RMD and IRMAA

[tothetune854]

[Topic is now in Personal Finance (Not Investing) - IRMAA and Roth conversion questions. mod mkc]

I am 69 and my wife is 66. Next year plan on starting SS of 91K total for both. Total 401k is 1.75M. and approx 700k taxable accounts. Looking at future RMD's has me concerned. I took 130K from 401 this year and plan on 130K yearly, however next year with the additional SS will push us into first tier IRMAA which is not terrible. I am afraid if I take less distributions I will end up with huge RMD's in future which will push me into second tier IRMAA which is even worse.
I have not looked at Roth conversions. I wasn't educated enough about them in the past and don't know if that is an option for us.
Any thoughts?

[retiredjg]

Would you go into IRMAA if you took out only $120k? or $110k? Or do you need the $130k in addition to SS to do what you want during your retirement years?

If your 401k does not grow any, your first RMD would be about $63k which is less than you have been taking out each year. You intend to take more than that, so it seems like RMDs will not be a big problem while you are both alive. And I assume that SS will be less when one of you dies.

Is your 401k invested aggressively?

Are you charitable givers? Qualified charitable donations (QCDs) once you reach 70.5 would take the edge off if that is something you are interested in.

[tibbitts]

I am 69 and my wife is 66. Next year plan on starting SS of 91K total for both. Total 401k is 1.75M. and approx 700k taxable accounts. Looking at future RMD's has me concerned. I took 130K from 401 this year and plan on 130K yearly, however next year with the additional SS will push us into first tier IRMAA which is not terrible. I am afraid if I take less distributions I will end up with huge RMD's in future which will push me into second tier IRMAA which is even worse.
I have not looked at Roth conversions. I wasn't educated enough about them in the past and don't know if that is an option for us.
Any thoughts?

My first thought it that it's hard to know what people mean by tier numbers because all IRMAA tables include the no-surcharge level... where of course you still have to pay. Next up is that curiously bargain-rate first surcharge level, and then you get the pricier levels, until you max out.

Anyway there is no simple answer for Roth conversions in most cases, as witnessed by the countless threads we have discussing them. You might still benefit although you've mostly missed the pre-SS years that are more likely candidates for conversions.

[tothetune854]

Thanks for the reply. I would have to go to 90K to avoid first tier IRMAA. Don't need the money. Monthly expenses around 6k which SS would cover.
401K is 55% SP500 index.45% bonds. I am guessing a 6% yearly average return which would net around 1.25M after 15 years with the 130K out yearly. RMD would not be a problem at that level, might even drop below IRMAA. 90K would result in 2.175M at 6%.
I guess I'm thinking first tier IRMAA as insurance against huge RMD's later if the market does extremely well.

[DIYtrixie]

Thanks for the reply. I would have to go to 90K to avoid first tier IRMAA. Don't need the money. Monthly expenses around 6k which SS would cover.
401K is 55% SP500 index.45% bonds. I am guessing a 6% yearly average return which would net around 1.25M after 15 years with the 130K out yearly. RMD would not be a problem at that level, might even drop below IRMAA. 90K would result in 2.175M at 6%.
I guess I'm thinking first tier IRMAA as insurance against huge RMD's later if the market does extremely well.

You sound like you may be a prime candidate for Roth conversions. Do you already have a Roth IRA account?

[cas]

Next up is that curiously bargain-rate first surcharge level [. . .]

Sorry for the diversion from OP's topic, but I do know the answer to the "curiously bargain-rate first surcharge level" issue.

Here's how Finance Buff puts it:

The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%. [. . .]

Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs. [. . .]

IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. As a result, they pay 1.4 times, 2.0 times, 2.6 times, 3.2 times, or 3.4 times the standard Medicare premium.

So the jump from the "base standard" 25%-of-actual-cost tier to the next 35%-of-actual-cost tier is 10%. All subsequent jumps (except the last one) are 15%. So that is why the first tier jump costs less than subsequent tier jumps.

[tibbitts]

Next up is that curiously bargain-rate first surcharge level [. . .]

Sorry for the diversion from OP's topic, but I do know the answer to the "curiously bargain-rate first surcharge level" issue.

Here's how Finance Buff puts it:

The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%. [. . .]

Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs. [. . .]

IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. As a result, they pay 1.4 times, 2.0 times, 2.6 times, 3.2 times, or 3.4 times the standard Medicare premium.

So the jump from the "everyone pays this" 25%-of-actual-cost tier to the next 35%-of-actual-cost tier is 10%. All subsequent jumps (except the last one) are 15%. So that is why the first tier jump costs less than subsequent tier jumps.

Thanks, I had no idea about that. It's so tempting to try to stay in that currently-$60-ish (Part B) tier and it does seem like a bargain compared to the next few $100-ish tiers, although then you have to think that might make you jump another $100-ish tier later, so... there's no good answer.

[tothetune854]

No, don't currently have Roth. Wish I had educated myself about them back when I was working. Same with IRMAA.

[pizzy]

No, don't currently have Roth. Wish I had educated myself about them back when I was working. Same with IRMAA.

Why are you planning to withdraw more than you need?

[WoodSpinner]

No, don't currently have Roth. Wish I had educated myself about them back when I was working. Same with IRMAA.

Well, today is the day to start considering Roth Conversions. You have already done some of the heavy lifting since you are taking Withdrawals. One easy option is to take Withdrawals for the funds you want to spend and do a Roth Conversion for the rest.

WoodSpinner

[Chuckles960]

The R in "RMD" means "required". You have no choice regarding whether to take RMD. Additional withdrawals are not RMD.

[123]

Consider efficient placement of your investment holdings as well. Stocks/equities should be in taxable or Roth accounts, fixed income holdings should be in tax-deferred accounts. Having stocks in tax-deferred accounts robs you of the long-term capital gains tax provisions as well as qualified dividend tax treatment. Some investors have a hard time getting used to having "real money" like CDs, treasuries, and bonds (general fixed income) in tax-deferred where they can't immediately get it without tax consequence. You just have to accept that it is be reasonable to swap holdings between the taxable and tax-deferred parts of your portfolio if it improves your tax situation.

[retiredjg]

My best guess: withdraw or Roth convert enough to get near the top of the first IRMAA tier. That will cost you about $1500 in IRMAA to take out an extra $50kish each year. Seems reasonable to me.

If you have any bonds somewhere other than in the 401ks, consider moving them for slower growth in the 401ks.

[PottedPlant]

If you have heirs, then you should consider Roth conversions.
If you wish to give gifts to charity, then starting at age 70½, you can do QCDs.
We do/have done both. QCDs reduce IRMAA exposure and Roth conversions increase it.
Welcome to the world of have "too much" income.

[chemocean]

All the CPI data for the 2024 IRMAA brackets (using 2022 MAGI data) has been released.

https://thefinancebuff.com/medicare-irm ... ckets.html

The first 2024 threshold is expected to be $206,000 (to which the 2022 MAGI is applied).

This years 2023 MAGI will determine your 2025 IRMMA. While inflation has decreased this year, there is still inflation and the first 2025 IRMAA bracket is expected to be even higher (we won't know until September 2024), unless we have deflation due to a recession.

Since IRMAA are stepped functions, I plan to do Roth conversions several thousand lower that $206,000 to be conservative in case unexpected income appears in Dec. 2023.

[Lalamimi]

is the total 401k 1.75M. just yours, or both of your accounts? I would personally do a Roth conversion this year and next,staying under the IRMAA threshold, and hold off on the wife starting SS another year.

[BatBuckeye]

Please keep in mind I'm not an expert so hopefully others can correct and or clarify.

I encourage you to use some tax software to help sort this out.

Remember your Standard Deduction if filing MFJ. The standard deduction of 25,900 reduces your AGI.

85% of SS will be taxed, so 77,350 goes to AGI. 91,000 * .85.

YOUR RMD will start at your age 73. Others have asked if the 1,750,000 belongs only to you.
You can search for RMD distribution charts. If the amount is all yours then first year, 1,750,000 / 27.5 = 63,869.

You will also need to include dividends & capital gains distributed in your AGI.

There are a lot of things to consider when doing the Roth Conversion. Some are pay taxes now or pay later.
Do you want to use a ROTH account in legacy planning. Some stop ROTH conversions when SS starts.

There are lots of things to consider. Be as educated as you can.

[RetiredCSProf]

Please keep in mind I'm not an expert so hopefully others can correct and or clarify.

I encourage you to use some tax software to help sort this out.

Remember your Standard Deduction if filing MFJ. The standard deduction of 25,900 reduces your AGI.

85% of SS will be taxed, so 77,350 goes to AGI. 91,000 * .85.

...

There are lots of things to consider. Be as educated as you can.

This is somewhat misleading. The standard deduction (or itemized deductions) reduces taxable income but has no impact on AGI or MAGI. I made this mistake the second year that I took Roth conversions, which pushed me into a higher IRMAA bracket than planned, although I stayed within the marginal tax rate that I had planned.

[vnatale]

Some in this forum believe funding Roths are a last priority. But for the reasons you describe ...that is one reason for taking the Roth approach earlier in life.

As soon as Roths became available in 1998 I converted all my current eligible IRAs to Roth and have always chosen the Roth option whenever possible since then.

You are still four (?) years away from you having to do the Required Minimum Distributions? And, your wife is even farther behind on that?

As a single person I've never paid attention to how it works for a married couple when one is of age and the other is not and the assets are jointly owned.

At this point you have a tricky problem in that by doing Roth conversions you, as you know, bring yourself closer to the Medicare surcharges. Additionally, having the additional income may expose more of your Social Security income to being taxed. However, you may already be taxed the maximum on your Social Security income so that may not be incurring an additional problem.

[StrongMBS]

Thanks for the reply. I would have to go to 90K to avoid first tier IRMAA. Don't need the money. Monthly expenses around 6k which SS would cover.
401K is 55% SP500 index.45% bonds. I am guessing a 6% yearly average return which would net around 1.25M after 15 years with the 130K out yearly. RMD would not be a problem at that level, might even drop below IRMAA. 90K would result in 2.175M at 6%.
I guess I'm thinking first tier IRMAA as insurance against huge RMD's later if the market does extremely well.

I was just working on these issues over the weekend.

Are you sure about the 90K? That means you have almost $40K of other income. (206-77.35-90=38.5)

Since both IRMAA and SS are index to inflation this also means your withdraw amount to stay under IRMAA is also if you can place the excess withdraw into a Roth. Think of this like the 4% of the SWR model, increase every year by inflation. Without a Roth to shield these funds you will have to account for the increase in your income that your ever-growing taxable account will be generating.

Try running your numbers again using real and not nominal values disregarding your taxable account issue at first to get a feel for the interaction. At a 5.15% (90/1,750) real withdraw rate you need 5.4% real return just to have the balance last to 100 years old. And over 6% just to have RMD over $90K and not until you are 95. I believe the S&P 500 has only a 7.2% 30-year average real return and that is 100% stock.

Of course, sequence of returns issues plays into this but luckily the worst case is when there are bad returns in the beginning, and this allows you to pull a relative larger portion of the balance outs before the good years.

BTW there is still good reason to withdraw over your RMD and that is dealing with the numbers when only one of you are alive.

Edited to fix the real numbers

[tothetune854]

Thanks for all the input. Going to hold off SS till 70 for both of us and do Roth conversions. Would like to do 3 yrs conversions over 3 yrs for total 765K, keeping within 2nd tier, will cost me 14K IRMAA but worth it for me. Should get me to around 1M.

[dcop]

I'm in a similar situation at 65 except I have a Roth. I'm currently getting 1600/mo in survivor benefits, 8K/yr in qualified dividends and about 5K in taxable interest. When I switch to my own SS at 70 it will be over $4200/mo. I'm going to max out my pre-tax account withdrawals with Roth rollovers and stay in the standard level IRMAA every year until 73 but unless we are in a major market downturn the math won't work for me. I also have 450K in unrealized CGs that I won't be able to touch if I follow my strategy. I've done very well with tax efficiency over the years but as I creep towards 73 I realize I'll be paying eventually. Best case scenario I'll pay the 1.4X tier IRMAA when I hit 75. Who knows maybe RMD age will get bumped up again.

[billfromct]

Please keep in mind I'm not an expert so hopefully others can correct and or clarify.

I encourage you to use some tax software to help sort this out.

Remember your Standard Deduction if filing MFJ. The standard deduction of 25,900 reduces your AGI.

The standard deduction does not reduce your AGI, it’s subtracted from your AGI to determine
your taxable income.

The 2023 standard deduction is $27,700 for married filing jointly (MFJ).

If both spouses are age 65 or older, the standard deduction for MFJ is $30,700 for 2023.

As mentioned, “thefinancebuff” gives very good current information & future estimates on tax brackets, standard deductions, IRMAA (Income Related Monthly Adjusted Amount, the Medicare high income penalty), as well as other income tax information.

bill

[Watty]

Wish I had educated myself about them back when I was working. Same with IRMAA.

Don't kick yourself too hard. Your retirement accounts are likely a lot larger than could have been expected since the stock market recovery since the 2008 financial crisis has been a lot larger than almost anyone would have predicted. Even if you were looking at Roth conversion in 2009 when your accounts were way down the choice to do conversions might not have been clear back then.

Being in a high tax bracket now is likely more due to good luck than poor planning.

The tax rates were also higher until the temporary tax rate reductions in 2018 so Roth conversions before then would have been harder to justify.

You also need to keep in mind that you will not actually start drawing down your retirement accounts until your withdrawal rate exceeds the RMD percentage. This means that if your investments can earn an average return of 7% that you will not need to actually start drawing down your retirement accounts until you are in your late 80s. It could be that planning for the taxes for your heirs is more important than your current taxes.

[smitcat]

Thanks for all the input. Going to hold off SS till 70 for both of us and do Roth conversions. Would like to do 3 yrs conversions over 3 yrs for total 765K, keeping within 2nd tier, will cost me 14K IRMAA but worth it for me. Should get me to around 1M.

This is likely a reasonable approach with what you posted so far if your heirs are in higher tax brackets. Have you run any of these scenarios with variable portfolio performance numbers and draws through something like Pralana? (or RPM or Newretirement)
https://pralanaretirementcalculator.com/

[David Jay]

Should get me to around 1M.

This fits my rule-of-thumb: Less than a million is manageable. There are ways to spend tax-deferred assets in late retirement.

After 3 years, you will have enough Roth space to put your growth assets (particularly equities) in Roth and leave lower-performing assets in tax-deferred space. This increases potential growth in Roth and decreases the rate of increase in tax-deferred.

[David Jay]

If you wish to give gifts to charity, then starting at age 70½, you can do QCDs.

A note to the OP: QCDs can only be done from a traditional IRA. You would need to roll over some funds from your 401K to a traditional IRA in order to give using QCDs.

[cas]

Wish I had educated myself about them back when I was working. Same with IRMAA.

Don't kick yourself too hard. [. . .] Even if you were looking at Roth conversion in 2009 when your accounts were way down the choice to do conversions might not have been clear back then. [. . .]

And even if the choice had been clear in 2009, you might have run into the income threshold ($100K in 2009) above which you were not permitted to do Roth conversions. (Legislation removed that income threshold for Roth conversions in 2010 and beyond.)

Plus the Roth IRA concept didn't exist until 1997 (and Roth 401(k) was later yet), so many people now retiring spent a good part of their working life with tax-deferred being the only flavor of tax-advantaged retirement savings available to them.

[retiredjg]

Thanks for all the input. Going to hold off SS till 70 for both of us and do Roth conversions. Would like to do 3 yrs conversions over 3 yrs for total 765K, keeping within 2nd tier, will cost me 14K IRMAA but worth it for me. Should get me to around 1M.

I think this is a good decision, but wondering if you are going just a little bit too far.

If you get the tax deferred account down to $1 million, the RMD (assuming both at the same time) will start at about $36k. But if you are going to take out more than $36k for living expenses (won't you be?) then maybe you don't need to get all the way down to $1 million?

[carolinaman]

Thanks for all the input. Going to hold off SS till 70 for both of us and do Roth conversions. Would like to do 3 yrs conversions over 3 yrs for total 765K, keeping within 2nd tier, will cost me 14K IRMAA but worth it for me. Should get me to around 1M.

Good plan. Roths can reduce your long term tax liability and become especially important when one of you dies, because the survivor will be in a higher tax bracket and a much lower IRMAA bracket. Also, large IRAs can become a tax bomb on heirs who may be in their peak earning years.

There are multiple facets to this tax issue, so it is important too carefully evaluate all of them.

[samsoes]

No, don't currently have Roth. Wish I had educated myself about them back when I was working. Same with IRMAA.

If you are still working, contribute $1 (or.your brokerage firm's minimum) today. That will get the 5 year clock rolling effective 1/1/2023. If you are not working, convert $1 today for the same reason.

[Running Bum]

Decide how much you want to take out of your 401K. Figure out how much you need of that money for spending. The difference between the two should be converted to a Roth rather than withdrawn, so that future earnings on the money are tax free, both for you and your heirs (for 10 years).

I don't know that you can do Roth conversions from a 401K. You may have to transfer the 401K to an IRA first. If you really don't want to do that for a good reason, then skip the Roth conversions.

There's nothing you can do about not looking into Roths before now. Learn from it and take the right action going forward.