IRMAA

[PapaGeek]

Without knowing about the IRMAA limits, I made a large Roth Conversion in December of 2020. This caused my 2022 Social Security Medicare premiums to increase by $323.90 for each benefit check, $3,886.80 for the year!

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate: It will take about 15 years to complete the conversions if the market grows at a 10% ROR each year, and I will pay taxes on $83,740 of RMDs. If the market grows at 12% it will take 19 years and I will pay taxes on $123,810 of RMDs. The better the market does, the more I pay!

My plan moving forward is to do maximum Conversions each year, within the IRMAA limits, which will only take 4 years and my RMDs will only total $19,725!

I just need to be certain of one item for the IRMAA calculations. Does the calculation include my full Social Security Benefit, or just the 85% max taxable amount?

The current IRMAA limit is $103,000. If my Social Security is $40,000 and my Pension is $20,000 and those are all of my income source except for IRA withdrawals: My total withdrawal limit would be $103,000 minus $40,000 SS minus $20,000 Pen equals $43,000 maximum withdraw from my IRA for Required Distribution plus Roth Conversions plus extra cash.

Some of the on-line chat sites say that is the correct calculation, others say that I should only use the Taxable portion of my Benefit which would be 85% of $40,000 equals $34,000. This would allow me to do an extra $6,000 of Roth Conversions.

If Taxable SSB is correct, can someone point me to an official government site that says to use only the taxable portion of my benefit.

[FiveK]

See MAGI for Medicare premiums (IRMAA tiers) for references that state it's only the taxable portion of SS.

You may also find Roth Conversion with Social Security and Medicare IRMAA useful.

[Longdog]

Without knowing about the IRMAA limits, I made a large Roth Conversion in December of 2020. This caused my 2022 Social Security Medicare premiums to increase by $323.90 for each benefit check, $3,886.80 for the year!

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate: It will take about 15 years to complete the conversions if the market grows at a 10% ROR each year, and I will pay taxes on $83,740 of RMDs. If the market grows at 12% it will take 19 years and I will pay taxes on $123,810 of RMDs. The better the market does, the more I pay!

Congratulations on your financial success! Certainly you're not suggesting that for every dollar increase in portfolio value, you pay more than an additional dollar in taxes are you?

[Prokofiev]

.
First off, expecting 12% or even 10% ROR on your TIRA is a bit much. Possible, but not likely.
This is especially true if you keep your fixed income in your TIRA per Bogleheads rules to
save on taxes. Keep stocks in your Roth and taxable accounts and fixed income in the TIRA.


Also, converting 100% to Roth may not be a wise decision. Medical, dental and nursing home
expenses can be paid with TIRA monies and taken out at a low or even 0% tax rate. I would
leave $150-$300k in the TIRA for this unless you are already in a low marginal bracket.

85% of SS is included in the MAGI calculation along with any tax-free income from Muni
bonds.

[PapaGeek]

Congratulations on your financial success! Certainly you're not suggesting that for every dollar increase in portfolio value, you pay more than an additional dollar in taxes are you?

Not at all!

If I do the Roth Conversions limited by my 12% tax bracket, my RMD will start at about $7,500 and my Conversion will be limited to about $11,500. I’ll pay taxes on about $18,000 a year for 15 to 19 years.

If I switch to the Max IRMAA Conversions, my first year will be the same $7,500 RMD but my conversion will be about $35,500. I’ll pay taxes on about $41,000 for only 4 years.

15 x 18 = 270 and 41 x 4 = 164

I’ll pay the taxes quicker, but on a much smaller total amount.

The most important thing is that I can start my LTCG Harvesting account quicker.

I also noticed that the IRMAA is calculated from Line 11, Adjusted Gross Income, on your 1040 return. Line 7 if from Schedule D, capital gains and losses. I'll check with my tax accountant, but if I do start my Harvesting account sooner, and I end up with a Short Term Capital Loss, can I use that to do more Conversions?

[chemocean]

There are two important reason to leave funds in your tax-deferred accounts. There is no need to convert funds that will be given to charities during your lifetime (QCDs from IRAs after the age of 70.5) or in estate that will flow to charities.
Also, what is your plan for funding long-term care. If you are self-funding LTC, then withdrawals from IRAs during the years of LTC will be partially tax deductible (medical expenses above 7.5% that lead to itemized deductions being greater than the standard deduction).
A non-spousal beneficiary is likely to pay taxes on the funds in the tax-deferred accounts 10 years after the death of a single taxpayer. Who will inherit the funds in the tax-deferred accounts and what will their tax rate be upon the death of the single taxpayer? If their marginal tax rate is higher than the marginal tax rate for your conversion, you are doing your beneficiaries a favor by reducing their taxes. It would advantageous if the funds inherited in the single taxpayers IRA by each beneficiary would not push them into a higher tax bracket if they withdrawal from the inherited IRA over 10 years. They can also keep their inherited Roth IRA as tax-free funds for the full 10 years of Secure 1. Taxes paid for Roth conversions also are removed from the estate if state or federal estate taxes are an issue.
The thresholds for IRMAA premiums are indexed for inflation. Unfortunately, as mentioned in numerous threads, the specific amount of Roth conversions to make in one year to reach a particular threshold two-years hence cannot calculated because the inflation data for the year between the Roth conversion and the year when the IRMAA premiums are applied are not known. Several posters on this forum have suggested to make Roth conversions to the specific threshold for this year. Then when the IRMAA thresholds for the year between the Roth conversion and the year when the IRMAA premiums are released, make an addition conversion keeping your AGI a couple $1K below the newly released IRMAA thresholds.


Your calculations do not account for the correlation between ROR and inflation that affects the increase in IRMAA thresholds.

[PapaGeek]

All of this reminds me of the paper I had to sign before I could start my last job before retirement.

The job was being a computer geek for a Hedge Fund. But, because I was working for a company that manages retirement money, there was a federal law that prohibited me from talking to any of our client about their personal income taxes.

[InMyDreams]

Also, converting 100% to Roth may not be a wise decision. Medical, dental and nursing home
expenses can be paid with TIRA monies and taken out at a low or even 0% tax rate. I would
leave $150-$300k in the TIRA for this unless you are already in a low marginal bracket.

It's also nice to do QCDs from a tIRA.

[Peter Foley]

Just to note - a few key considerations have already been mentioned:
Saving some IRA for possible medical expenses is a good approach.
Not all SS Benefits are included in the modified adjusted gross income figure used for IRMAA.
If part of your spending is charities, qualified charitable distributions from an IRA are possible at age 70.5.
Also note that the IRMMA premium increase is modest to level 2, but significantly more for the next levels.

I would explore a plan that looks at converting to the top of level 2 IRMAA.

The Numbers Unlimited document can be helpful in terms of this planning.

[dagsboro]

As a corollary to the comments made that saving some tIRA for long term medical care could be a tax saver, would that same benefit apply to interest on I Bonds. In other words, as you are forced to cash in long term I Bonds which have accrued large amounts of interest, and might push you into the IRMAA Medicare surcharge category, could you reduce the tax burden and or surcharge by putting some of that interest revenue toward assisted living or nursing home expense? I apologize for not distilling this question to the point it is a bit more succinct and clear.

[Jack FFR1846]

If you're under 70, why not suspend your SS payments? Then you can either do more Roth converting, if you have money available to pay tax or you can calculate and do some Roth converting, then take an IRA withdrawal to your checking account and use that to pay the tax. Either way, you are able to take more out of your IRA and your SS eventual startup again at 70 will be more.

If you're already 70, ignore all the above.

Getting the RMD to $19k is pretty amazing. DW and I are looking at when both of us have to take RMDs, if we don't aggressively Roth convert, we'll have about $300k in RMDs.

[MoreTaxes]

Congratulations on your financial success! Certainly you're not suggesting that for every dollar increase in portfolio value, you pay more than an additional dollar in taxes are you?

Well, the IRMAA cliffs do indeed operate that way. The dollar putting you over a cliff can cost you hundreds of dollars at the next IRMAA tier.

[chemocean]

As a corollary to the comments made that saving some tIRA for long term medical care could be a tax saver, would that same benefit apply to interest on I Bonds. In other words, as you are forced to cash in long term I Bonds which have accrued large amounts of interest, and might push you into the IRMAA Medicare surcharge category, could you reduce the tax burden and or surcharge by putting some of that interest revenue toward assisted living or nursing home expense? I apologize for not distilling this question to the point it is a bit more succinct and clear.

Your question brings up a non-linearity in the margin tax rate that I had not though of.
Taking out a distribution for LTC will increase your MAGI (above-the-line), and thus might increase your IRMAAA premium, BUT taking the medical deduction will decrease your taxable income (below-the-line) and your INCOME TAX. If you use the Roth distributions for the part of LTC care expenses that will not increase your itemized deductions above your standard deductions you will minimize the effect of t-IRA withdrawals on IRMAA premiums.

But the fact that you never had to pay income taxes on the amount of LTC expenses above the standard deduction (either when you earned the funds to deposit in the T-IRA, or distributed the funds from the T-IRA) out weighs the increase the amount of the IRMAA premiums as a result of using T-IRA for LTC expenses.


As to your question, about redeeming I-Bonds for long-term care. I think the answer is no. The only way to decrease the above-the-line income (AGI) for I-bond interest income of redeemed bonds is to use them for educational purposes (see line 3 on Schedule B and Publication 8815) for direct educational expenses or depositing the total redemption value into a 529 with very rigid requirements. Even if you were able to prevent the inclusion of tax-exempt interest income from I-Bonds in your AGI, I think the MAGI formula, on which the IRMAA premiums are based, includes adding that same tax-exempt interest income to your AGI thus nullifying using the redemption of I-Bonds for educational purposes.

[Prokofiev]

Also, converting 100% to Roth may not be a wise decision. Medical, dental and nursing home
expenses can be paid with TIRA monies and taken out at a low or even 0% tax rate. I would
leave $150-$300k in the TIRA for this unless you are already in a low marginal bracket.

It's also nice to do QCDs from a tIRA.

.
Yes, you pay no taxes from a QCD. That will work. But if someone is worried about their portfolio lasting
through retirement, giving money away is not the first thing I would consider. In extreme cases, you can actually
give money AND end up with more, if you are near an IRMAA breakpoint. A $100 donation can save you $1000
in IRMAA. But you need to know the IRMMA limits 2 years in advance and be absolutely certain of your MAGI for
that year before Dec 31. In practice, that may not be easy to do. But it is worth considering.

Of course, you can also just give money to charity, tax-free without itemizing via QCDs.

[LilyFleur]

I'm wondering why you're assuming market returns of 10 to 12% a year?

[cosmos]

I'm wondering why you're assuming market returns of 10 to 12% a year?

Is this not guaranteed?!

[wwhan]

12%/yr CAGR is pretty optimistic.

Over a 20 year period, with 100% stock market one might get 10.5% CAGR.

The last 10-20 years have been abnormal.

[MadHungarian]

Ouch, this IRMAA stuff makes my head hurt!

But it's worse, because being single and having a pension and being in a VHCOL area, i figure i'm in IRMAA trouble already and there's nothing i can do about it.
But fortunately i still have 8 years or so before i reach IRMAA age. So i can ignore it until then. Or i can use those 8 years to try to reduce the damage?

But then that requires trying to predict & optimize for the ever-changing tax laws decades ahead of time, which doesn't seem likely to be too successful!
And my fear is that once there's enough money sitting in Roths, the government will not keep its hands off of it. I could certainly see Roth distributions being, say, included in MAGI even if they're still not taxable. So then, all my very expen$ive efforts to move my TIRA into Roth would turn out to be an expensive failure.
And if i'm trying to optimize for future taxes decades down the road, then it seems i really do need to try to predict all the possible tax changes and their probabilities.

Like i said, all this stuff makes my head hurt.

I'm guessing this is where tax diversification comes in -- you don't try to optimize too much for an unknown future tax scenario, but instead have some taxable, some TIRA, some Roth.

[NDHawkFan]

Congratulations on your financial success! Certainly you're not suggesting that for every dollar increase in portfolio value, you pay more than an additional dollar in taxes are you?

Well, the IRMAA cliffs do indeed operate that way. The dollar putting you over a cliff can cost you hundreds of dollars at the next IRMAA tier.

Yes. This. Indeed, they do!

[dagsboro]

Thanks chemocean.

[VanGar+Goyle]

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate

The 40.7% tax rate seems to be the Social Security Tax Torpedo, with 1.85 times 22%.
You could hit that at $34,000, which is well below the $103,000 IRMAA threshold.
With your pension and social security, you may be paying the 40.7% rate no matter what you convert, and going well past it to 22% and 24%.

[PapaGeek]

The other issue to consider when it comes to doing maximum Roth Conversions as soon as possible is the growth rates of your RMDs and the market. The average yearly market increase during Obama was 13.63%, Trump 17.55%, and Biden 11.69%; over the past 16 years the average was over 14%.

At the same time that the market is growing, and hopefully your IRA at the same rate, your Required Distribution at age 73 is 4.05%, 6.13% at 83, and 10.42% at age 93. Basically, you are take a larger percentage of a larger amount each year.

The only real way to manage these larger RMDs is to reduce or reverse the growth of your IRA with additional Roth Conversions.

[Longdog]

The other issue to consider when it comes to doing maximum Roth Conversions as soon as possible is the growth rates of your RMDs and the market. The average yearly market increase during Obama was 13.63%, Trump 17.55%, and Biden 11.69%; over the past 16 years the average was over 14%.

At the same time that the market is growing, and hopefully your IRA at the same rate, your Required Distribution at age 73 is 4.05%, 6.13% at 83, and 10.42% at age 93. Basically, you are take a larger percentage of a larger amount each year.

The only real way to manage these larger RMDs is to reduce or reverse the growth of your IRA with additional Roth Conversions.

If you have taxable, pre-tax, and Roth space to play with, then (to the extent that you can do this) putting equities in Roth and taxable, while putting fixed income in pre-tax, puts that market growth in accounts where it’s treated, tax-wise, most favorably, and avoids (or at least mitigates) excessive growth in the pre-tax accounts. Asset location matters, when optimizing taxes.

[an_asker]

Ouch, this IRMAA stuff makes my head hurt!

[...]

Like i said, all this stuff makes my head hurt.

I'm guessing this is where tax diversification comes in -- you don't try to optimize too much for an unknown future tax scenario, but instead have some taxable, some TIRA, some Roth.

I was just watching an instagram video today. He made two points:

- no point wasting time on being guilty about stuff you did in the past. You cannot go back in time and fix it.

- no point being worried about something that is happening eight years in the future either.

Focus on what you can do now - whether it is to set right the past things that you are guilty about or addressing what will happen in eight years (if it is in your control!

There was a long thread about IRMAA. Bottom line is that if you are not just entering IRMAA territory, you have enough money and more to pay for it. Why worry? Enjoy life and enjoy your money!!

[Dregob]

Without knowing about the IRMAA limits, I made a large Roth Conversion in December of 2020. This caused my 2022 Social Security Medicare premiums to increase by $323.90 for each benefit check, $3,886.80 for the year!

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate: It will take about 15 years to complete the conversions if the market grows at a 10% ROR each year, and I will pay taxes on $83,740 of RMDs. If the market grows at 12% it will take 19 years and I will pay taxes on $123,810 of RMDs. The better the market does, the more I pay!

My plan moving forward is to do maximum Conversions each year, within the IRMAA limits, which will only take 4 years and my RMDs will only total $19,725!

I just need to be certain of one item for the IRMAA calculations. Does the calculation include my full Social Security Benefit, or just the 85% max taxable amount?

The current IRMAA limit is $103,000. If my Social Security is $40,000 and my Pension is $20,000 and those are all of my income source except for IRA withdrawals: My total withdrawal limit would be $103,000 minus $40,000 SS minus $20,000 Pen equals $43,000 maximum withdraw from my IRA for Required Distribution plus Roth Conversions plus extra cash.

Some of the on-line chat sites say that is the correct calculation, others say that I should only use the Taxable portion of my Benefit which would be 85% of $40,000 equals $34,000. This would allow me to do an extra $6,000 of Roth Conversions.

If Taxable SSB is correct, can someone point me to an official government site that says to use only the taxable portion of my benefit.

The better the market does, the more I pay!

Do you view this as a bad thing?

[tibbitts]

Without knowing about the IRMAA limits, I made a large Roth Conversion in December of 2020. This caused my 2022 Social Security Medicare premiums to increase by $323.90 for each benefit check, $3,886.80 for the year!

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate: It will take about 15 years to complete the conversions if the market grows at a 10% ROR each year, and I will pay taxes on $83,740 of RMDs. If the market grows at 12% it will take 19 years and I will pay taxes on $123,810 of RMDs. The better the market does, the more I pay!

My plan moving forward is to do maximum Conversions each year, within the IRMAA limits, which will only take 4 years and my RMDs will only total $19,725!

I just need to be certain of one item for the IRMAA calculations. Does the calculation include my full Social Security Benefit, or just the 85% max taxable amount?

The current IRMAA limit is $103,000. If my Social Security is $40,000 and my Pension is $20,000 and those are all of my income source except for IRA withdrawals: My total withdrawal limit would be $103,000 minus $40,000 SS minus $20,000 Pen equals $43,000 maximum withdraw from my IRA for Required Distribution plus Roth Conversions plus extra cash.

Some of the on-line chat sites say that is the correct calculation, others say that I should only use the Taxable portion of my Benefit which would be 85% of $40,000 equals $34,000. This would allow me to do an extra $6,000 of Roth Conversions.

If Taxable SSB is correct, can someone point me to an official government site that says to use only the taxable portion of my benefit.

The better the market does, the more I pay!

Do you view this as a bad thing?

I would view having $1 (or similarly small amount) in extra income result in me having to pay well over $1k in extra tax a bad thing, and I think avoiding that is the point of the question.

[freckles01]

The other issue to consider when it comes to doing maximum Roth Conversions as soon as possible is the growth rates of your RMDs and the market. The average yearly market increase during Obama was 13.63%, Trump 17.55%, and Biden 11.69%; over the past 16 years the average was over 14%.

At the same time that the market is growing, and hopefully your IRA at the same rate, your Required Distribution at age 73 is 4.05%, 6.13% at 83, and 10.42% at age 93. Basically, you are take a larger percentage of a larger amount each year.

The only real way to manage these larger RMDs is to reduce or reverse the growth of your IRA with additional Roth Conversions.

If you have taxable, pre-tax, and Roth space to play with, then (to the extent that you can do this) putting equities in Roth and taxable, while putting fixed income in pre-tax, puts that market growth in accounts where it’s treated, tax-wise, most favorably, and avoids (or at least mitigates) excessive growth in the pre-tax accounts. Asset location matters, when optimizing taxes.

This is what I'm doing- taxable/rothIRA- all equities, 401k- nearly all bonds/stable(cash).

One "issue" is equities have grown much more than bonds, making it more challenging to maintain AA. For years, all 401k money goes to bonds with occasional exchange from remaining equity fund into bonds to rebalance.

Plan to do some RothIRA conversions to keep 401k to about 600k. Will lump sum pension (300k?) into bonds in IRA.

RMD's from a 900k -1 million account, single filer is a manageable amount- not too much, not too little.

[Exchme]

There are a couple landing spots to consider.

With $40K in SS income, $20K in a pension and no other income, then $12.2K can be converted before reaching 50% of SS benefits taxed, so the top marginal tax rate on that conversion would be 18%.

The next $12.5K of Roth conversion ($24.7K total) can be done in the 12% bracket (22.2% marginal tax cost). At that point, 76.5% of the SS benefit is already taxed, so you are nearly through the tax torpedo.

The next $4k is taxed at 40.7% and then you are through the torpedo and have access to the 22% bracket up to the top of the base IRMAA tier. If you power through the rest of the torpedo range all the way to the top of the base IRMAA tier, then average tax rate between the top of the 12% bracket and the top of the base IRMAA tier will be less than 25%.

So you may find that some combination of conversions to the top of the base IRMAA tier in some years and no conversions in other years to leave some SS untaxed may actually be better.

Note that tax brackets, SS benefits and IRMAA limits are inflation adjusted, but the SS exclusion limit is not (not sure about your pension). If your analysis doesn't consider inflation, you are not going to get a reasonable answer.

[Dregob]

Without knowing about the IRMAA limits, I made a large Roth Conversion in December of 2020. This caused my 2022 Social Security Medicare premiums to increase by $323.90 for each benefit check, $3,886.80 for the year!

If I continue to do my Roth Conversions within the 12% / 22.2% Tax Bracket to avoid the 40.7% tax rate: It will take about 15 years to complete the conversions if the market grows at a 10% ROR each year, and I will pay taxes on $83,740 of RMDs. If the market grows at 12% it will take 19 years and I will pay taxes on $123,810 of RMDs. The better the market does, the more I pay!

My plan moving forward is to do maximum Conversions each year, within the IRMAA limits, which will only take 4 years and my RMDs will only total $19,725!

I just need to be certain of one item for the IRMAA calculations. Does the calculation include my full Social Security Benefit, or just the 85% max taxable amount?

The current IRMAA limit is $103,000. If my Social Security is $40,000 and my Pension is $20,000 and those are all of my income source except for IRA withdrawals: My total withdrawal limit would be $103,000 minus $40,000 SS minus $20,000 Pen equals $43,000 maximum withdraw from my IRA for Required Distribution plus Roth Conversions plus extra cash.

Some of the on-line chat sites say that is the correct calculation, others say that I should only use the Taxable portion of my Benefit which would be 85% of $40,000 equals $34,000. This would allow me to do an extra $6,000 of Roth Conversions.

If Taxable SSB is correct, can someone point me to an official government site that says to use only the taxable portion of my benefit.

The better the market does, the more I pay!

Do you view this as a bad thing?

I would view having $1 (or similarly small amount) in extra income result in me having to pay well over $1k in extra tax a bad thing, and I think avoiding that is the point of the question.

I agree altlhough I assume that quirk of IRMAA is fairly rare. But worth keeping in mind!

[tibbitts]

I agree altlhough I assume that quirk of IRMAA is fairly rare. But worth keeping in mind!

Having exactly $1 trigger an IRMAA tier jump would be somewhat rare, but unless you intentionally plan for it, on average you'll only use half of whatever IRMAA tier you end up paying for. Whether that range would trigger changes in marginal tax rate varies.

[Prokofiev]

The other issue to consider when it comes to doing maximum Roth Conversions as soon as possible is the growth rates of your RMDs and the market. The average yearly market increase during Obama was 13.63%, Trump 17.55%, and Biden 11.69%; over the past 16 years the average was over 14%.

At the same time that the market is growing, and hopefully your IRA at the same rate, your Required Distribution at age 73 is 4.05%, 6.13% at 83, and 10.42% at age 93. Basically, you are take a larger percentage of a larger amount each year.

The only real way to manage these larger RMDs is to reduce or reverse the growth of your IRA with additional Roth Conversions.

So you are projecting 14% to 18% ROR for your TIRA? That seems a little rich to me, especially if you hold your fixed income in
the TIRA and your stocks in Roth/taxable.

The correct distribution percentages are 3.77% at 73, 5.65% at 83 and 9.90% at 93.
https://www.fidelity.com/bin-public/060 ... eTable.pdf


The other "real way" of managing your RMDs is to have bonds/ fixed income in your TIRA. That would slow the rate of growth.
Changing your TIRA and Roth holdings is easy and tax-free so you may be able to keep the same AA. Unless of course you are
100% equities.