I Want to Convert My $640,000 401(k) to a Roth IRA. Will It Affect My Medicare Premiums?

For Medicare Part B and Part D, the extra amount you can pay based on your income is called Income Related Monthly Adjustment Amount, or “IRMAA.”

This adjustment amount is based on your household income, specifically your Modified Adjusted Gross Income or “MAGI.” This starts with your Adjusted Gross Income, which is defined as your total taxable income, less your adjustments to income. Generally speaking, adjustments to income are your above the line deductions like retirement contributions.

In the case of Medicare, you then modify this Adjusted Gross Income (for the MAGI) by including any tax-exempt interest you may have earned during the year. For most households, your MAGI and your adjusted gross income will be the same. Based on your MAGI, Medicare may charge higher premiums for Part B and Part D.

For Part B in 2025, these premiums can range from $174.70 for household incomes below $103,000/$206,000 single/joint. They can rise as high as $594 per month for household incomes above $500,000/$750,000 single/joint.

For Part D in 2025, these premiums can range based on your individual plan. For household incomes below $103,000/$206,000 single/joint you will not pay any additional premiums based on IRMAA. You can pay up to an additional $85.80 per month on top of your plan premium for household incomes of $500,000/$750,000 single/joint.

Your Medicare premiums are recalculated annually based on a two-year lookback period. This means that your premiums each year are based on your income from two years ago. So, for example, say that in 2022 you earned $150,000 as an individual. In 2024, your Medicare Part D premiums could increase by $33.30 based on that income. Then, in 2025, your premiums could adjust again based on your income in 2023 and so on.

Consider speaking with a financial advisor to determine an appropriate tax and Medicare strategy for your goals.

Here, you would like to convert $640,000 from your 401(k) to a Roth IRA. That will likely affect your Medicare premiums, depending both on how you do it and your annual income.

In brief, a Roth conversion is when you move money from a qualified pre-tax retirement account (like a 401(k)) and put it in a Roth IRA. Once you make this conversion, the money follows the standard rules of a Roth portfolio. It will grow untaxed and you will not pay taxes on the money when you withdraw it in retirement. There is no limit on how much money you can convert in a given year, so long as it all comes from a qualified pre-tax portfolio.

However, when you make a Roth conversion the entire amount converted will count toward your taxable income for that year. For example, say that you earn $75,000 per year (roughly the national median). You convert $100,000 from your 401(k) to your Roth IRA. In that year, your taxable income will be $175,000.

Or, in our example, say that you convert $640,000 from your 401(k) to your Roth IRA. At the median income, you would increase your taxable income for that year to $715,000 ($640,000 + $75,000).

While it is beyond the scope of this article, in this situation you would want to have a plan for the taxes this income would generate. Here, you would likely owe around $192,000 in federal income taxes alone, and you will need the cash on hand to manage this tax bill.

Your Medicare premiums would also adjust upward based on this surge in your income. As an individual, increasing your taxable income by $640,000 in a single year would push you to the maximum IRMAA regardless of your base income. In 2024, that would mean paying $594 per month for Medicare Part B and adding $85.80 per month to your premiums for Medicare Part D.

Rather than converting your 401(k) to a Roth IRA all at once, a financial advisor can also help you devise and execute a plan to mitigate taxes and Medicare premium increases.

There are a few ways you can manage an increase to your Medicare premiums. First, and perhaps most importantly, remember the two-year lookback period.

This lookback period means that any increase to your Medicare premiums is not permanent, nor is it immediate. Instead, this will trigger a single-year surge for each year(s) in which you made a conversion. This surge will apply to your premium after the year in which you make the conversion.

The lookback period also means that your premium increases might be mitigated by inflation. Each year the Medicare program increases its income tiers for the IRMAA calculations. This means that a conversion which would push you into a higher Medicare premium tier in 2024 might not do so based on the brackets in 2026, for instance. As a result, inflation can sometimes mitigate the impact of an income hike from two years ago.

However, when large amounts of money are involved, typically the most effective way to manage your premium increases is by staggering your conversions.

A staggered Roth conversion is when you move your money in pieces, year-by-year, rather than all at once. This is an effective tax strategy, but it can also help reduce the impact on your Medicare premiums.

For example, again say that you make $75,000 per year. Now say that you convert your 401(k) in $100,000 increments over the next seven years. This would increase your taxable income to $175,000, which would only increase your Part B premiums to $454.20 rather than $594 and your Part D premiums by $57. (Less in your last year, when you would only convert $40,000.)

This would reduce your monthly payments, which can be good for cash management. However, make sure to calculate the long-term consequences of a staggered approach. Depending on how you manage this, it can be easy to save money in the short term while paying more over time. Take our example above. Here, by staggering your conversions you have reduced your payments from $85.80 to $57 per month. This saves you $345.60. However, you then have to continue paying that $57 increase for the next six years, costing you another estimated $4,104 over time.

These costs can be managed, but make sure you account for them. A financial advisor can help you do the math based on your circumstances.

Your income can affect the premiums you pay on Medicare Part B and Part D. If you take a Roth conversion, this will increase your income for the year(s) involved, which in turn might increase your premiums for one or more years as well.

• There are a lot of different Medicare plans, and that’s particularly true the more we get into the weeds on Parts C and D. So let’s talk about how you can choose the right Medicare plan for you. 

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.

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