Unintended Consequences - IRMAA

[jazz4cash]

I was searching for something entirely different and I was surprised how often IRMAA is included in a thread title. Here's one from a few months ago that addresses the issue.....
https://www.early-retirement.org/forums/f28/had-no-trouble-getting-irmaa-reversed-105433.html

 

[Perryinva]

It is important to remember that though they used 2 years ago to determine IRMAA, it is the income in the year that you are charged for the increase that matters. I went over in 2018 and filed the SSA-44 with retirement as the major life change, explaining with documentation 2020 income would be below IRMAA, and it was reversed. 2019 income again triggered IRMAA for 2021, and as soon as I file 2020 taxes, I will submit SSA-44 again and it will be reversed.

 

[statsman]

It is important to remember that though they used 2 years ago to determine IRMAA, it is the income in the year that you are charged for the increase that matters. I went over in 2018 and filed the SSA-44 with retirement as the major life change, explaining with documentation 2020 income would be below IRMAA, and it was reversed. 2019 income again triggered IRMAA for 2021, and as soon as I file 2020 taxes, I will submit SSA-44 again and it will be reversed.

Some income increases can be ignored. Apparently, the capital gains (beyond the exemption) on the sale of a house owned through the working years and then sold in retirement will not be ignored.

 

[RetireBy90]

Back when I was employed I had 3 or 4 months of excessive overtime, 14 hour days 7 days a week. Kicked my income up almost double and it was 2 years before DW went on Medicare. I did the SSA-44 and we got relief. They even backdated so after extra IRMAA first months we got 0 bill for 2 months. Maybe I got an understanding reviewer or maybe there is a good chance you can get some relief when it is reasonable.

 

[audreyh1]

So, it looks like our 2020 income would drop us one tier. Do you think it’s worth filing form SSA-44? it doesn’t qualify as a major life change*, just lower investment income. Otherwise I guess we’ll get our break in 2022.

*Looking at the checklist it doesn’t apply.

 

[pb4uski]

Not sure, but seems like it can't hurt. No real downside to trying is there?

 

[Car-Guy]

So, it looks like our 2020 income would drop us one tier. Do you think it’s worth filing form SSA-44? it doesn’t qualify as a major life change*, just lower investment income. Otherwise I guess we’ll get our break in 2022.

*Looking at the checklist it doesn’t apply.

Not sure, but seems like it can't hurt. No real downside to trying is there?

My case isn't really covered by the forms selection of life changing events, but I'm going to try anyway as soon as I've filed my 2020 return next year. Plan to send in a copy of my signed 1040 return for documentation...

 

[pb4uski]

No joke!


I wish I could "vent" about it here.....

Why can't you?

 

[RunningBum]

What gets me is that IRMAA can be triggered by Roth conversions. This is for money earned many years ago. I know it wasn't taxed back then, but it was income then AND reported. I almost went over the trigger this years because my spreadsheet erroneously linked to my "taxable" income rather than my AGI/MAGI. I caught it about 2 hours before I pulled the trigger on the conversion while doing a final check.

I don't see this as a valid point. It was income, that you chose to defer. How was it reported? Certainly not in a way that cost you any taxes.

Contributions to tIRAs and 401Ks are not yours to spend until you pay the taxes. So now you are converting and reporting the income, which means you pay the taxes now, which could include IRMAA. If your spreadsheet doesn't count conversions as income that's a pretty basic error that's on you.

 

[Car-Guy]

Why can't you?

I'd likely violate many of the forums rules if I "vented" on this topic without sugar coating it. So no sense in poking porky.

 

[pb4uski]

I don't see this as a valid point. ...

+2

 

[pb4uski]

I'd likely violate many of the forums rules if I "vented" on this topic ...

 

[CRLLS]

I don't see this as a valid point. It was income, that you chose to defer. How was it reported? Certainly not in a way that cost you any taxes.

Contributions to tIRAs and 401Ks are not yours to spend until you pay the taxes. So now you are converting and reporting the income, which means you pay the taxes now, which could include IRMAA. If your spreadsheet doesn't count conversions as income that's a pretty basic error that's on you.

First I agree on your last point. My spreadsheet was wrong. That is on me.
As far as where was it “reported” years earlier?

1) In the case of employment income, employee’s gross income is reported on the annual W2 IRS form.
2) FICA withholding is calculated on one’s “gross income”, not net after 401K deductions,
3) FICA includes both SS and Medicare contributions
4) IRA deduction to gross income is done (today) on Schedule 1 as an adjustment to income on tax form 1040.

So both IRA’s and 401Ks were reported (albeit, not taxed) in the year contributions were made.

BTW, I didn’t chose to "defer the income" back then, I chose to defer the tax paid on that income in exchange of having limited access to that as retirement savings.

Considering #2 & #3 above, I have already paid the FICA tax (includes the Medicare tax) on all 401K contributions when they were made way-back-then as reported on my W2 years ago. As such, IMO, it should be excluded from any of today’s income based additions to Medicare. A point could be made about a Roth conversion from an IRA being treated differently because there was no FICA paid on those IRA contributions. However any rollover from a 401K to an IRA before today would mix those dollars making treatment today as being difficult at best.

To be clear, as I am paying the conversion tax from IRA monies, I have no issue about including that tax as income in the year of the conversion and thus subject to IRMAA. It wasn’t “converted” to the Roth. I do think that IRMAA should not be based on the total Roth conversion amount.

 

[pb4uski]

What gets me is that IRMAA can be triggered by Roth conversions. This is for money earned many years ago. I know it wasn't taxed back then, but it was income then AND reported. I almost went over the trigger this years because my spreadsheet erroneously linked to my "taxable" income rather than my AGI/MAGI. I caught it about 2 hours before I pulled the trigger on the conversion while doing a final check.

I don't see this as a valid point. It was income, that you chose to defer. How was it reported? Certainly not in a way that cost you any taxes.

Contributions to tIRAs and 401Ks are not yours to spend until you pay the taxes. So now you are converting and reporting the income, which means you pay the taxes now, which could include IRMAA. If your spreadsheet doesn't count conversions as income that's a pretty basic error that's on you.

First I agree on your last point. My spreadsheet was wrong. That is on me.
As far as where was it “reported” years earlier?

1) In the case of employment income, employee’s gross income is reported on the annual W2 IRS form.
2) FICA withholding is calculated on one’s “gross income”, not net after 401K deductions,
3) FICA includes both SS and Medicare contributions
4) IRA deduction to gross income is done (today) on Schedule 1 as an adjustment to income on tax form 1040.

So both IRA’s and 401Ks were reported (albeit, not taxed) in the year contributions were made.

BTW, I didn’t chose to "defer the income" back then, I chose to defer the tax paid on that income in exchange of having limited access to that as retirement savings.

Considering #2 & #3 above, I have already paid the FICA tax (includes the Medicare tax) on all 401K contributions when they were made way-back-then as reported on my W2 years ago. As such, IMO, it should be excluded from any of today’s income based additions to Medicare. A point could be made about a Roth conversion from an IRA being treated differently because there was no FICA paid on those IRA contributions. However any rollover from a 401K to an IRA before today would mix those dollars making treatment today as being difficult at best.

To be clear, as I am paying the conversion tax from IRA monies, I have no issue about including that tax as income in the year of the conversion and thus subject to IRMAA. It wasn’t “converted” to the Roth. I do think that IRMAA should not be based on the total Roth conversion amount.

Its not any deep, dark secret that IRMAA is based on your tax return income and that tax return income includes any Roth conversions. It's not like they changed the rules on you.

And you didn't defer the tax as you claim... the only way you can defer tax is by deferring income... that's why it is called an income tax. You deferred the income (being recognized as such in your tax return) which in turn deferred the tax.

FICA income and the timing of FICA taxes have nothing to do with it... never had and never will.

 

[Hermit]

I am carefully working at keeping my income under $163k which is a step for IRMAA as well as the break point for the top of the 24% tax bracket for singles. I want to pull some cash out of the traditional IRA so I can add posts to the "Spend That Dough" thread. RMDs are just around the corner so I will be paying IRMAA taxes for the rest of my life.

 

[RobbieB]

I sure hope I do.

 

[audreyh1]

I sure hope I do.

You inspire me RobbieB!

 

[2017ish]

I sure hope I do [pay IRMAA for the rest of my life].

Yeah, that's us. We are converting aggressively now in our late 50s and early 60s to try avoiding fourth tier once we hit our 70s (and, maybe, perhaps, once one of us dies).

No complaints. Converting Roth to top of 24% bracket gives us an 18.7% effective rate--far better than what we put the money in at, even with IRMAA....

 

[Gumby]

Yeah, that's us. We are converting aggressively now in our late 50s and early 60s to try avoiding fourth tier once we hit our 70s (and, maybe, perhaps, once one of us dies).

No complaints. Converting Roth to top of 24% bracket gives us an 18.7% effective rate--far better than what we put the money in at, even with IRMAA....

I've always felt this way; If I'm paying big taxes, it's because I'm making a boatload of money.

 

[CRLLS]

Its not any deep, dark secret that IRMAA is based on your tax return income and that tax return income includes any Roth conversions. It's not like they changed the rules on you.

I never said they changed the rules on me. But in reality, they did when they implemented IRMAA on monies already put into 401K and IRAs. Not that they can't change the rules.

And you didn't defer the tax as you claim... the only way you can defer tax is by deferring income... that's why it is called an income tax. You deferred the income (being recognized as such in your tax return) which in turn deferred the tax.

I see nothing on my tax forms that says "deferred income" as it relates to 401k's. You call it what you will. I will do the same. And really? A facepalm? I do know what income tax means.

FICA income and the timing of FICA taxes have nothing to do with it... never had and never will.

FICA taxes has a lot to do with it IMO. That says to me, they (Medicare) acknowledged the income was made in the year it was paid. not in the year of a Roth conversion. Notice I never said income taxes were paid on that money back then.

See my comments in orange above.

 

[pb4uski]

Oh grow up and quit your whining.

 

[Ready-4-ER-at-14]

A one-year 40% return as never happened that I can find... at least for calendar years.

Yes, my choice of words was more dramatic than accurate if you ignore significant figures, but per the source thebalance.com from 1990 to 2019 re S&P500 index there were at least 6 years around 30% and 1995 was listed as 37.2%.
(31.5 1989, 30.5 1991, 37.2 1995, 33.0 1997, 28.58 1998, 28.68 2003, 31.49 2019)

I started engineering when slide rules were still used.. You added or subtracted logarithms and decimal places were kept in your head. We spent a bit of time on significant figures. The logic was a decimal point showed you how accurate the measurement really was. IE did Noah measure his Ark with the distance from his elbow to his fingertip or some sort of digital laser accurate to millimeters. They stressed this stuff in chemistry quantitative analysis as well..

37.2 to me means 37.1 to 37.3. 40 means 30 to 50 while 40. means 39 to 41. 40.0 means 39.9 to 40.1. This type of logic conveyed your confidence in the accuracy of the number and kept bridges from falling down. I simplified the explanation above some by omitting rounding effect.

And while I can sort of defend what I said, the truth was I was lazy and did not look up the highest year. And you nicely clarified the issue that the number was not digitally accurate.

Even one year at 37.2% and I am still golden re the taxes I paid. Living through two 30% gains and I am ecstatic. Also note there are 6 down years listed from 1986 to 2019 re S&P500 index although only one really bad in 2008 of -37.00%.

Just an analog guy living in a digital world.. lol

 

[RunningBum]

See my comments in orange above.

IRMAA is not an additional Medicare tax, but instead an increase in premiums for higher income people.

https://www.medicare.gov/your-medicare-costs/part-b-costs

2020

The standard Part B premium amount in 2020 is $144.60. Most people pay the standard Part B premium amount. If your modified adjusted gross income as reported on your IRS tax return from 2 years ago is above a certain amount, you'll pay the standard premium amount and an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium.

Your early argument that Roth conversions shouldn't count towards IRMAA income has problems. One could game the system easily by converting an amount to a Roth, then withdrawing from the Roth.

 

[Hermit]

My biggest issue with the whole deferred taxes and taking distributions while retired is that I listened to the investment pundits back when Roths were first implemented. The sage advice at the time was if you were over 50 or so it didn't make sense to do Roths and it was best to just keep socking that money in traditional IRAs or 401k. I don't think IRMAA was part of the equation back then and I doubt if it is today for the newer generation of investment pundits. If my current income from SS and pensions is just under $87k and I withdraw enough to put my income just under $163k, I will pay 24% federal tax, 4.63% Colorado state income tax, and 4.45% IRMAA tax for a total of 33% taxes on that $76k distribution. The IRMAA tax calculation (an additional $282/mo in 2022 for Part B and Part D) uses 2020 numbers but will actually use 2022 numbers so they could be different. The moral of this story is do your homework and don't take the pundit's word for it. In future years I will add enough to my RMD to put my income just under $163k for as much income as I can get while in that bracket.

 

[Dtail]

I always used TIRA instead of any Roth, but also was earning too much dough to do a Roth anyway.
Potential IRMAA is at least 12 years away, but calculated that it could be close either way for the surcharge at least at first.