Dear Liz: With the recent stock market correction, I am considering doing a Roth conversion on an existing IRA now that it is worth less. I can handle the accompanying income tax hit. But while I see plenty of ink spilled on how a Roth conversion can increase Medicare premiums, what about Affordable Care Act costs? Is it the same story there: Will a one-time income spike this year due to Roth conversion impact what I pay all next year for ACA health insurance?
Answer: Potentially, yes. Roth conversions count as income for Affordable Care Act subsidies, so a large enough transaction could increase the premiums you pay.
A conversion allows you to transfer money from a regular IRA or 401(k), which would be taxable in retirement, to a Roth IRA, which would be tax free. If you expect to be in a higher tax bracket in retirement, conversions can make sense — you’re paying income taxes at the lower rate now, rather than the higher rate later. But obviously higher health insurance premiums would offset some of that benefit.
A tax pro can help you model conversions of different sizes to see the effects on all your finances, not just your tax bill. It’s possible that a partial conversion could help you take advantage of the current downturn without dramatically increasing your health insurance costs.
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