Many people worry about not having enough money to retire. But one thing you may not realize is that having a large amount of savings could cause you some headaches, especially if you have your money in a traditional IRA.
It's certainly nice to have a large savings balance to work with so you have enough money to do the things you've always dreamed of. But a large IRA balance could cost you in a surprising way.
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Will forced IRA withdrawals drive up your Medicare premiums?
A big problem with traditional IRAs is that you'll eventually be forced to take annual withdrawals known as required minimum distributions, or RMDs. Not only can those cause large tax bills if they're substantial, but they could have a less obvious drawback -- increased Medicare costs.
Medicare enrollees pay a standard monthly premium for Part B. But higher earners are assessed surcharges known as income-related monthly adjustment amounts, or IRMAAs.
IRMAAs are tiered, so the higher your income, the higher your surcharges are. But all told, IRMAAs could add hundreds of dollars a month to the cost of your Medicare Part B premiums.
Earlier in retirement, you may be able to avoid those surcharges by being mindful of IRA withdrawals. But once RMDs start, you don't really get a choice in how much you withdraw.
If you don't take your RMDs in full, you risk a 25% penalty on whatever amount you don't remove, which could be even more costly than what you'd otherwise pay in IRMAAs. So all told, you could have a classic lose-lose situation on your hands.
How to avoid paying a boatload for Medicare
If you don't like the idea of getting hit with IRMAAs (and why would you?) then there's one potential solution you should know about -- doing a Roth conversion before RMDs start.
If you move at least some of your traditional IRA into a Roth IRA, the amount you convert won't be subject to RMDs. And Roth IRA withdrawals also don't count as income for the purpose of IRMAA calculations. So even if you decide to take larger withdrawals, it won't necessarily leave you paying more for Medicare.
Of course, the one catch is that when you do a Roth conversion, the amount you move over counts as taxable income. If you have a large IRA, spreading conversions out across several years could help minimize the tax consequences.
Even though a large IRA balance is a good problem to have, it's a problem nonetheless. Without careful planning, a bigger retirement account could also mean enormous Medicare bills. But with strategic Roth conversions, you may be able to reduce your IRMAA risk or even get out of paying those surcharges completely.
