Roth conversions and ACA subsidies
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 will a one-time income spike this year due to Roth conversion affect 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 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.
Social Security claim for ex-spouse
Dear Liz: I was married for 25 years. Most of the time, I was a housewife and worked part time here and there. Social Security keeps telling me that I can’t collect on my ex’s Social Security until he dies. He is 74, and I am 72. I started collecting at 62 and don’t get that much in Social Security. Is it true that I have to wait until he dies to get more?
Answer: You’re eligible for a divorced spousal benefit that’s up to 50% of your ex’s benefit if your marriage lasted at least 10 years and you haven’t remarried. If that amount is less than your own benefit, though, you wouldn’t get anything extra.
The math changes if your ex should die. Then you would be eligible for a survivor’s benefit that is equal to what he was receiving. If that amount is larger than your own benefit, you would get the larger amount.
Switching to a new Medicare option
Dear Liz: I’m 75 and I’ve been on an Advantage plan since I started on Medicare at 65. I’m interested in switching to original Medicare with a supplemental policy. I know I will have to enroll in a drug policy also. Will I be subject to any penalties for late enrollment for any of the three policies?
Answer: You won’t be subject to penalties, but you will be subject to underwriting for the supplemental policy. That means the private insurance companies that offer these plans can deny you coverage or charge more for preexisting conditions.
There are a few exceptions. Insurers can’t subject you to underwriting if you’re within the first 12 months of having a Medicare Advantage plan, for example, or if you move out of the plan’s service area.
Make sure your application for a supplemental policy has been approved before canceling your current plan.
No reason to delay Medicare Part A
Dear Liz: You recently answered a question from someone who was delaying signing up for Medicare because he had health insurance through his job. You mentioned that if the company had 20 or more employees, he didn’t have to sign up until that employment ended. That’s correct, but there’s typically no cost for Medicare Part A, so there is no reason not to sign up.
Answer: That’s an excellent point. Medicare Part A covers hospital visits and typically is premium-free, so signing up at age 65 is a good idea even if you have insurance coverage through work. The other parts of Medicare require monthly premiums and can impose penalties if you don’t apply when you’re first eligible.