Can I do a Roth conversion to save future taxes and Medicare premiums at 63?

[wglennreid]

What are some ways to minimize taxes/surcharges, particularly as RMDs kick in? I am thinking that I have 1 year to avoid the extremely large Medicare premiums but I am I right?  Here's what I am thinking = 

I plan to retire at the end of 2020 at age 62 (I turn 62 in September 2020).  When I run the RMD calculator on Schwab, I am looking at estimated RMDs at age 70 ½ that would put retirement income in the range of $150K -$200K including pension, which is more than I need.  I noticed that the Medicare B premiums on that income in 2019 would be the standard $135.50 plus $216.70 per month and Medicare D would be $51.40 per month, or $500 monthly in new medical premiums I would have to pay in addition to keeping my existing medical and dental insurance.

One option I thought of converting some of the Regular IRA to a Roth during the following year after I retire, but see that Medicare goes two years back to compute MAGI, so I am trying to determine if I should delay filing for Medicare B until 1-3 months after I turn 65 in September 2023.   If I do so, my Medicare coverage would not start until January or February 2024. I cannot figure out what year MAGI would be used for the Medicare premium – would it be 2022, in which case the large conversion would not count, or 2021, which would include the large conversion.  I also want to wait to convert until I retire as I want to move to south Florida from Maryland. So avoidance of state taxes, about 9% state and local taxes, is also a consideration in why I want to wait until I retire and move.

I can’t tell from the Medicare website – (a) whether I have to apply for Medicare part B even though my employer is the Federal government and I will be keeping my insurance or whether I would be subject to late penalty enrollment fee if I don’t sign up.  (b) what year is used in computing the MAGI if you apply after your birthday but still within the standard enrollment period.

So the question is whether the year I convert (2021 at age 63) would be considered for my first year's Medicare premium if I wait until after my birthday to apply for Medicare, which would not effective until January or Feb 2024?  If I apply 3 months before my 65 birthday in 2023, I know Medicare is effective in 2023 and presume MAGI for 2021 is used, but I can't tell if I wait.

I guess I rambled a bit, the RMD tables are scary, so thanks.  Thanks.

[secondcor521]

I don't know all of the answers to your questions, but I wanted to share a few things I am fairly certain of which may be helpful.

First, your Medicare premiums add up to about $400 a month, not $500 a month.

Second, the Medicare brackets will start going up for inflation every year starting next year.  If your income is on the cusp, then you may be in one tier lower premium bracket than you think.

Third, I don't think most people keep their existing insurance when they go on Medicare, so you wouldn't necessarily need to keep your existing medical and dental.  Although I think you can.  I have also heard that Medicare is primary, so your insurance would only be secondary, which may mean it's not worth keeping.

Fourth, and this is an important point, the increased Medicare premium surcharges are on a year by year basis.  So if you do a large Roth conversion in 2021, it will mean a large Medicare premium in 2023, but if your income in 2022 is lower, then your Medicare premiums in 2024 will drop down again.  If you have a high income year, the increased Medicare premium two years later is not permanent.

Your 2024 Medicare premium will be based on your 2022 tax return.  So a conversion in 2021 should not affect it.

A conversion in 2021 would affect your Medicare premium in 2023, but it sounds like that would only be for a month or two at most.

I do not know whether you are required to buy Medicare Part B in your situation.  I'd chat with someone who sells Medigap or Medicare Advantage policies as they are probably well versed in that question.

I guess the good news is you'll have plenty of money to pay the Medicare premiums if your RMDs are that big?

Hope that helps.

[Catbert]

Well, let me solve part of your problem.  If you have FEHB in retirement, you do NOT have to take Medicare.  When DH and I each reached 65 we opted for Medicare Part A (hospital, Free) but not Part B.  Kaiser encourages me to get Part B and would even give me a better deal (waived co-pays on most appointments but not worth several hundred dollar each month.)

FEHB costs the same and works the same for retirees as it does for employees. 

I *think* that the make-too-much-pay-more-for-Medicare is actually year by current year so your income before the year you start Medicare doesn't matter.  It just seems like 2 years before b/c it takes a while for SS to know your income.  (In year A you earn too much.  Your taxes are filed by Oct year B and SS is notified on income in late-year B.  So in Year C they raise the premiums to make up for what you didn't pay in Year A.)

Yes, do Roth conversions to prevent a Tsumani of RMDs.  Pick an income tax bracket and fill it with Roth conversions after other income if factored in.  Maybe that's the bracket your in while working.  Or maybe the next one down.

[MDM]

I *think* that the make-too-much-pay-more-for-Medicare is actually year by current year so your income before the year you start Medicare doesn't matter.

Unfortunately it does matter.  The rest of your explanation is pretty much correct, but (absent some reason justifiable via https://www.ssa.gov/forms/ssa-44-ext.pdf) one's Medicare premium at age "n" is based on one's Medicare MAGI for the return filed at age "n-2".

In other words, your return at age 63 determines your Medicare premium at age 65.