Roth IRA Withdrawals Not Included for Medicare Part B Assessment

High income seniors on Medicare face income-based Medicare Part B premiums. The more income you have, the higher your Medicare part B premium. The good news is that Roth 401(k) or Roth IRA withdrawals are not added to the earnings for calculating Medicare B premiums.

In the 2003 Medicare Act, Congress added an income-based surcharge to the Medicare Part B premium for beneficiaries in higher tax brackets. This add-on was started in 2007 and it is completely phased-in now. Before 2007, everyone paid the same premiums for Medicare Part B, which covered only 25 percent of the cost of coverage. The remaining 75 percent was subsidized by the government and the current assessment based on income, allows the federal government to cover more of the cost (the program still runs at a deficit).

So, depending upon the modified adjusted gross income (MAGI) of the Medicare beneficiary, high earning seniors will have to pay more Part B premiums, which helps in reducing this government subsidy. MAGI is an addition of adjusted gross income and some add-backs including non-taxed municipal bond income. MAGI includes all the income that is taxable income, as well as conventional IRA withdrawals and pension. But it does not include the tax-free Roth 401k distributions and Roth IRA withdrawals.

The Medicare Part B premium for 2011 is $110.50 a month per person unless the Medicare participant exceeds the income threshold below. Those who must pay more premiums are unmarried people with MAGI of more than $85,000 and wedded couples filing jointly with earnings more than $170,000. See the table for MAGI thresholds on Premiums below. The more a person earns, the larger the percentage of premium is paid from the pocket and not subsidized by the government.

The Social Security Administration will review recent tax returns to determine the amount owed. For most taxpayers, the determination for 2011 is based on your 2009 tax return (the premium is based on the MAGI for the tax return from 2 years prior).

Modified Adjusted Income (MAGI) based Medicare Part B Premiums (2011)
Single Filers MAGI	Joint Filers MAGI	Medicare Part B Premium per Person
≤$85,000	≤$170,000	$110.50
>$85,000 to $107,000	>$170,000 to $214,000	$161.50
>$107,000 to $160,000	>$214,000 to $320,000	$230.70
>$160,000 to $214,000	>$320,000 to $428,000	$299.90
>$214,000	>$428,000	$369.10

Source: Medicare web site

So another consideration for converting to a Roth IRA (from a traditional IRA or qualified plan) includes minimizing the cost of Medicare B premiums if your income is near or above the threshold MAGI. This because the distributions from your Roth IRA are not included as a part of your earnings while withdrawals from your traditional IRA or retirement plan are included.