Why converting your Roth IRA could have ‘unintended’ tax consequences

As the end of the year approaches, you may be paying attention Convert to a Roth individual retirement account.

However, this strategy will increase your income, which can have another effect tax consequencesexperts say.

Roth conversion changes pre-tax or IRA funds are not deductible to a Roth IRA, providing tax-free future growth. But a rollover balance will increase your current year balance adjusted gross income.

Additionally, increasing your AGI can have “completely unintended” consequences, says certified financial planner JoAnn May. She is also a certified public accountant and the principal and co-founder of Forest Asset Management in Riverside, Illinois.

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Whether you’re doing a Roth conversion or generating other income, you need to track your AGI throughout the year, experts say. Otherwise, you could lose access to certain tax breaks or experience an unexpected tax increase.

For example, once income passes a certain threshold, Social Security recipients could owe up to 10% in taxes 85% of income from welfareMay said.

A higher AGI also makes claiming benefits more difficult Deduct medical expensesshe said. For 2024, you can deduct unreimbursed expenses above 7.5% of your AGI, assuming you itemize tax breaks.

Here are some other important tax issues to watch, experts say.

If you are access Medicare age or registered, an increase in your AGI may also affect the income-related monthly adjustment amount, or IRMAA, for Medicare Part B and Part D premiums.

The income used to determine IRMAA is based on your modified adjusted gross income, which is your AGI plus tax-exempt interest. IRMAA will be looked back in two years, meaning your 2024 MAGI could impact the IRMAA for 2026.

“It’s a big deal,” said Ashton Lawrence, CFP and principal at Mariner Wealth Advisors in Greenville, South Carolina previously told CNBC. “No one likes paying excessive insurance premiums.”

For 2024, standard monthly Medicare Part B premiums is $174.70. But that number could be higher if your 2022 MAGI is over $103,000 as an individual or $206,000 as a couple.

Experts warn that those income thresholds are a cliff, and that Roth rollover income could push you into the next bracket.

“The last thing you want is to peak right above that $1 bracket,” Lawrence said. “Now your Medicare premiums just went up significantly.”

Another reason to track your AGI is the health insurance tax breaks in the marketplace, called Premium tax creditis currently being enhanced until 2025.

In 2024, some 92% of subscribers in the marketAccording to the U.S. Centers for Medicare and Medicaid Services, about 19.7 million people are eligible for advance payments of premium tax credits, which reduce annual health insurance premiums by an average of $700.

However the calculation credit eligibility can be complicated because it is based on the difference between the standard premium — the cost of the second-lowest-cost silver plan available in an area — and the maximum contribution based on a percentage of income.

To avoid eligibility issues, Forest Asset’s May said she omits Roth conversions for a client claiming premium tax credits.