Ask the Expert: Ineligible for tax breaks
A Roth IRA conversion increases your taxable income for a year and, as a result, may temporarily disqualify you for some tax breaks. Credit: iStock
Several years ago, I did a Roth conversion. I paid taxes on money moved from traditional IRAs into the Roth. Since my taxable income for the year was higher, I lost eligibility for the New York State school tax relief program (STAR). Also -- and unexpectedly -- my Social Security check was reduced. Now, I want to increase my Roth IRA withdrawals. Will that once again reduce my Social Security check and disqualify me from STAR?
No. Regardless of their size, Roth IRA withdrawals are tax-exempt, so they can't reduce your Social Security check or change your STAR eligibility.
Your experience highlights the fact that a Roth conversion can have unexpected consequences later on. The fact that your taxable income in the year of conversion is higher can make you subject to tax surcharges and/or ineligible for certain tax breaks a couple of years after the conversion.
An enhanced STAR exemption reduces school taxes for homeowners who are 65 or older and have $79,500 of less in total household income. But eligibility for STAR exemptions isn't based on this year's income. It's based on the information you reported on your federal tax return two years earlier.
Similarly, your annual Medicare Part B premium is based on the income reported on your tax return two years earlier. (Your 2013 Medicare premiums are based on your 2011 taxable income.) As a result, your higher income in the year of the Roth conversion may have boosted your Medicare premium two years afterward. That would have reduced your Social Security check because Medicare premiums are withheld from Social Security payments, says Barry C. Picker, a Brooklyn tax accountant and IRA expert.
The bottom line A Roth IRA conversion increases your taxable income for a year and, as a result, may temporarily disqualify you for some tax breaks.
Websites with more information bit.ly/TKvLfw and 1.usa.gov/VV7yS9
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