Of RMDs, MAGI, Medicare and Heirs

Retirement funds are wonderful things. They are fed pre-tax, then grow tax-deferred exponentially via that miracle of tax-deferred compounding. Can there be any downsides to this equation? 

Yes.

Some day all of the tax-deferred funds must be taxed. Without careful planning, those taxes can pack a whallop for you and your loved ones.

So, are there any workarounds to mitigate the tax bite?

A recent article in Financial Planning, titled "Estate Planning: Smart Roth Conversion Trick," explains that some individuals choose to have partial Roth IRA conversions. As a result, they remain in their current income tax bracket and decrease other taxes and charges. Along with a Medicare surtax and deduction phase-outs, Medicare Part B premiums are also part of the mix.

What is the big deal?

Medicare enrollees typically pay about $105 monthly for Medicare Part B. This covers doctor bills and some other medical expenses. However, seniors who have a modified adjusted gross income (MAGI) above $85,000 (or $170,000 on joint returns) will pay anywhere from roughly $145 to $335 a month for that same coverage.

Why?

This is because Roth IRA conversions increase an individual's MAGI. The original article advises those in this situation to take an annual series of partial conversions now to thereby limit future taxes, as well as “stealth” taxes like extra Part B premiums.

A partial Roth IRA conversion also serves to reduce an individual’s traditional IRA, taxable RMDs, and the taxable account ultimately passing on to beneficiaries.

The key is to plan to pay the income tax now—at a relatively low rate—instead of later at a potentially higher rate. Accordingly, it might be wise to start looking at this well before you are even thinking about RMDs.

This might sound a little confusing, and it can be. You should discuss your IRA situation and how it affects your retirement and estate planning with an experienced estate planning attorney.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.

Reference: Financial Planning (August 19, 2014) "Estate Planning: Smart Roth Conversion Trick"