Roth convert to just below IRMAA threshold?

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theta
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Roth convert to just below IRMAA threshold?

Post by theta » Sat Jan 13, 2018 7:42 am

I've (age 67 this year) been doing my Roth conversions for the past few years to manage my MAGI to stay just under the $170,000 IRMAA threshold (MFJ). Right now, the cost of going over that threshold is approximately $800.

The next IRMAA threshold is $214,000 and the cost of going over that is $1200. (on top of the $800)

There will come a year and an age (70), when thanks to pension plus SS and RMD's, I will no longer be able to stay under $170,000.
I'm leaning toward then shift to a strategy of Roth conversion to just shy of the next IRMAA threshold. So, I would convert to get my MAGI up to between $210,000 to $213,000.

This, despite the fact that it would throw me into the 24% tax bracket. Numbers-wise, this would mean I would pay 2% more tax on $20,000 additional income. Say, I ended up with $210,000 MAGI. Standard deduction takes me down to $185,000, approx. Top of 22% is $165,000, so I pay 24% on $20,000, or 2% extra. Which works out to $400.

Why pay extra? So, I don't end up getting kicked up into the next IRMAA threshold. Really, the cost of 3 years of additional conversion equals one year of higher IRMAA.

But, the IRMAA cost will double, once my DW (age 62 this year) becomes Medicare-eligible. At that point, the IRMAA cost (1st tier) will be $1600/year and the 2nd tier will be $2400/year on top of that, or $4000.

So, my thinking is that I try to put off the 2nd tier IRMAA as long as possible, because the income tax cost versus the IRMAA cost is so dramatically less.

Of course, I also have the QCD option to play once age 70 rolls around, and that will definitely come in handy.

Am I thinking straight on this? Am I missing anything? Thanks all...

Lynette
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Re: Roth convert to just below IRMAA threshold?

Post by Lynette » Sat Jan 13, 2018 8:31 am

I haven't looked at your numbers but if you have pensions, SS and tax-deferred savings, I've found it is really difficult to plan to manage IRMAA after 70. For example, in 2018 Medicare added another bracket that caught me off guard. If one goes over $1 of an IRMAA bracket, one has to pay the additional Medicare premium. There is a two-year look back at your earnings, so this adds to the difficulty of planning. In addition if the stock market does well, this adds to one's RMD. I am doing QCDs but ??? Other than that, I've decided to simply pay the tax.

Best wishes planning!

Lynette

smitcat
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Re: Roth convert to just below IRMAA threshold?

Post by smitcat » Sat Jan 13, 2018 8:45 am

We have utilized the RPM calculator/spreadsheet to answer these questions - it takes an effort to load your inputs correctly but you can then compare your base case and Roth case(s) directly and make multiple runs to tune in your best choice.
In our case we are better off maxing the Roth (blowing thru the IRMAA limits) conversions rather than limiting them to that level. The advantage turns out to be right about 4% of the converted amount in dollars that are available to spend.

scifilover
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Re: Roth convert to just below IRMAA threshold?

Post by scifilover » Sat Jan 13, 2018 8:49 am

Not sure what asset classes you have in TIRA. One way to help reduce TIRA growth is to concentrate equities in Roth. So, rather than sell and move $$ to Roth, just ask Broker to xfer Equities to make up the amount of the Roth conversion. If you have anything other than equities in Roth use those in re-balancing to get to 100% equities in Roth. Fixed income assets have been slowly drifting lower with interest rate increases.

If there is a correction later this year, that would be the opportunity to make a larger conversion, and then pay the additional Irmaa.

theta
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Re: Roth convert to just below IRMAA threshold?

Post by theta » Sat Jan 13, 2018 9:03 am

Smitcat,

I'm in the midst of trying out the RPM - I'm struggling a bit, but recognize it as an amazing tool.

Could you elaborate a bit on what you mean by "maxing the Roth"? If you just blow through the IRMAA limits, you can bump up into higher tax brackets, right? Then you pay more anyway. I do dream about one day having everything in Roth and not having to deal with these kinds of issues, but I can't imagine bumping myself up into 32% tax bracket for 2 or 3 years to get there...

thanks

smitcat
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Re: Roth convert to just below IRMAA threshold?

Post by smitcat » Sat Jan 13, 2018 11:37 am

theta wrote:
Sat Jan 13, 2018 9:03 am
Smitcat,

I'm in the midst of trying out the RPM - I'm struggling a bit, but recognize it as an amazing tool.

Could you elaborate a bit on what you mean by "maxing the Roth"? If you just blow through the IRMAA limits, you can bump up into higher tax brackets, right? Then you pay more anyway. I do dream about one day having everything in Roth and not having to deal with these kinds of issues, but I can't imagine bumping myself up into 32% tax bracket for 2 or 3 years to get there...

thanks
Hello Theta,

We ran many options on the RPM and found that exceeding the IRMMA limits gave us the best overall return for the long haul. Dependent upon how many years you have to convert and how large your conversion dollars are the outputs are going to vary a lot. We have 8 years to do conversions with these new tax brackets but as it looks now we will convert most (not all) during those 8 years - leaving much smaller RMD's are not a problem. When we run our example and stay under the $170K limit our results are inferior.
It really comes down to your exact situation and there are a lot of variables - the RPM allows you to 'try out' the options and compare the results by saving &/or printing each run that seems close to the best.

DrGoogle2017
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Re: Roth convert to just below IRMAA threshold?

Post by DrGoogle2017 » Sat Jan 13, 2018 12:05 pm

Is there a link for the RPM?

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One Ping
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Re: Roth convert to just below IRMAA threshold?

Post by One Ping » Sat Jan 13, 2018 12:51 pm

DrGoogle2017 wrote:
Sat Jan 13, 2018 12:05 pm
Is there a link for the RPM?
Wiki link https://www.bogleheads.org/wiki/Retiree_Portfolio_Model

Wiki has link to the model ...
"Re-verify our range to target ... one ping only."

theta
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Re: Roth convert to just below IRMAA threshold?

Post by theta » Sat Jan 13, 2018 2:32 pm

Thanks Smitcat,

Your experience confirms what I was beginning to think - I just have to run the numbers, probably many times, to look at the options and see which one plays out best.

Initial runs of RPM indicate that 10 years of Roth conversion leads to higher balances but only on the 19th year. That poses the problem in an entirely different light: if I can just live 20 more years, I should convert. If not, just play out the base case. Hmmm. Would make me tend to think that perhaps 10 years of conversion is too many. As you said, I just have to play with the numbers.

thanks again

The Wizard
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Re: Roth convert to just below IRMAA threshold?

Post by The Wizard » Sat Jan 13, 2018 3:58 pm

I'm in a higher IRMAA tier and always will be with the present system.
But I agree that one should keep an eye on projected MAGI each year to avoid being Just Above the next tier threshold due to Roth conversions a bit too big.

Due to $30,000 of part-time income in 2016, I'm in an even higher IRMAA tier for 2018 presently.
But I've filed the form for life changing event (no more employment income as of 2017) and expect that to be approved eventually.
This will drop me back to my usual tier about $4000 below the next threshold, including $18,000 of Roth conversions in 2017...
Attempted new signature...

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FIREchief
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Re: Roth convert to just below IRMAA threshold?

Post by FIREchief » Sat Jan 13, 2018 4:01 pm

According to my calculations, the additional marginal "tax" (i.e. IRMAA premiums, both Part B and Part D) for the first three tiers of IRMAA are 3.63%, 4.57% and 4.57%. So, if I'm in the 24% fed bracket, I'll effectively be paying 27.63% or 28.57% for additional Roth conversions, provided I consume the entire next MAGI range for IRMAA. Anything less, and my effective total marginal rate will be higher. Also keep in mind that IRMAA premiums can be paid from an HSA, so there is some potential benefit there if one's HSA is over funded.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

theta
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Re: Roth convert to just below IRMAA threshold?

Post by theta » Sun Jan 14, 2018 11:21 am

OK, I've spent some time fooling with RPM and developed a preliminary plan. I'll briefly describe it here in case it's at all useful to some other BH's.

I can convert 95% of my IRA (keeping the rest for future QCD use) in a 3 year period, taking a huge IRMAA hit, moving into the next-to-last IRMAA tier, thus costing $3200 each of those years ($6400 when DW becomes Medicare-eligible).

But, after those 3 years, my MAGI is substantially under control and my RMD's are manageable. My IRMAA hits never go beyond the 1st threshold. After 19 years, my portfolios become more valuable. My marginal tax bracket stays at or below 24%, even with modestly increased SS and pensions.

There are some negatives, to be sure. Substantial net worth hit for the first decade, due to additional income taxes for 3 years. Added to that are the additional IRMAA fees/taxes, which are not insignificant at all.

But the positives seem to outweigh the negatives. Lower MAGI probably means less impact from future tax law changes. Tax planning becomes much easier. Estate planning for DW and children becomes significantly easier.

I will point out that RPM, (which has been tremendously helpful) does not get much into the nitty-gritty of IRMAA. It will tell you how many years you pass the first threshold, but that's about it, as far as I can tell. No second or third threshold, and I don't believe it adds the additional Medicare fees into the tax picture at all. So, if you really want to get a true picture of the Roth conversion, you start with RPM, but then you'll have to examine the IRMAA tiers and make sure you understand the impact there as well.

ralph124cf
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Re: Roth convert to just below IRMAA threshold?

Post by ralph124cf » Sun Jan 14, 2018 11:51 am

One thing that makes planning hard is that the IRMAA surcharges are based on MAGI, while the tax brackets are based on taxable income.

One actionable item is that if you see that you are near an IRMAA cliff, either be very sure to stay under it, or exceed it up to the next income tax bracket (assuming you have control of your income by taking distributions or ROTH conversions or timing of billing for part time gigs).

One place this really does not matter is that the difference between the 22% and 24% is so minor that it can be ignored for planning purposes. Going from the 12% to the 22% bracket makes a significant difference, as does going from the 24% bracket to the 32% bracket.

Ralph

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FIREchief
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Re: Roth convert to just below IRMAA threshold?

Post by FIREchief » Sun Jan 14, 2018 1:59 pm

theta wrote:
Sun Jan 14, 2018 11:21 am
I can convert 95% of my IRA (keeping the rest for future QCD use) in a 3 year period, taking a huge IRMAA hit, moving into the next-to-last IRMAA tier, thus costing $3200 each of those years ($6400 when DW becomes Medicare-eligible).

But the positives seem to outweigh the negatives. Lower MAGI probably means less impact from future tax law changes. Tax planning becomes much easier. Estate planning for DW and children becomes significantly easier.
It sounds like you've correctly analyzed this and reached some meaningful conclusions. Besides becoming "easier," estate planning can also greatly benefit from having most/all retirement assets in Roth accounts; especially if you choose to leave them to your heirs through a qualified accumulation trust. Roth RMDs in such a trust will not create taxable income, and can thus be 100% retained within trust without tax liability (the retained assets would eventually generate taxable gains, but very minor for quite a while).

Also, in the unfortunate event that you or your DW pass away, it may be beneficial to be in the lower tax brackets where the tax increase won't be so harsh.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

southport
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Re: Roth convert to just below IRMAA threshold?

Post by southport » Sun Apr 08, 2018 6:49 pm

I turn 65 this year, so that's an additional $1300 on top of the standard deduction of $24,000.

We're a couple still trying to contribute the maximum to our Roth IRAs in addition to conversions. So our MAGI can go to $189,000 before phase-outs begin. With the standard deduction and my additional "over 65" amount, that works out to taxable income of $163,700, which is just under the top ($165,000) of the 22% taxable income bracket.

With a lot of traditional IRA money available to convert over the next few years, paying the IRMAA surcharge for the first tier above the baseline of $170,000 seems like a good bet.

Increased market volatility in recent days actually may help over the long term. I've been converting on big down days, effectively converting a larger percentage of the traditional IRAs for a given dollar amount.

This point here is that in our case $189,000 MAGI is a "sweet spot."

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FiveK
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Re: Roth convert to just below IRMAA threshold?

Post by FiveK » Sun Apr 08, 2018 8:23 pm

southport wrote:
Sun Apr 08, 2018 6:49 pm
With a lot of traditional IRA money available to convert over the next few years, paying the IRMAA surcharge for the first tier above the baseline of $170,000 seems like a good bet.
...
This point here is that in our case $189,000 MAGI is a "sweet spot."
If the IRMAA surcharge is palatable, converting into the 24% bracket might be worthwhile, depending on the rates you would pay later due to SS, RMD, etc.

Chart below is for MFJ, ages 65 and 62, with tIRA withdrawals as the only income. Spikes are the IRMAA tiers. See the personal finance toolbox spreadsheet to enter more accurate numbers.
Image

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