and they could potentially add hundreds of dollars a month to your cost.
One smart move ahead of retirement, though, could help you keep your Medicare premiums lower. You just have to plan for it carefully.
Why Roth conversions are key
Your Medicare costs hinge on what your modified adjusted gross income (MAGI) looks like. You should know that withdrawals from a traditional IRA or 401(k) plan count toward your MAGI. And if you have a large retirement plan balance, that could drive you into IRMAA territory.
Now you may be thinking, "Well, I'll just limit my IRA or 401(k) withdrawals, then." But that may only work until you have to start taking required minimum distributions, or RMDs.
At that point, you won't have a say in how much you withdraw, since failing to take RMDs results in steep penalties. And if your RMDs are substantial, you could be looking at IRMAAs.
That's why it pays to look at a Roth conversion ahead of retirement.
If you're able to move funds from your traditional IRA or 401(k) into a Roth IRA, your withdrawals won't be taxed and therefore won't count toward your MAGI. This means you could effectively withdraw hundreds of thousands of dollars per year in retirement without having to pay more than Medicare's standard monthly Part B premium.
Time your Roth conversions carefully
You may be all nice and ready to do a Roth conversion by now. But remember, the money you convert counts as taxable income the year you convert it. If you have a $1 million IRA, converting it all in a single year is not advisable.
It's a good idea to spread Roth conversions out over several years to minimize each year's tax bill. So if you have $1 million to convert, you may want to try doing that over 10 years if possible. You may have an opportunity to do that if you semi-retire in your 50s by taking a lower-paying and less stressful job and sticking with it for a decade.
Of course, you may not be able to move all of your money out of a traditional retirement plan. But you don't have to. If you're able to whittle your $1 million traditional IRA down to $400,000 by the time you have to start taking RMDs, there's a good chance those mandatory withdrawals will be small enough that you won't risk IRMAAs.
The last thing you probably want to do in retirement is pay for more for Medicare. With the right strategy, you may not have to.
