How health insurance costs could increase because of a Roth IRA

Dear Liz: Given the recent stock market correction, I’m considering doing a Roth conversion on an existing IRA now that it’s worth less. I can handle the accompanying income tax hit. But while I see a lot of ink being spilled on how a Roth conversion can increase Medicare premiums, what about the cost of the Affordable Care Act? Is it the same story there: will a one-time spike in income this year due to the Roth conversion affect what I pay for next year’s ACA health insurance?

Answers: Potentially yes. Roth conversions count as income for the Affordable Care Act subsidy, so a large enough 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 upon retirement, to a Roth IRA, which would be tax-free. If you expect to be in a higher tax bracket when you retire, conversions can make sense — you pay the lower income tax rate now, not the higher later. But obviously, higher health insurance premiums would offset some of that benefit.

A tax expert can help you model different-size conversions to see the impact on all of your finances, not just your tax bill. It’s possible that a partial conversion could help you take advantage of the current downturn without dramatically increasing your health insurance costs.

Social Security and Divorce

Dear Liz: I was married 25 years. Most of the time I was a full-time housewife and worked part-time here and there. Social Security keeps telling me I can’t collect my ex’s Social Security until he dies. He’s 74 and I’m 72. I started collecting when I was 62 and I don’t get as much on Social Security. Is it true that I have to wait until he dies to get more?

Answers: Technically, you’re entitled to a divorced spouse benefit, which is up to 50% of your ex’s benefit if your marriage was at least 10 years and you haven’t remarried. However, if that amount is less than your own benefit, you would not receive anything extra.

The math changes if your ex should die. Then you would be entitled to a survivor’s pension equal to the one he received. If that amount is greater than your own benefit, you will receive the greater amount.

Switch back to original Medicare

Dear Liz: I am 75 years old and have had an Advantage plan since I started Medicare at 65. I am interested in switching to original Medicare with supplemental coverage. I know I have to sign up for a drug policy too. Will I be penalized for late filing for any of the three policies?

Answers: You are not subject to penalties, but you are subject to subscription for the supplemental policy. This means that the private insurance companies offering these plans may deny you coverage or charge you more for pre-existing medical conditions.

There are a few exceptions. Insurers can’t make you covered if, for example, you’re still within the first 12 months of a Medicare Advantage plan or if you move out of the plan’s coverage area. Additionally, four states — Connecticut, Maine, Massachusetts, and New York — require Medigap companies to offer coverage to all Medicare beneficiaries.

Before you cancel your current plan, start researching and make sure your add-on policy request has been approved.

Medicare Part A

Dear Liz: You recently answered a question from someone who delayed enrolling in Medicare because they had health insurance through their job. You mentioned that if the employer has 20 or more employees, the employer does not have to register until that employment ends. That’s right, but there’s usually no cost for Medicare Part A, so there’s no reason not to sign up.

Answers: That’s an excellent point. Medicare Part A covers hospital visits and is usually free of premiums. So it’s a good idea to enroll at age 65, even if you’re insured through work. The other parts of Medicare require monthly premiums and can incur penalties if you don’t apply when you’re first eligible.

Liz Weston, Certified Financial Planner, is a personal finance columnist at NerdWallet. Questions can be directed to 3940 Laurel Canyon, No. 238, Studio City, CA 91604, USA, or through the “Contact Us” form on asklizweston.com.

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