Retirement Savings and Benefits
Questions and comments about IRAs, 401k accounts, social security, and other forms of retirement savings and benefits.
IRA to Roth conversion and MAGI
Posted by: phini, March 17, 2017 05:26PM
Forgive me if this has been covered as I did not see it in my search:

I have been told, and have read, that a direct conversion from IRA to Roth will not affect my MAGI and therefore will not affect my ACA subsidy. When I do my taxes (Turbotax) the conversion does show as part of MAGI and therefore I loose my ACA subsidy. I made no other contributions, so no "back door" is possible. I have now spoken to Turbotax and the IRS. They both say that the conversion does go into MAGI and I am out of luck. Unless someone has an idea, I will need to back out my conversion. I am attempting the conversion to pay the taxes now rather then after SS turns on and my income (and tax bracket) is much higher. Thanks for any input.

Re: IRA to Roth conversion and MAGI
Posted by: Alan S., March 17, 2017 06:05PM
You are juggling current vs future benefits here and there are several variables. For example, if you recharacterize a conversion that already has investment gains, you are moving those gains back into a TIRA where they will be taxed eventually. Note that if the ACA subsidy has a dollar threshold, you only need to recharacterize as much of the conversion as needed to drop your AGI under that limit. It is not all or nothing. Finally, you should look at the lost subsidy as an increased tax on your conversion, so if you add those lost dollars to the conversion taxes, it will probably make the effective marginal rate for the conversion higher than what you expect in retirement if you didn't convert. So you do have an option here, but it will take some number crunching.

Re: IRA to Roth conversion and MAGI
Posted by: triad, March 17, 2017 07:12PM
"I've been told" is usually wrong and it is here as well.

The Premium subsidy reconciliation starts with the AGI on the tax return and ADDS a few things. There are no subtractions that would lower your income for this purpose.

When you convert an IRA to a ROTH, you push that AGI up. If it pushes you over 400% of the poverty level, you get no subsidy and must every penny back. Even if you don't go over 400%, each additional dollar is part of the required contribution and the multiplier on all of your income goes up as well.

The exchange personnel do not do taxes and routinely leave off income when trying to estimate your income (there are people trying to claw their way UP to get a subsidy). The problem is that what makes sense on lower incomes is deadly for the folks who already made the cut. I talked to taxpayer who was told not to count interest when applying for a subsidy. The exchange was thinking $10 on a checking account, not the $50K he had of tax exempt interest and when he went to file, he and his wife owed $12,000 back. (He admitted he knew it was too good to be true.)

BTW, MAGI means something different every time it is used in the tax code. Another MAGI may not care. This one does.

It is up to you if want to recharacterize the conversion. However, this is also a crystal ball kind of thing. If the Trump affect continues, you might pay more later than you would now....

Re: IRA to Roth conversion and MAGI
Posted by: Art, March 17, 2017 08:40PM
Well said.

Re: IRA to Roth conversion and MAGI
Posted by: 47Percent, March 17, 2017 09:12PM
Just a few thoughts to add to the above..

The 400% MAGI threshold is a cliff. If you exceed that by even a dollar, not only do you fall off the cliff, you land on a nail bed with your fleshy part of the anatomy.

So you should recharacterize enough to get yourself below that magic number first -- and allow a little bit of extra cushion for some forgotten $20 1099-INT statements from accounts you didn't even remember you had.

Then play with Turbo tax and reduce the MAGI by a couple of hundred dollars to see how it affects the taxes -- keeping an eye on the state taxes too. Depending on what you see, you can adjust the recharacterization amount accordingly.

While tweaking the MAGI.. don't forget

1) Contribution to deductible IRA (yours and spousal), if eligible, would reduce MAGI directly.
2) Contribution to HSA, if eligible, would reduce MAGI directly
3) If you have a choice betn. taking the education tax credit (Form 8863), or taking a Tuition & fees deduction
(form 8917) -- only the Tuition & fees deduction reduces your MAGI. Try both ways to see if one is more advantageous.

All the three above can be done after Dec 31st, up to the time of filing - recharacterization up to filing extension date -- which is really handy.

Good luck..

Re: IRA to Roth conversion and MAGI
Posted by: phini, March 18, 2017 03:11PM
Thank you all for the info. It is right on target. A few details: We are retired and have no earned income, so an IRA or HSA deposit seems to be a no go.

The idea of a partial (versus total) recharacterization is a possibility. I will have to do some thinking and crunching in turbotax to see the trade offs between a lower subsidy now, taxes on the conversion now and the taxes that will be payable at age 70 on the IRA withdrawls.

I guess my only remaining question is whether this trade off is linear. i.e. for each $1k increase in the conversion (up to the top of the bracket) does the subsidy fall by the same amount? I appreciate your input. It's a shame things have to be this complected.

Thanks again

Re: IRA to Roth conversion and MAGI
Posted by: triad, March 19, 2017 12:16AM
Download the instructions for form 8962. There is a page of multipliers in it. From 100-300%, the percentage you contribute goes up geometrically. From 300-400% it is a flat percentage.

Re: IRA to Roth conversion and MAGI
Posted by: 47Percent, March 19, 2017 08:00PM

>> "We are retired and have no earned income, so an IRA or >> HSA deposit seems to be a no go. "

Unlike IRA, you don't need earned income for HSA. You need only a HDHP health plan (HSA eligible), and the required money to put in an HSA. The money can come from savings, investments, or any other means.

So this is an ideal vehicle for tweenies -- who are between retirement and medicare eligibility!

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