Another thread on IRMAA for planning purposes

[Z3Dreamer]

Just ended the ACA Premium Tax Credits game and I did well, with your help. New game is Roth converting prior to RMDs. I am not giving you enough data to plug into calculators. Just asking if my theory is correct. My question is: Does anyone Roth convert up to the IRMAA limit?

I am deciding how much to Roth convert each year based on all the factors numerous threads have enunciated. I have already done too many sensitivity analyses. At first, I thought I would Roth convert to the top of the 12% bracket. As you know, because of the tax torpedo (social security becoming more taxable as income rises), the effective tax rate in the 12% bracket is sometimes in the 20% plus range. Once I get past the torpedo, the marginal rate for me (MFJ) is in the upper 20's. I say this because state taxes are 5%. I can live with taxes in the upper 20's, knowing that Roth earnings will not be taxed.

If I do no Roth conversions, DW and I will have a marginal tax rate (Fed and State) of about 27% when we are taking RMDs. I cannot Roth convert it all before I turn 73 and stay out of the 32% Federal bracket (plus 5% state).

Now, I need to factor in IRMAA. Tier 1 is $230.80 per month. For DW and I, this would be an additional annual tax of $1,581.60. This tier is $52,000 wide so I can Roth convert this amount for roughly 3%. I am thinking that Roth converting so I am just under IRMAA is the way to go as avoiding this 3% tax is a good goal.

Again my question: Does anyone Roth convert up to the IRMAA limit? Or, are there other parts of the game that I am missing?

Yes, future earnings and taxes are unknown.

 

[qwerty3656]

"other parts of the game" - Another thing to consider is tax rates are rising beginning 2026.

 

[RunningBum]

Treat IRMAA like just another tax, and try to convert to just under whatever IRMAA tier you are trying to avoid to minimize the tax. It's not large enough (like going over the old ACA cliff) that it would be so obvious you want to avoid it that you don't even need to run the numbers.

[-]I don't get your numbers though. Tier 1 for part B is $230.80. That's $2769/yr, not $1581, right? And part D is $12.20, so your Tier 1 total is $2916. It's a 5.6% tax if you take it to the edge. So add that into your conversion marginal rate for deciding if you are going to convert into Tier 1.[/-]

If you do no Roth conversions, or small conversions to which IRMAA tier do you project you'll be in? Add that % into your comparison of your RMD years later vs. today with or without conversions. You shouldn't just worry about IRMAA now and ignore the effect later.

Along with the SS tax torpedo, don't forget to factor in that conversions and RMDs can push qualified divs and LTCGs into a 15% tax.

It sounds like state tax is a fixed rate at whatever income level is possible for you? Just take it out of the equation to simplify it. I got a little lost with you switching between a fed+state rate and a fed rate (+ state).

For my own situation, I should be able to fully convert my IRA without reaching the first IRMAA tier as long as I defer SS to age 70. That doesn't mean I'm against converting into IRMAA, just that the numbers in doing so don't work for me.

 

[RunningBum]

Also, unless you have no QDivs or LTCGs, the SS tax torpedo is a lot higher than 20some%.

If your SS is not fully (85%) taxed, an extra $1000 of conversion or RMD income has this tax impact:

$120: $1000 regular income on the conversion or RMD withdrawal @12%
$102 $850 social security that becomes taxed @12%
$277.50: $1850 QDivs/LTCGs that are pushed into being taxed @15%
---
$499.50 or a 49.95% marginal rate.

Often that SS tax torpedo window is very small, so it may be worth converting through the 49.95% rate to get back down to 12% or 27% (depending if all QDivs are taxed) after the SS torpedo.

Nobody said this was an easy calculation!

 

[Z3Dreamer]

Treat IRMAA like just another tax, and try to convert to just under whatever IRMAA tier you are trying to avoid to minimize the tax. It's not large enough (like going over the old ACA cliff) that it would be so obvious you want to avoid it that you don't even need to run the numbers.

I don't get your numbers though. Tier 1 for part B is $230.80. That's $2769/yr, not $1581, right? And part D is $12.20, so your Tier 1 total is $2916. It's a 5.6% tax if you take it to the edge. So add that into your conversion marginal rate for deciding if you are going to convert into Tier 1.

If you do no Roth conversions, or small conversions to which IRMAA tier do you project you'll be in? Add that % into your comparison of your RMD years later vs. today with or without conversions. You shouldn't just worry about IRMAA now and ignore the effect later.

Along with the SS tax torpedo, don't forget to factor in that conversions and RMDs can push qualified divs and LTCGs into a 15% tax.

It sounds like state tax is a fixed rate at whatever income level is possible for you? Just take it out of the equation to simplify it. I got a little lost with you switching between a fed+state rate and a fed rate (+ state).

For my own situation, I should be able to fully convert my IRA without reaching the first IRMAA tier as long as I defer SS to age 70. That doesn't mean I'm against converting into IRMAA, just that the numbers in doing so don't work for me.

My math on the IRMA first tier is $230.80 minus what I have to pay ($164.90) times 24 is my figure. 24 because DW and I times 12 months. The marginal IRMA tax is the increased pay. I left the part D IRMA but you are right. The incremental tax would be $12.20 time 24 for MFJ.

Don't have any qualified divs or LTCG at the moment. But worth considering.

Your third paragraph. Before I have to RMD, if I take no Roth conversions, I pay no taxes. Nada. Zippo. Big picture if I do no Roth conversions now, is that I have no taxes now and 27% forever.

State is 5%. I switched because I thought people would tell me something like: There is no 27% bracket. Sorry for the confusion.

DW and I decided that SS at an earlier age was the way to go. I would be in the same boat as you (being able to Roth convert all of my IRA) if I had made your decision.

Thanks for the comments.

 

[RunningBum]

My math on the IRMA first tier is $230.80 minus what I have to pay ($164.90) times 24 is my figure. 24 because DW and I times 12 months. The marginal IRMA tax is the increased pay. I left the part D IRMA but you are right. The incremental tax would be $12.20 time 24 for MFJ.

DOH! I crossed out my bad math on the IRMAA hit.

 

[Dash man]

It’s best to estimate as best you can what your taxes will be filing as an individual, should one of you pass early. That’s a big reason for many of us doing Roth conversions. We chose to ignore IRMAA for the few years we’ve done Roth conversions, assuming we likely will eliminate IRMAA before long.
Another consideration is if you’re charitably inclined, you can make Qualified Charitable Contributions (QCD) from your IRA and have it count as your RMD and not pay taxes. You can contribute up to $100,000 this way.

 

[Winemaker]

I am converting up to NIIT limit at $250,000, yes, I'm into the 2nd IRMAA tier. I am converting all of DW's tIRA first, then will attack mine. I turn 65 tomorrow, and plan to take SS at 70.

 

[Z3Dreamer]

It’s best to estimate as best you can what your taxes will be filing as an individual, should one of you pass early. That’s a big reason for many of us doing Roth conversions. We chose to ignore IRMAA for the few years we’ve done Roth conversions, assuming we likely will eliminate IRMAA before long.
Another consideration is if you’re charitably inclined, you can make Qualified Charitable Contributions (QCD) from your IRA and have it count as your RMD and not pay taxes. You can contribute up to $100,000 this way.

Good points. Will look at using single rates. We had planned on doing QCD's.

 

[Z3Dreamer]

I am converting up to NIIT limit at $250,000, yes, I'm into the 2nd IRMAA tier. I am converting all of DW's tIRA first, then will attack mine. I turn 65 tomorrow, and plan to take SS at 70.

Played with NIIT a bit. Last time, it added $304 to equation. Will keep in mind.

 

[Exchme]

The math is different for everyone depending on your current and future tax rates, return assumptions, assumed age when the first of you passes, size of your IRA and taxable accounts, other income, desire to make charitable gifts and bequests, planning for long term care, heir tax rates, age relative to IRMAA and SS claiming, estate tax avoidance and more.

We have been converting well past the first IRMAA tier and will for several more years.

 

[Z3Dreamer]

It’s best to estimate as best you can what your taxes will be filing as an individual, should one of you pass early. That’s a big reason for many of us doing Roth conversions. We chose to ignore IRMAA for the few years we’ve done Roth conversions, assuming we likely will eliminate IRMAA before long.

If we don't Roth convert much and DW outlives me, she will be well into the 22% Federal (27% Federal and State) bracket once she begins taking RMDs. We would have to Roth convert about half of our IRAs so as to keep her out of this higher bracket. This might be an achievable goal. I could do this while still staying below IRMAA.

 

[Z3Dreamer]

The math is different for everyone depending on your current and future tax rates, return assumptions, assumed age when the first of you passes, size of your IRA and taxable accounts, other income, desire to make charitable gifts and bequests, planning for long term care, heir tax rates, age relative to IRMAA and SS claiming, estate tax avoidance and more.

We have been converting well past the first IRMAA tier and will for several more years.

Good points. I am compiling pros and cons concerning various levels of Roth conversions. IRMAA considerations is one. Another is my heirs. Given the current tax laws, no estate taxes will be due, but the income taxes on a regular IRA are bad for beneficiaries. In other words, $100 of Roth inheritance is better than $110 of regular IRA inheritance. Is that the way you see it?

 

[Gumby]

I would say that depends on the relative tax rates of yourself and your expected heir. If you Roth convert $110 out of your tIRA today, you are in the 22% marginal bracket, and you pay the taxes out of the conversion, you will pay $24.20 and end up with $85.80 in the Roth. If you die tomorrow, your beneficiary can withdraw that amount without any income tax, so they will end up with $85.80 in cash. But suppose you leave that $110 in your IRA, die tomorrow and your heir is in the 12% marginal tax bracket. They can withdraw the $110 out of the inherited tIRA, pay $13.20 in income tax and end up with $96.80 in cash. In that case, you would have effectively passed on more money net of taxes by leaving it in the tIRA.

And if you pay the tax on the conversion out of current after tax funds, you are just reducing the after tax funds you pass on to presumably the same heir.

 

[Z3Dreamer]

I would say that depends on the relative tax rates of yourself and your expected heir. If you Roth convert $110 out of your tIRA today, you are in the 22% marginal bracket, and you pay the taxes out of the conversion, you will pay $24.20 and end up with $85.80 in the Roth. If you die tomorrow, your beneficiary can withdraw that amount without any income tax, so they will end up with $85.80 in cash. But suppose you leave that $110 in your IRA, die tomorrow and your heir is in the 12% marginal tax bracket. They can withdraw the $110 out of the inherited tIRA, pay $13.20 in income tax and end up with $96.80 in cash. In that case, you would have effectively passed on more money net of taxes by leaving it in the tIRA.

And if you pay the tax on the conversion out of current after tax funds, you are just reducing the after tax funds you pass on to presumably the same heir.

You make a good point but I have no control over my heirs future tax rates. All seem to be gainfully employed.

 

[marko]

"other parts of the game" - Another thing to consider is tax rates are rising beginning 2026.

I must have been asleep at the switch. What are these tax increases coming in 2026?

 

[audreyh1]

I must have been asleep at the switch. What are these tax increases coming in 2026?

For individual taxpayer it reverts to the tax structure that existed prior to the last major tax change (passed in 2017 for 2018 taxes). For most this means an increase in bracket % and back to the original standard deduction and exclusions and more itemizations. AMT reverts back too.

The corporate tax changes were made permanent.

 

[youbet]

For individual taxpayer it reverts to the tax structure that existed prior to the last major tax change (passed in 2017 for 2018 taxes). For most this means an increase in bracket % and back to the original standard deduction and exclusions and more itemizations. AMT reverts back too.

Such gloomy talk for a Friday afternoon!

 

[Koolau]

I guess I consider myself past the Roth conversion stage since I'm 76. But I did a bunch of conversions back in my 60s. However, I'm doing what I can to "deplete" my 401(k) so that when one of us graduates, the other will have less impact from being single - tax wise.

But the concept is the same. Take as much as possible from the 401(k) without breaking through the IRMAA limits (I'm trying to stay under the first threshold.) Pay the taxes and invest in taxable vehicles or donate to kids or charities.

So far, the 401(k) has a mind of its own and is growing faster than I can take the money out. I know. Poor baby. That darned old megacorp stock just keeps growing. I recently did a back of the envelope and figure I've got some stock worth 200 times what I paid for it (when it was added to my 401(k) as matching funds from megacorp.)

But, for some reason, I can't seem to make myself go to the next threshold of IRMAA and take out even more. I guess the gummint just got lucky that I've been blessed and the gummint WILL get it's share!

 

[Z3Dreamer]

I must have been asleep at the switch. What are these tax increases coming in 2026?

That is the current law, so the rates will revert. However, I believe there are politicians who might want to campaign on "Preventing this awful tax increase."

 

[marko]

For individual taxpayer it reverts to the tax structure that existed prior to the last major tax change (passed in 2017 for 2018 taxes). For most this means an increase in bracket % and back to the original standard deduction and exclusions and more itemizations. AMT reverts back too.

The corporate tax changes were made permanent.

Oh. Thanks. Had no idea

Such gloomy talk for a Friday afternoon!

I know! DW and I are only halfway through family cocktail hour, and now, this.

 

[Koolau]

That is the current law, so the rates will revert. However, I believe there are politicians who might want to campaign on "Preventing this awful tax increase."

Yep, the political ads almost write themselves on this one though YMMV.