Roth Distribution Affecting Cover CA

[klashelle]

I'm curious to know if my wife and I take a Roth Distribution (withdrawal) will this be counted as income in the eyes of Covered CA and lower our premium assistance we receive? A couple of facts regarding us:

• We're both over 59 ½ and we both have had our Roth IRA's for more than 5 years.

I believe if we meet the two criteria above we aren't subject to tax on a distribution but I just want to ensure the rules regarding Covered CA and the "countable sources of income".

Thank You!

[JulieS · Accepted solution]

No, Covered California doesn't count non-taxable IRA distributions as income for the purpose of qualifying for health insurance. They do count some nontaxable income such as tax exempt interest and social security benefits.

Click here to see the rules for calculating your household income.

If you scroll down the section titled, "How do I calculate my Modified Adjusted Gross Income (MAGI) for Covered California?", you will see the items that have to be added back to your federal adjusted gross income. Your total Roth distributions will appear on line 4a on Form 1040. That line is not added to your total income.

For federal purposes, a Roth distribution is not taxable if the account has been open for 5 years and the account owner is at least 59 1/2 years old. 

[What if 2]

Thanks for that link - very informative. My question also has to do with Roth IRA and Covered California, and it is not answered in the link. Maybe you know the answer: What is the effect of converting a traditional IRA to a Roth IRA on MAGI? Where does such a conversion "count" (as income)? Much appreciated. 

[a266753]

Hi! Thanks for answering the question! Does this still hold true for the 2022 tax year?

[PAKTECH]

I had the same question, and called Covered California representative.  I too, converted $$ from regular IRA to Roth IRA this year.

After some discussion with her supervisor, the representative told me to "ask your tax advisor".  She had no clue as to how to handle this question.

In my mind, this is not "income" from which I can spend, even though it is technically "taxable", to the IRS.

You could, in theory, list the Roth conversion amount as both income and deduction, for the purposes of Covered California.

Just a thought.  I am not a tax advisor, or expert in this field, just being logical.

[SweetieJean]

Per Covered California:

You start by using your adjusted gross income (AGI) from your most recent federal income tax return.  Add any foreign income, Social Security benefits and interest that are tax-exempt. Then, add or subtract any income changes you expect in the next year.

AGI does include Roth conversions. 

[Teachable]

NOTE: I'm not an expert, so treat this with appropriate skepticism and consult with appropriate authoritative sources.

I think it depends on when you do the conversion(s). For example, at some point -- let's say at the start of the year -- you reported your projected income for the year, and that projection established your financial assistance and premium payments for your selected plan. Let's suppose that at that point, you had not decided to do a Roth conversion (although you might have been considering it), so you would not include it in your projected income. Then, on December 15th, you decide to proceed with a conversion and actually do it, and you faithfully report the change to your income for that year to Covered CA. Let's also suppose you paid your December premium on 12/1. They don't do anything retroactively with the change to your income, so the conversion would not affect any of your premiums for that year. The following year, you're back in the same boat. The conversion(s) you just did were income for the prior year, and have no bearing on the upcoming year.

If someone has definitive information to the contrary, please post. Thanks!

Note: The distribution from your IRA (to roll into the Roth IRA) definitely go into your AGI (with some possible specific exceptions) and will very likely affect your taxes. The response above is only about Covered CA.

[Teachable]

UPDATE: After a discussion with a Covered CA representative today (Darlene - very helpful!), I feel like I have a clearer understanding. While it's true that a mid-December Roth conversion will not affect your Covered CA premiums, because the additional income occurred and was reported after the final premium for the year, that's not the end of the story.

Basically, you'll need to settle up with the IRS at tax time. Covered CA will report the tax credit benefits you received in the form of reduced premiums (I think form 1095-A), and the IRS will require any adjustments based on your total income for the year and the total tax credits that are allowed for that income level. So, even though you won't pay any higher premiums, you could owe more taxes. Depending on your situation and the amount of money converted, you might end up having to pay back *all* of the financial assistance (i.e., premium reductions) you received during the year.