Can Income Converted from Traditional IRA to Roth IRA Count Towards ACA Health Insurance Credit?
The Affordable Care Act (ACA) offers tax credits to help people afford health insurance through the Marketplace. To qualify, you must meet certain income requirements. Modified Adjusted Gross Income (MAGI) is used to determine eligibility for these credits. However, there is confusion about whether income converted from a Traditional IRA to a Roth IRA counts towards MAGI.
What is MAGI?
MAGI is a calculation of your income that differs from your regular taxable income. It is based on your Adjusted Gross Income (AGI) with several adjustments. Notably, tax-exempt income, such as municipal bond interest, is added back into MAGI.
Does Income Converted from Traditional IRA to Roth IRA Count Towards MAGI?
Yes. Income converted from a Traditional IRA to a Roth IRA does count towards MAGI. According to the instructions for Form 8962, which is used to calculate the premium tax credit for ACA health insurance, taxable income generated by converting to a Roth IRA is included in MAGI.
This means that if you convert a portion of your Traditional IRA to a Roth IRA, the amount of the conversion will increase your MAGI.
Impact on ACA Health Insurance Credits
If your MAGI is too high, you may not qualify for ACA health insurance credits. Therefore, converting too much of your Traditional IRA to a Roth IRA could potentially reduce or eliminate your eligibility for these credits.
Example
Let’s say you earn $40,000 per year and have no other income. Your MAGI would be $40,000. If you convert $10,000 from your Traditional IRA to a Roth IRA, your MAGI would increase to $50,000.
If you were previously eligible for the maximum premium tax credit based on a MAGI of $40,000, your eligibility would be reduced or eliminated once your MAGI increases to $50,000.
Conclusion
If you are considering converting income from a Traditional IRA to a Roth IRA and receiving ACA health insurance credits, be sure to carefully consider the impact on your MAGI. Our licensed agents can assist you with a complete review of your situation and help you make informed decisions about your insurance needs.
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