Does Income from a Roth IRA Conversion Qualify for ACA Subsidies?
Under the Affordable Care Act (ACA), many Americans qualify for subsidies to help reduce the cost of health insurance. One common question is whether income from a Roth IRA conversion can be used to increase income and qualify for these subsidies.
What is a Roth IRA Conversion?
A Roth IRA conversion involves moving money from a traditional 401(k) or IRA into a Roth IRA. Contributions to a Roth IRA are made after taxes, but qualified withdrawals are tax-free in retirement. When you convert a traditional 401(k) or IRA into a Roth IRA, the amount converted is considered taxable income.
Eligibility for ACA Subsidies
To qualify for ACA subsidies, your modified adjusted gross income (MAGI) must fall within certain limits. MAGI is your adjusted gross income (AGI) plus certain deductions and adjustments, such as tax-free Social Security benefits.
Income from a Roth IRA conversion is included in your MAGI. Therefore, converting a portion of your 401(k) into a Roth IRA can increase your MAGI and potentially make you eligible for ACA subsidies.
Other Considerations
Before converting funds from a 401(k) to a Roth IRA, consider the following:
– Taxes: You will owe income taxes on the amount converted.
– Early withdrawal penalties: If you withdraw money from a Roth IRA before age 59 ½, you may face penalties.
– Investment goals: Roth IRAs are appropriate for individuals planning to withdraw their investments in retirement.
Conclusion
Converting a portion of your 401(k) into a Roth IRA can be a strategic way to increase your MAGI and potentially qualify for ACA subsidies. However, it is important to carefully consider the potential tax implications and investment goals before making a decision. If you need assistance determining if a Roth IRA conversion is right for you, consult with a licensed insurance agent.
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