Unintended Consequences - IRMAA

[MichaelB]

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

It is exactly that. Another way to say it is IRMAA is a reduction in the Medicare premium subsidy for higher income taxpayers.

Edit to add - even SSA describes it in those terms https://www.ssa.gov/OP_Home/cfr20/418/418-1005.htm

The purpose of the income-related monthly adjustment amount is to reduce the Federal subsidy of the Medicare Part B program for beneficiaries with modified adjusted gross income above an established threshold. These beneficiaries will pay a greater share of actual program costs. Medicare Part B premiums paid by beneficiaries cover approximately 25 percent of total Medicare Part B program costs and the remaining 75 percent of program costs are subsidized by the Federal Government's contributions to the Federal Supplementary Medical Insurance Trust Fund. The reduction in the Medicare Part B premium subsidy results in an increase in the total amount that affected beneficiaries pay for Medicare Part B coverage.

Even taxpayers with incomes over $750k (joint), the highest bracket, receive a subsidy.

 

[RunningBum]

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.

Edit: I left out the Part D surcharge, so Hermit's math is correct. [-]Math check, assuming you are single, but going from just under $87K to just under $163K gives you an IRMAA surcharge of $231.40/month ($376 - $144.60), which is $2776.80 per year, divided by your $76K distribution is 3.65%, not 4.45%. [/-]

I agree with your conclusion, to do your homework and figure out what works for you. I've seen some good advice here on e-r.com that you should defer to any company matching level, and then consider where to put the rest of what you're saving for retirement. Don't automatically defer to the max. That's not the message that most of the public is getting.

Have you looked at whether you saved more than 33% when you deferred the income? It's not as hard to swallow a 33% conversion tax if you saved more than that earlier.

Like Dtail's said after yours, Roth contributions weren't an option for me, and a backdoor Roth would've had a steeper tax rate.

I think people overlook investing in taxable accounts. You'll get hit with some dividend income along the way, hopefully qualified. When you sell, you only get hit with 15% (sometimes 0%) federal + state + the possible IRMAA surcharge but you may be able to control that.

The other thing that some overlook is being aggressive in Roth conversions early. Often people resist, because they can't stomach the thought of paying taxes before they need to, but then get hit with IRMAA and don't like that either.

OTOH, in most cases it probably doesn't make sense to go over the ACA subsidy cliff before 65 just to avoid IRMAA. ACA has these minor (~10%) reduction in subsidy as you approach the cliff, then WHAM! it's all gone. IRMAA cliffs are more like steps. At most you pay a little over $1000 if you go $1 over one of the IRMAA limits.

 

[pb4uski]

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.

Hermit, tax-deferred probably still made sense for you, just a little less so because of IRMAA.

I'm guessing that your marginal federal tax rate was probably 28% or 31% or even higher when you deferred that income so you're saving at least 4% or 9% or perhaps more... but those savings are offset by the IRMAA premium increase that works out to 4.45%. So if you marginal tax bracket was 31% when you deferred then you saved 2.55% (31% - 24% - 4.45%) and if your marginal tax bracket was 28%when you deferred it cost you 0.45% (28% - 24% - 4.45%).

Either way, since the benefits are less than you expected when you deferred that income it means that you have had more financial success than you anticipated when you decided to defer that income. That's good, right?

State income tax is probably a push... IOW what you saved by deferring income is the same as what you pay now.

 

[pb4uski]

...The other thing that some overlook is being aggressive in Roth conversions early. Often people resist, because they can't stomach the thought of paying taxes before they need to, but then get hit with IRMAA and don't like that either. ..

Absolutely. When I first retired, I was shocked and overjoyed at the idea of have a federal income tax bill of $0 after ~$50k in tax annually when I was working.

But after giving it more thought I figured out that that low tax income was a golder opportunity to do more Roth conversions at a very low tax cost so I sucked it up, did the Roth conversions and wrote out the checks to the IRS (albeit not happily).

 

[Gumby]

Math check, assuming you are single, but going from just under $87K to just under $163K gives you an IRMAA surcharge of $231.40/month ($376 - $144.60), which is $2776.80 per year, divided by your $76K distribution is 3.65%, not 4.45%. ......

That's just for Part B. I think you also need to add in the surcharge for Part D, which is $50.70 per month. Then the sum works out to 4.45% on $76K.

 

[RunningBum]

That's just for Part B. I think you also need to add in the surcharge for Part D, which is $50.70 per month. Then the sum works out to 4.45% on $76K.

Thanks for the correction. I just went back to cross out that part of my post.

 

[Hermit]

You can call IRMAA whatever you want, but in my humble opinion, when money leaves my pocket and goes into the government's pocket, that is a tax. In this case a progressive tax. I paid a lot more into Medicare than most people on Medicare and that is OK. I don't mind the tax as much as the obfuscation. Why not just say old people on Medicare need to pay an additional progressive income tax? Our state government has also gotten on the "No NewTaxes" band wagon by making everything "fees". In the state's case, it is not progressive which really hurts the lower income people.


So far as Roth vs traditional, I was always in the 24% bracket (married, 2 kids) while working. A large portion of my savings is derived from gains. I have never tried to calculate what I would have paid for potential taxable gains but probably less than 24%. My gains are certainly much larger based on the larger pre tax contributions so there is also that to consider. I think I will just have to suck it up and enjoy my posts to the "Blow That Dough" thread.

 

[Midpack]

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....

IRMAA is an annoying penalty, but I wouldn't let it drive my Roth Conversion strategy, we're maxing to the top of the 22% bracket. I'm paying taxes now voluntarily, and I wish conversions were excluded from MAGI, but I'm not under any illusion that would ever happen.

 

[TheWizard]

I'm not sure if it woul be successful, but it might be worth a shot to apply and claim that you were over only because you did a withdrawal from retirement accounts to pay off your HELOC and that income will not recur in future years. Only cost would be to fil out the form and send it in. Who knows, you might get a sympathetic examiner.

You can try, but voluntary withdrawals from tax-deferred for whatever reason are not one of the seven life-changing events on SSA-44...

 

[TheWizard]

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.

I'm in a very similar boat and always will be.
That $163k amount indexed upward to $165k for 2021 IRMAA based on 2019 MAGI.

And for what little it matters, top of 24% bracket is based on Taxable Income after deductions, not MAGI.
So we won't be getting into the 32% bracket if we stay in the IRMAA tier <$165K...

 

[prototype]

Does anyone know if the the SSA (or whatever Govt. agency) automatically checks taxes returns each year (filing from 2 years ago) to determine (i.e.and automatically adjust up or down) IRMAA level each year?

Or does one have file an appeal if they in IRMAA stage X, and their income drops for whatever reason to lower their IRMAA level, or get it lowered or removed permanently (until they have big income hit again).

FYI - Here is a another link to another thread from this year on IRMAA. https://www.early-retirement.org/forums/f38/irmaa-does-the-money-grab-never-end-83713.html

 

[braumeister]

Does anyone know if the the SSA (or whatever Govt. agency) automatically checks taxes returns each year (filing from 2 years ago) to determine (i.e.and automatically adjust up or down) IRMAA level each year?

Yes.

 

[Gumby]

Yes.

Yes, you know, or yes, they do? Likely both, but not entirely clear.

 

[braumeister]

Yes, they do.

 

[SecondCor521]

Yes, you know, or yes, they do? Likely both, but not entirely clear.

Yes.

 

[Golden sunsets]

^^^^^^^

I think you need to file form SSA-44 for any reconsideration.. I know I'm thinking about it for next year.

Ditto here. We ended up jumping two tiers into IRMAA, for 2021 essentially doubling our Medicare premiums, based on 2019 income, the first year that the tax torpedo hit us, (2 RMD's plus 2 deferred til 70, SS payments in addition to pensions and VA disability). That will be our status annually for the long term, but as we did not take RMD's in 2020, due to the CARE's Act, we will not pay IRMAA in 2022. We will also try to claw it back in 2021, filing the SSA 44 form, once our tax return for 2020 is completed. If it works - great. If not, we'll survive.

 

[rkser]

If I do not do Roth Conversions now, the projections show the RMDs will push us in higher tax brackets later, if we do the Roth conversions IRMAA gets us now.

A sweet spot to be in..... Ha

My guess is doing Roth Conversions now is still better than RMDs related income taxes later. But I am not sure.

Similar story with Tax Exempt Bond Funds, you pay less income tax, but the income pushes your MAGI to a higher TIER in Medicare Premiums.

The choice is ours which way or by what name you choose the hair cut by the taxes..

 

[RunningBum]

If I do not do Roth Conversions now, the projections show the RMDs will push us in higher tax brackets later, if we do the Roth conversions IRMAA gets us now.

A little perspective is needed here. You may know this, but it can be misleading to others.

IRMAA is not a yes or no proposition. There are tiers. If you do Roth conversions now that push you into IRMAA, but it may (or may not) keep you from being in a higher tier later when you must take RMDs.

My guess is doing Roth Conversions now is still better than RMDs related income taxes later. But I am not sure.

Why not model it, with a spreadsheet or tax program? There are some assumptions (guesses) that you must make, but it doesn't have to be a total guess.

Similar story with Tax Exempt Bond Funds, you pay less income tax, but the income pushes your MAGI to a higher TIER in Medicare Premiums.

I don't see any similarity.

Presumably you would invest in lower yielding tax exempt bond funds if the after tax return was better than taxable bonds. Yes, you have to add the tax-exempt bond income for the IRMAA MAGI calculation. But your alternative would've been taxable bonds; income from those is already part of AGI. In fact, taxable bond income is higher. There's no penalty wrt to IRMAA in having tax-exempt bonds.

 

[pb4uski]

You can call IRMAA whatever you want, but in my humble opinion, when money leaves my pocket and goes into the government's pocket, that is a tax....

Under that construct the regular Part B premium is also a tax in that it is money that leaves your pcoket and goes into the government's pocket... so I think that is a poor way to define a tax. Are you seriously asserting that the regular Part B premium is a tax?

OTOH, you can easily avoid the regular Part B premium and any IRMAA premiums by just not claiming Medicare and buy you own private insurance. Does that make you feel better?

 

[Lsbcal]

IRMAA got us this year. I thought she was a nice old fashioned girl until I opened the SS letter. We sold an inherited house last year and that triggered IRMAA in a big way.

Am I right that there is (a) no recourse, and (b) this is a one year reduction in SS benefits and next year will be based on our 2020 income?

 

[audreyh1]

IRMAA got us this year. I thought she was a nice old fashioned girl until I opened the SS letter. We sold an inherited house last year and that triggered IRMAA in a big way.

Am I right that there is (a) no recourse, and (b) this is a one year reduction in SS benefits and next year will be based on our 2020 income?

Right. 2022 Medicare premiums will be based on 2020 income. It’s a one year deal.

Did you wait to sell the inherited house and it appreciated a lot after you inherited it?

 

[Lsbcal]

Right. 2022 Medicare premiums will be based on 2020 income. It’s a one year deal.

Did you wait to sell the inherited house and it appreciated a lot after you inherited it?

My father passed away in 1982 but his widow occupied the house until last year when she died. She was a nut case and the house was not in the greatest shape.

I sold it immediately and am glad I did as Covid might have made it a mess should I have chosen to try to rent it out. And I don't really know if renting it would have changed the inheritance picture as far as taxes are concerned. The house is in a community that had gone way down hill in recent decades.

Glad to close that ugly chapter in post-family history.

 

[RunningBum]

IRMAA got us this year. I thought she was a nice old fashioned girl until I opened the SS letter. We sold an inherited house last year and that triggered IRMAA in a big way.

Am I right that there is (a) no recourse, and (b) this is a one year reduction in SS benefits and next year will be based on our 2020 income?

We're still in 2020. When you say you sold last year, you mean 2019, right? In that case, IRMAA would get you next year, 2021, not this year. And the year after (2022) would be based on 2020 income.

I can't tell if you are confused about IRMAA being based on two vs one years ago income, or if you have already received your 2021 notice and are thinking of 2021 as "this year".

Can't blame you for wanting to put 2020 in the rear view mirror a little early.

 

[Hermit]

Under that construct the regular Part B premium is also a tax in that it is money that leaves your pcoket and goes into the government's pocket... so I think that is a poor way to define a tax. Are you seriously asserting that the regular Part B premium is a tax?

OTOH, you can easily avoid the regular Part B premium and any IRMAA premiums by just not claiming Medicare and buy you own private insurance. Does that make you feel better?

pb4uski, you are certainly in an argumentative mood today. In my estimation, even more than usual! The taxes I paid all during my working career along with those of my employer were quite real. They are called taxes by Medicare. They were intended to fund Medicare. I am pretty confident that I along with my employer have fully funded my Medicare bennifits. I also realize that current payroll taxes fund current Medicare recipients including me as my taxes did for those on Medicare when I was working and contributing. If it makes you happy to think of money collected by government as fees that is a good thing because that seems to be what government wants you to think. When I have to pay additional costs because of my income I cannot call it a fee because I am not receiving any additional value so I will continue to call it a tax, not a fee.

 

[Lsbcal]

We're still in 2020. When you say you sold last year, you mean 2019, right? In that case, IRMAA would get you next year, 2021, not this year. And the year after (2022) would be based on 2020 income.

I can't tell if you are confused about IRMAA being based on two vs one years ago income, or if you have already received your 2021 notice and are thinking of 2021 as "this year".

Can't blame you for wanting to put 2020 in the rear view mirror a little early.

Yes 2021 is the bad SS year. Just had read the SS notice today.