We recently sat down with someone who could walk us through their household’s retirement accounts almost entirely from memory. After managing the money for decades, the balances, contributions, and history were familiar territory. 

That knowledge had helped get the household to retirement. Now, the questions were starting to change. 

How much would eventually have to come out of those retirement accounts? What would those withdrawals mean for taxes? Could moving money into a Roth help? And if so, could that decision affect Medicare premiums later? 

These questions introduce three concepts that can become increasingly relevant in retirement: required minimum distributions (RMDs), Roth conversions, and Medicare’s income-related monthly adjustment amount (IRMAA). 

Each one has its own rules, but they can also affect each other. Tax-deferred accounts can eventually create RMDs. Roth conversions may reduce the amount left in those accounts, but conversions create taxable income in the year they’re completed. That additional income may also affect IRMAA and what you pay for Medicare later. 

Understanding how those pieces fit together can make future planning conversations easier to follow and give you more time to explore what may apply to your situation. 

Understanding Required Minimum Distributions 

If you have money in a traditional 401(k) or IRA, you generally received a tax benefit when the money went into the account, and those dollars have been able to grow tax-deferred.  

Eventually, the IRS requires you to begin taking money out. These withdrawals are called required minimum distributions, or RMDs, and they generally create taxable income. 

Your RMD starting age is based on your birth year, so it’s important to confirm which age applies to you before your required distributions begin. 

To see why RMDs can become a larger part of retirement tax planning, consider someone who is 62 with $2 million in a traditional IRA. If we illustrate what could happen if that account grew to approximately $4 million by the time RMDs begin, a rough rule of thumb for the first distribution is around 4% of the balance. 

On a $4 million balance, that would put the first required withdrawal at roughly $160,000. 

That $160,000 would be taxable income, potentially on top of Social Security and other income coming into the household. 

We’ve heard clients look at projections like this and say, “I wish I’d known about this sooner.” There’s still value in learning about it now. Once you understand what future RMDs could look like, you can start exploring whether there are planning strategies worth considering before those distributions begin. 

How a Roth Conversion Changes the Picture 

A Roth conversion is one strategy that may be considered when planning for future RMDs. 

With a Roth conversion, money is moved from a traditional IRA into a Roth IRA. The amount converted is generally taxable income in the year of the conversion. Moving those dollars out of the traditional IRA can reduce the balance that may otherwise be subject to future RMDs. 

That doesn’t mean everyone should complete a Roth conversion. The strategy can be analyzed to see whether paying taxes on some of those dollars today may improve the long-term tax picture. 

Our Director of Financial Planning and Tax Strategy, Taylor Wolverton, oversees this analysis for our clients. One example Taylor has used to explain how a Roth conversion strategy can work involves a hypothetical couple we call Frank and Lily. 

In their projection, Frank and Lily had room to “fill up” the 22% tax bracket each year. In plain English, the analysis looked at how much they could convert while keeping their taxable income within that targeted bracket. 

For Frank and Lily, that meant converting approximately $66,000 per year for five years. Based on their specific projection, that strategy was expected to save them more than $300,000 in lifetime taxes by age 90. 

Those numbers are specific to Frank and Lily’s hypothetical situation, but the example demonstrates why exploring Roth conversions before RMDs begin can be useful. More planning time gives you more opportunities to evaluate how much to convert, when to convert it, or whether converting makes sense at all. 

There’s another part of the calculation, though. A Roth conversion increases taxable income in the year it’s completed, and taxable income can affect more than your tax return. 

It can also affect what you pay for Medicare. 

What Is Medicare IRMAA? 

IRMAA stands for income-related monthly adjustment amount. It’s an additional amount you may pay for Medicare Part B and Part D when your income exceeds certain thresholds. 

One of the most important parts of understanding IRMAA is the timing. 

Medicare generally uses income information from two years earlier when determining whether IRMAA applies. For example, income reported at age 63 can affect Medicare premiums at age 65. 

The income thresholds can change over time, including adjustments for inflation. That makes it important to check the thresholds that apply to the specific year you’re planning for rather than relying on an older number. 

This is where IRMAA starts to connect with the other concepts we’ve discussed. 

RMDs can increase taxable income. Roth conversions also increase taxable income in the year of the conversion. Depending on the amount and timing, that additional income could move someone above an IRMAA threshold and result in higher Medicare Part B and Part D premiums two years later. 

That doesn’t automatically tell you whether an RMD or Roth conversion strategy makes sense. It gives you another piece of information to consider when comparing the short- and long-term effects of a decision. 

Looking at the Decisions Together 

RMDs, Roth conversions, and IRMAA can be fairly straightforward to define individually. Planning around all three is where the decisions can start to get tangled up. 

Maybe your traditional IRA balance is growing and future RMDs could create more taxable income than you expected. 

A Roth conversion may help reduce that future balance, but now you’re choosing to recognize additional taxable income today. Depending on the timing and amount, that income could also affect Medicare premiums through IRMAA. 

You may decide that tradeoff supports your longer-term strategy. In another situation, smaller conversions over several years may be worth exploring. Or the analysis may show that a Roth conversion isn’t the right move at that time. 

The answer can also change. Account balances move, income changes, tax laws change, and IRMAA thresholds are adjusted over time. A strategy that makes sense one year may need to be reviewed again the next. 

That ongoing conversation is built into our ROUTE to Retirement process. The O stands for optimized income, and the T stands for tax planning. These areas naturally overlap when we’re reviewing how retirement income decisions may affect taxes and Medicare costs over time.  

The purpose is to provide an opportunity for your household to understand the choices available and how adjusting one part of the plan may affect another. 

If you’d like to talk through what your own RMD timeline, Roth conversion opportunities, and potential IRMAA exposure could look like, visit pomwealth.net to schedule a complimentary conversation with our team.