IRMAA Avoidance Strategies

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FinancialDave
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IRMAA Avoidance Strategies

Post by FinancialDave » Mon Dec 03, 2018 12:55 pm

I see a number of articles such as this one for people trying to avoid the IRMAA cliff in any particular year:

viewtopic.php?t=252912

I see little on strategies that would reduce the IRMAA permanently.

Now I'm not talking about buying "losers" in a portfolio just to save $700 or so a year, but strategies that possibly produce less taxable income in retirement for the same investment risk.

Let's assume the retiree has absolutely zero tax advantaged accounts and all the wealth is in a brokerage account with no earned income.

In this case too high a typical bond component is really hurting this person. Does it make some sense to reduce some of it in favor of say something more tax efficient like VTI?

It seems like the goal is to be able minimize dividends and income in favor of picking and choosing selling of assets to hold down the LTCG with a LIFO methology, just to stay below the "cliff."

This is of course hard to swallow if the investor has been taught the way navigate retirement is to only live off the dividends.

Thoughts?
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mhalley
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Re: IRMAA Avoidance Strategies

Post by mhalley » Mon Dec 03, 2018 1:12 pm

I think worrying about Irma is a little overblown. My wife and I turned 64 this year and our terrible hsa compatible bronze plan is going to be over 2800 a month next year. Health insurance is our single largest expense, taxes being the second (due to Roth conversions).
I don’t think bogleheads plan on just living off dividends, in general we favor a total return strategy.

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celia
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Re: IRMAA Avoidance Strategies

Post by celia » Mon Dec 03, 2018 2:30 pm

There's nothing wrong with being subject to IRMAA. It just means you have a lot of income. It is sort of like asking "How can I avoid the Alternative Minimum Income Tax?"

It also means you are enrolled in Medicare. If you instead buy your own individual insurance plan during your retirement years, you won't be subject to IRMAA (although your premiums will likely be more that the sum of all the Medicare premiums--Medicare itself and IRMAA fees, supplemental insurance, drug plan).

And you are NOT required to file for Social Security either!

You have choices. :D

not4me
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Re: IRMAA Avoidance Strategies

Post by not4me » Mon Dec 03, 2018 3:50 pm

FinancialDave wrote:
Mon Dec 03, 2018 12:55 pm
strategies that possibly produce less taxable income in retirement for the same investment risk.
I'm having trouble understanding what you are suggesting. I think you are trying to contrast 2 portfolios, one being VTI. I'm not clear on the other. I get that shifting from bonds to stocks in taxable, MAY reduce current year income. Are you saying you think that has the same investment risk?

And I didn't get the comment about those who "live off dividends". Are you saying that instead of VTI they probably would be invested in dividend focused funds instead? Without doing much research, it has seemed to me that VTI pays out about 80-90% as much in dividends as those funds. So, basically are you saying they have stock funds generating more in dividends than they actually need? Dividends & cap gains would fill the MAGI bucket at the same rate wouldn't they?

Help me understand what I'm missing. I'd certainly like to hear some viable strategies to avoid IRMAA if they do indeed have the same investment risk

Mitchell777
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Re: IRMAA Avoidance Strategies

Post by Mitchell777 » Mon Dec 03, 2018 4:03 pm

Not sure what you can do other than have tax efficient equity funds outside your tax deferred accounts. I've just been looking at this. It will be more of a concern for ME in 2019 as interest rates are up and the IRMAA tiers have been adjusted to have one jump into tier three sooner. I have only fixed income in my tax deferred accounts but I still have a good bit of fixed income outside my tax deferred accounts. I'm not going to increase my equity percentage just to reduce the interest on the fixed income. I'm probably going to turn down some part time consulting because I'd need to work 150 hours just to make enough to pay the increase in IRMAA.

FinancialDave
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Re: IRMAA Avoidance Strategies

Post by FinancialDave » Mon Dec 03, 2018 4:58 pm

not4me wrote:
Mon Dec 03, 2018 3:50 pm
FinancialDave wrote:
Mon Dec 03, 2018 12:55 pm
strategies that possibly produce less taxable income in retirement for the same investment risk.
Let me take the second question first as it's easier.
And I didn't get the comment about those who "live off dividends". Are you saying that instead of VTI they probably would be invested in dividend focused funds instead? Without doing much research, it has seemed to me that VTI pays out about 80-90% as much in dividends as those funds. So, basically are you saying they have stock funds generating more in dividends than they actually need? Dividends & cap gains would fill the MAGI bucket at the same rate wouldn't they?
No, what I was saying is that by reducing the dividend and interest income in favor of captial gains, you could reduce your AGI.

I'm having trouble understanding what you are suggesting. I think you are trying to contrast 2 portfolios, one being VTI. I'm not clear on the other. I get that shifting from bonds to stocks in taxable, MAY reduce current year income. Are you saying you think that has the same investment risk?
This is more of a hard sell and depends on how you define the risk of your asset allocation. Classically, this could be viewed as your stock/bond ratio, so certainly in that arena selling bonds for stocks increases your risk, but the question is by how much.

If you consider your other fixed income such as pension and SS as part of your "risk profile" then if 60% of your income is already fixed and the rest is 50/50 your current fixed income allocation is 80% of your cash flow. If you sell half your bonds your portfolio goes from 50/50 to 75/25, but your fixed income cash flow changes by only 10% to 70%. If you can tolerate "that way of looking at it" maybe you can tolerate the small change in fixed income.

The second aspect to the above is James Cloonan, the founder of AAII suggests that real risk is not really the "volitility risk" that most traditional definitions ascribe to, it is a "risk of loss of cash flow" in retirement or a permanent loss of capital. In that regard with even 70% of your cash flow provided by "almost guaranteed" sources of income it is quite likely that even the worst recession is not going to cause a permanent loss of capital in the long term. In other words selling of bonds can be later replaced during the following bull market.

Both of the above are essentially a "redefinition of risk" in the traditional sense, so if you can't buy into that you can't reduce your bond allocation.

That's why I said reducing your income stream in your taxable account is maybe the easier road for most, but I'm still looking for some studies that might have defined the math.

Total return is the yardstick of really what will happen to your portfolio, but total return comes in all forms of "income" + "capital appreciation" and LTCG affects your AGI differently than income (in the form of interest or dividends).

Dave
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not4me
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Re: IRMAA Avoidance Strategies

Post by not4me » Mon Dec 03, 2018 5:09 pm

FinancialDave wrote:
Mon Dec 03, 2018 4:58 pm


No, what I was saying is that by reducing the dividend and interest income in favor of captial gains, you could reduce your AGI.


Both of the above are essentially a "redefinition of risk" in the traditional sense, so if you can't buy into that you can't reduce your bond allocation.

That's why I said reducing your income stream in your taxable account is maybe the easier road for most, but I'm still looking for some studies that might have defined the math.

Total return is the yardstick of really what will happen to your portfolio, but total return comes in all forms of "income" + "capital appreciation" and LTCG affects your AGI differently than income (in the form of interest or dividends).

Dave
I guess I get what you are saying, but let me try to re-phrase in such a way I can confirm. 1st, your "starting point" to which you apply the strategy is that the taxable portfolio is generating more current year "distributions" than necessary. Because if I cut that back by x dollars, but then sell x dollars in shares, my IRMAA isn't helped (may or may not help my income taxes). 2nd, the starting point hasn't been optimized for risk tolerance -- however that is defined. Seems to be that both of these would have been appropriate before the days of IRMAA, but maybe in many/most cases it wasn't.

I'll be interested in following the thread...different approach & good to challenge thinking

dpc
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Re: IRMAA Avoidance Strategies

Post by dpc » Mon Dec 03, 2018 5:14 pm

Not sure it's worth worrying about, but be aware that the IRMAA determination runs almost a year behind the actual calendar. Medicare won't get information from IRS on your 2018 taxes until near the end of 2019. At least that is how it was explained to me by Medicare when I appealed my IRMAA. It was a big waste of my time in the end.
"Worrying is like paying interest on a debt that you might never owe" -- Will Rogers

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Artsdoctor
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Re: IRMAA Avoidance Strategies

Post by Artsdoctor » Mon Dec 03, 2018 5:17 pm

Dave,

I would not let taxes and surcharges overwhelm my financial plan, but I agree that you should take these all into consideration.

If you're going to be subject to IRMAA surcharges, you may be in a high enough tax bracket that munis should be considered. Tax-exempt interest will still be factored into your MAGI although the amount will be less than if you're collecting taxable interest. IRMAA is somewhat interesting in that only $1 more in MAGI can result in hundreds of dollars in surcharges, but I still wouldn't allow IRMAA to supercede other aspects of financial planning.

andypanda
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Re: IRMAA Avoidance Strategies

Post by andypanda » Mon Dec 03, 2018 6:23 pm

I made a lot of money in 2017. I just received my notice that my Medicare premium will be $428-whatever per month during 2019.

I did the only thing I could do... I got married last month. :sharebeer

The Wizard
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Re: IRMAA Avoidance Strategies

Post by The Wizard » Mon Dec 03, 2018 6:41 pm

andypanda wrote:
Mon Dec 03, 2018 6:23 pm
I made a lot of money in 2017. I just received my notice that my Medicare premium will be $428-whatever per month during 2019.

I did the only thing I could do... I got married last month. :sharebeer
Good news is: once your AGI is over $160,000 per person, you have a LOT of headroom before you hit the next IRMAA tier...
Attempted new signature...

curmudgeon
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Re: IRMAA Avoidance Strategies

Post by curmudgeon » Mon Dec 03, 2018 6:58 pm

It's not something I'm going to sweat all that much, though I'll keep an eye on it and if I'm near a boundary I may tweak a bit. From age 65 to 70 I hope to be doing quite a bit of Roth conversion. This may or may not push us into IRMAA (no SS or pensions at that point).

The main strategies I can see for avoiding or tweaking IRMAA hits would be:

1) QCDs, maybe alternating with larger withdrawals in other years, so you only get hit with IRMAA half the time

2) Owning your home. The progressive tax enthusiasts haven't (yet) gotten around to taxing an imputed income for living in your own home, so this lets you park a chunk of investment where the returns are not taxed and not on your AGI. Not worth twisting your life around to achieve this, but a good side benefit.

3) Investing in directly owned real estate. It's often possible to keep a significant chunk of cash flow and investment return off your AGI for a number of years with depreciation and other RE tax rules. Again, probably not worth doing unless you have other reasons given the relatively minor IRMAA hit (at least at present).

FinancialDave
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Re: IRMAA Avoidance Strategies

Post by FinancialDave » Tue Dec 04, 2018 11:05 am

andypanda wrote:
Mon Dec 03, 2018 6:23 pm
I made a lot of money in 2017. I just received my notice that my Medicare premium will be $428-whatever per month during 2019.

I did the only thing I could do... I got married last month. :sharebeer
Congrats on that!

:sharebeer
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FinancialDave
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Re: IRMAA Avoidance Strategies

Post by FinancialDave » Tue Dec 04, 2018 12:20 pm

not4me wrote:
Mon Dec 03, 2018 5:09 pm
FinancialDave wrote:
Mon Dec 03, 2018 4:58 pm


Total return is the yardstick of really what will happen to your portfolio, but total return comes in all forms of "income" + "capital appreciation" and LTCG affects your AGI differently than income (in the form of interest or dividends).

Dave
I guess I get what you are saying, but let me try to re-phrase in such a way I can confirm. 1st, your "starting point" to which you apply the strategy is that the taxable portfolio is generating more current year "distributions" than necessary. Because if I cut that back by x dollars, but then sell x dollars in shares, my IRMAA isn't helped (may or may not help my income taxes). 2nd, the starting point hasn't been optimized for risk tolerance -- however that is defined. Seems to be that both of these would have been appropriate before the days of IRMAA, but maybe in many/most cases it wasn't.

I'll be interested in following the thread...different approach & good to challenge thinking
Not exactly. Let me lead with an example.

You love to have fun in retirement and so you have decided you need an extra $100k above your pension & social security. Your pension and 85% of your SS gives you an AGI of $100k. You are married.

You have only a taxable account with $3 million in assets. You decide to allocate about $20k for taxes not knowing exactly what they will be, meaning you need $120k from your taxable account. This is only 4% so it seems reasonable. All bonds are tax exempt.

Option 1: Taxable account is set up 50/50 stocks / bonds, both stocks and bonds are allocated to deposit 4% income into your checking account. This is $120k of dividend/interest income so your AGI is now $220k, way over the $170k ceiling.

Option 2: Taxable account still set up 50/50 stocks and bonds but in this case you use more of a bucket strategy - short term bonds earning 2% and VTSAX on the stock side which earns 2% as well. The $60k of income goes directly to your checking account and you get the other $60k by selling 4% of your VTSAX (or you could sell some bonds and replenish later). The key is that in selling each block of $60k you pick specific ID blocks that generate only $9,000 of LTCG (have only appreciated by 15% or less). End result total AGI = $100k + $60k +$9k = $160k. I have not run the math on this yet as it certainly depends on your cost basis, but seems doable at least for a "few" fun years.

Let's review the possible tax differences:

Option 1. $100k taxable income + [Stocks] $30k qualified dividends, $30k non-qualified, [bonds] $60k tax exempt bond interest.
From PFT spreadsheet the tax on this option is $19,127.

Option 2. $100k taxable income + [Stocks] $30k qualified dividends, [bonds] $30k tax exempt bond interest. $9k LTCG from sale of $60k VTSAX.
From PFT spreadsheet the tax on this option is $13,707.


Option 2 seems a much better plan, mainly from the $5420 savings in taxes, and you also get the benefit of no IRMAA.

For those that think the $30k of non qualified dividends is the main reason let's do Option 3 which conversts them to qualified. I don't think you can easily get a 4% dividend income with 100% qualified but let's do it anyway:

Option 3. Same as option one except make all the dividends qualified:
From PFT spreadsheet the tax on this option is $16,857. Still better than option one plus no IRMAA.

Let's go all-in with an Option 4, which investigates a version of Option two with LTCG of $60k instead of $9k. Has to sell $62k to pay the tax.

In this case the tax is more than option 1 and is $21,357 and your AGI plus tax exempt is back up to $220k.

As a number of posters have mentioned there is a range of possibilities that you should be able to see where you should avoid worrying about the IRMAA and just save the thousands in taxes, but the point of this excercise is to show if you focus on just "living off the income" you won't likely do either - minimize your taxes or avoid the IRMAA.

Dave
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FIREchief
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Re: IRMAA Avoidance Strategies

Post by FIREchief » Tue Dec 04, 2018 12:59 pm

I would focus more on optimizing income under IRMAA than simply avoiding it. In other words, I will manipulate my income to stay just below whatever the next IRMAA tier is. If it makes sense to avoid it all together, I will look at bringing my income up to just below the MFJ first IRMAA threshold via tools such as Roth conversions.
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not4me
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Re: IRMAA Avoidance Strategies

Post by not4me » Tue Dec 04, 2018 1:54 pm

FinancialDave wrote:
Tue Dec 04, 2018 12:20 pm

As a number of posters have mentioned there is a range of possibilities that you should be able to see where you should avoid worrying about the IRMAA and just save the thousands in taxes, but the point of this excercise is to show if you focus on just "living off the income" you won't likely do either - minimize your taxes or avoid the IRMAA.

Dave
This helps me see where you're coming from. I had to read through twice....1st time I was distracted by things like viability of actual investment products, low cagr on stocks, no rebalancing, etc. That is, I didn't think it was sustainable for a "lifetime", if even one year. So few of the constraints fit my case that I wasn't able to glean anything for my specific case.

2nd tme through I realized your intent wasn't about IRMAA. But, clearly you've done more thinking than I & hopefully someone in a different situation will pick up something. I try not to have the "tax tail" wag the dog, but have no problem with maximizing $ in the pocket. For those of a certain age, IRMAA came about too late in their investing. In another thread actually on a more specific IRMAA avoidance, the poster had started Soc Sec "early" & had an annuity -- presumably to bridge until RMDs started. Perhaps they wouldn't have if they knew about IRMAA far enough in advance. That's more along the lines of what I was looking for.

FinancialDave
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Re: IRMAA Avoidance Strategies

Post by FinancialDave » Tue Dec 04, 2018 2:13 pm

not4me wrote:
Tue Dec 04, 2018 1:54 pm
FinancialDave wrote:
Tue Dec 04, 2018 12:20 pm

As a number of posters have mentioned there is a range of possibilities that you should be able to see where you should avoid worrying about the IRMAA and just save the thousands in taxes, but the point of this excercise is to show if you focus on just "living off the income" you won't likely do either - minimize your taxes or avoid the IRMAA.

Dave
This helps me see where you're coming from. I had to read through twice....1st time I was distracted by things like viability of actual investment products, low cagr on stocks, no rebalancing, etc. That is, I didn't think it was sustainable for a "lifetime", if even one year. So few of the constraints fit my case that I wasn't able to glean anything for my specific case.

Not sure what viability concerns you (option 1 or option 2). Both options are very doable and do exist and can be rebalanced based on where you withdraw the money without affecting the taxes much.

Option 1 is definitely lower CAGR in stocks, as 4% yield is pushing the envelope, but when you have 4% in dividends you can afford a lower CACR if you get a reasonable dividend CAGR to keep up with inflation. I have been doing this in one account for three years (it just isn't a taxable account.) A different Option I do in another account is more like Option 2, which could on the surface be a Boglehead two fund portfolio. I just choose to do it with 7 ETFs. These both have been running side by side using a variable withdrawal strategy to adjust the income based on the RMD table. Of course the ETF portfolio has been winning in the bull market, but it's quite possible (or not) the 4% stock income portfolio will catch up in the downturn especially since the ETF portfolio is 90% stocks. Both are only up for rebalance once a year, but I rarely need much rebalance as the withdrawals handle most of it.

Dave
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JackoC
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Re: IRMAA Avoidance Strategies

Post by JackoC » Tue Dec 04, 2018 2:23 pm

curmudgeon wrote:
Mon Dec 03, 2018 6:58 pm
It's not something I'm going to sweat all that much, though I'll keep an eye on it and if I'm near a boundary I may tweak a bit. From age 65 to 70 I hope to be doing quite a bit of Roth conversion. This may or may not push us into IRMAA (no SS or pensions at that point).

The main strategies I can see for avoiding or tweaking IRMAA hits would be:

1) QCDs, maybe alternating with larger withdrawals in other years, so you only get hit with IRMAA half the time

2) Owning your home. The progressive tax enthusiasts haven't (yet) gotten around to taxing an imputed income for living in your own home, so this lets you park a chunk of investment where the returns are not taxed and not on your AGI. Not worth twisting your life around to achieve this, but a good side benefit.

3) Investing in directly owned real estate. It's often possible to keep a significant chunk of cash flow and investment return off your AGI for a number of years with depreciation and other RE tax rules. Again, probably not worth doing unless you have other reasons given the relatively minor IRMAA hit (at least at present).
Another one is that IRMAA makes municipal bonds that much more attractive if that's not already where you put all taxable fixed income and if you're right below an IRMAA threshold. The muni interest gets included in your MAGI for Medicare purposes, but it's still a lower absolute number than a taxable bond for the same after income tax return. Note I'm not a big fan of muni's in general now because of the issue of credit quality credit correlation v the stock market, prolonged terrible stock market would I believe seriously exacerbate the issue of underfunded public employee retirement benefits and hurt muni credit and prices when you need your fixed income the most, and history isn't a guide to that possibility. But, IRMAA threshold can be an additional marginal reason to consider more muni's among competing considerations.

For your 3 and I mine though there are always other perhaps more important factors, or people are starting out already owning a home, already all muni's etc. And most of all it's typically difficult to predict if you're going to end up right on one those thresholds in a given year. It's not worth it to jump through a lot of hoops if you're going to be below anyway, and definitely not if you end up above anyway simply because your dividends were higher, interest earned was higher, etc.

Repositioning to low dividend stock funds doesn't seem very practical. Most people by the time they are 2 yrs from Medicare, in the recent period of good stock market, have big capital gains in existing funds in taxable that would make it prohibitive to sell stock funds just to reduce current income. Likewise I don't see much point planning for this issue more than a few years from Medicare, too many other things could change for a younger person to plan specifically for it.

FinancialDave
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Re: IRMAA Avoidance Strategies

Post by FinancialDave » Tue Dec 04, 2018 5:31 pm

JackoC wrote:
Tue Dec 04, 2018 2:23 pm



Repositioning to low dividend stock funds doesn't seem very practical. Most people by the time they are 2 yrs from Medicare, in the recent period of good stock market, have big capital gains in existing funds in taxable that would make it prohibitive to sell stock funds just to reduce current income. Likewise I don't see much point planning for this issue more than a few years from Medicare, too many other things could change for a younger person to plan specifically for it.
I agree but in the bigger picture you shouldn't be putting dividends stocks in your taxable account to begin with if you have other options, you should already be looking for tax efficient funds, unless you foresee yourself in the 12% bracket even as a single person in retirement.

In area of large taxable gains build-up - don't forget if the dividends are reinvested, which they should be up until retirement then there is easily 2-3% each year with very little capital gain attached to them.

Dave
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JackoC
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Re: IRMAA Avoidance Strategies

Post by JackoC » Tue Dec 04, 2018 11:26 pm

FinancialDave wrote:
Tue Dec 04, 2018 5:31 pm
JackoC wrote:
Tue Dec 04, 2018 2:23 pm



Repositioning to low dividend stock funds doesn't seem very practical. Most people by the time they are 2 yrs from Medicare, in the recent period of good stock market, have big capital gains in existing funds in taxable that would make it prohibitive to sell stock funds just to reduce current income. Likewise I don't see much point planning for this issue more than a few years from Medicare, too many other things could change for a younger person to plan specifically for it.
I agree but in the bigger picture you shouldn't be putting dividends stocks in your taxable account to begin with if you have other options, you should already be looking for tax efficient funds, unless you foresee yourself in the 12% bracket even as a single person in retirement.

In area of large taxable gains build-up - don't forget if the dividends are reinvested, which they should be up until retirement then there is easily 2-3% each year with very little capital gain attached to them.
That's true for some people. Other people have the vast majority of their investments in taxable, and that's more likely among people who are likely to hit IRMAA thresholds, especially the ones higher than the first one.

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Re: IRMAA Avoidance Strategies

Post by SGM » Wed Dec 05, 2018 3:39 pm

My Roth conversions have lowered my MAGI. Also gifts and charitable donations have lowered my MAGI. I will probably have a larger amount in muni bond funds so that I won't be likely to sell from my stock portfolio to fund expenses and therefore decrease capital gains until some much later date. I cannot get around the expense completely.

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