Filling Income Brackets to Avoid IRMAA

[lawman]

Some will take distributions from their IRA early in hopes of having to take a smaller RMD once they reach the required age. Assuming I take a $10,000.00 distribution each year starting at age 65 I will reduce the amount of my RMD. But if I invest that $10,000.00 each year instead of spending it I don't see how it helps me avoid being bumped into a higher IRMAA bracket..Right or wrong?

[Stormy Kromer]

I'm going to start drawing my IRA as soon as I reach 59.5 since I have room in the 12% Federal bracket. I don't need the money to live on so I'll be investing it in either an index fund or ETF and let it grow til I reach RMD age and if I draw it then it will be considered Long Term Capital Gains which is better than ordinary income of an RMD.

Others will be along soon to explain it better.

Your situation sounds similar.

[joesxm3]

I was just watching some YouTube videos from a channel called "wealth wednesday" that did a very good job of explaining this stuff.

They talk about having four income buckets to manipulate your taxes in retirement: taxable, trad ira, Roth and social security.

One point they made about taking IRA distributions and buying funds in taxable is that if there is an unexpected fund distribution it can mess with your plan.

They also said that for conversions each years Roth conversion has a five year time clock of its own compared to the single start of account clock for working deposits.

Before watching these I did not fully appreciate the tax hit that excess income triggers by making more of your social security taxable.

[audreyh1]

Quote:

Originally Posted by Stormy Kromer I'm going to start drawing my IRA as soon as I reach 59.5 since I have room in the 12% Federal bracket. I don't need the money to live on so I'll be investing it in either an index fund or ETF and let it grow til I reach RMD age and if I draw it then it will be considered Long Term Capital Gains which is better than ordinary income of an RMD. Others will be along soon to explain it better. Your situation sounds similar.

If you don’t need the money why not do a Roth conversion? Then all future growth is tax free.

[SecondCor521]

Quote:

Originally Posted by lawman Some will take distributions from their IRA early in hopes of having to take a smaller RMD once they reach the required age. Assuming I take a $10,000.00 distribution each year starting at age 65 I will reduce the amount of my RMD. But if I invest that $10,000.00 each year instead of spending it I don't see how it helps me avoid being bumped into a higher IRMAA bracket..Right or wrong?

IRMAA is a consequence of (M)AGI.

A. $10K Roth conversion or $10K IRA distribution creates $10K of AGI now.

B. $10K in a taxable account creates maybe $500 of AGI later.

C. $10K in a Roth creates $0 of AGI later.

If it makes sense to Roth convert or IRA distribute to try to avoid IRMAA later, then moving from A->B or A->C should also hopefully make sense.

[SevenUp]

Quote:

Originally Posted by lawman ...I don't see how it helps me avoid being bumped into a higher IRMAA bracket..Right or wrong?

See Roth Conversion with Social Security and Medicare IRMAA if you want to investigate your specific situation.

[oldtimer]

Quote:

Originally Posted by joesxm3 I was just watching some YouTube videos from a channel called "wealth wednesday" that did a very good job of explaining this stuff. They talk about having four income buckets to manipulate your taxes in retirement: taxable, trad ira, Roth and social security. One point they made about taking IRA distributions and buying funds in taxable is that if there is an unexpected fund distribution it can mess with your plan. They also said that for conversions each years Roth conversion has a five year time clock of its own compared to the single start of account clock for working deposits. Before watching these I did not fully appreciate the tax hit that excess income triggers by making more of your social security taxable.

All the conversion 5-year clocks end once you reach 59.5. The 5-year account earnings clock is still active after 59.5 if you fund your first Roth IRA at 55 or later.

[lawman]

I don't even try to maximize my tax avoidance..My question is strictly regarding avoiding higher IRMAA brackets..

[audreyh1]

Quote:

Originally Posted by lawman I don't even try to maximize my tax avoidance..My question is strictly regarding avoiding higher IRMAA brackets..

But the point is that a higher taxable portfolio will generate annual income that could push you above the IRMAA threshold. Roth conversions instead before RMD age would move a withdrawal to an account where growth and income does not show on your AGI and thus would not count against your IRMAA threshold in all future years.

[N02L84ER]

The RMD % starts above 3.5% and increases each year. If the IRA withdrawal is invested in a taxable total market index fund or ETF, the dividends are less than 2% annually.
Traditional IRA $10,000 will generate $350+ IRMAA income the first year
Taxable total market index $10,000 will generate <$200 IRMAA income the first year
Roth IRA $10,000 will generate $0 IRMAA income every year

[lawman]

Quote:

Originally Posted by N02L84ER The RMD % starts above 3.5% and increases each year. If the IRA withdrawal is invested in a taxable total market index fund or ETF, the dividends are less than 2% annually. Traditional IRA $10,000 will generate $350+ IRMAA income the first year Taxable total market index $10,000 will generate <$200 IRMAA income the first year Roth IRA $10,000 will generate $0 IRMAA income every year

Not sure I am following you completely but it seems that early withdrawals would not help much.


Audreyh1...Not interested in converting to Roth as I don't want to pay the increased IRMAA bracket that would occur as a result of the conversion..

[Done]

Quote:

Originally Posted by lawman Not interested in converting to Roth as I don't want to pay the increased IRMAA bracket that would occur as a result of the conversion..

A distribution of $10k and a Roth conversion of $10k have the same impact on your current income, and on your IRMAA two years later. The difference is that the growth in the Roth will never be taxed again. Roth conversion is a strategy to recognize income now to reduce future RMDs, and potentially avoid many years of IRMAA.

The value depends on your marginal tax bracket and IRMAA situation now versus in the future. Married couples are often better off being taxed at today’s MFJ rates than at higher single rates when one is widowed.

[audreyh1]

Quote:

Originally Posted by lawman Some will take distributions from their IRA early in hopes of having to take a smaller RMD once they reach the required age. Assuming I take a $10,000.00 distribution each year starting at age 65 I will reduce the amount of my RMD. But if I invest that $10,000.00 each year instead of spending it I don't see how it helps me avoid being bumped into a higher IRMAA bracket..Right or wrong?

Quote:

Originally Posted by lawman Audreyh1...Not interested in converting to Roth as I don't want to pay the increased IRMAA bracket that would occur as a result of the conversion..

I don’t understand either. If you do the $10,000 a year distribution and put it in a Roth IRA (convert it) it won’t contribute to your future taxable investments and also will reduce your RMD. You pay the same taxes on the distribution whether it’s a Roth conversion or not. It has the same impact on your IRMAA the year of distribution (well 2 years later actually).

IRMAA starts at $194,000 MAGI (AGI plus tax exempt interest) for MFJ. Is $10,000 a year distribution going to put you over that threshold? Maybe not. That’s what you would have to figure out. You’d have to pay more taxes now, instead of paying more taxes on a larger RMD later. That’s the trade off people try to make.

My point was that if you are going to do IRA distributions starting at age 65 to try to reduce future RMDs, but you are going to invest that money, you might as well put it in a Roth IRA and invest it there, so as not to increase your future taxable income even more, which also has an impact on future IRMAA if you cross the threshold.

[Stormy Kromer]

Quote:

Originally Posted by audreyh1 If you don’t need the money why not do a Roth conversion? Then all future growth is tax free.

Because I don't know how.

[audreyh1]

Quote:

Originally Posted by Stormy Kromer Because I don't know how.

Your broker will handle this for you. Have them walk you through the process ahead of time.

If you have the funds, pay taxes on the conversion out of taxable funds you already have. If you are 59 1/2 or older you can opt for tax withholding from the funds converted, but that means less goes into the Roth.

[SevenUp]

Quote:

Originally Posted by audreyh1 If you don’t need the money why not do a Roth conversion? Then all future growth is tax free.

Quote:

Originally Posted by Stormy Kromer Because I don't know how.

SK, if you want to be knowledgeable enough to do so on your own, or at least understand better when talking with a broker, the Roth IRA conversion - Bogleheads wiki article may be useful to you.

[lawman]

Quote:

Originally Posted by audreyh1 I don’t understand either. If you do the $10,000 a year distribution and put it in a Roth IRA (convert it) it won’t contribute to your future taxable investments and also will reduce your RMD. You pay the same taxes on the distribution whether it’s a Roth conversion or not. It has the same impact on your IRMAA the year of distribution (well 2 years later actually). IRMAA starts at $194,000 MAGI (AGI plus tax exempt interest) for MFJ. Is $10,000 a year distribution going to put you over that threshold? Maybe not. That’s what you would have to figure out. You’d have to pay more taxes now, instead of paying more taxes on a larger RMD later. That’s the trade off people try to make. My point was that if you are going to do IRA distributions starting at age 65 to try to reduce future RMDs, but you are going to invest that money, you might as well put it in a Roth IRA and invest it there, so as not to increase your future taxable income even more, which also has an impact on future IRMAA if you cross the threshold.

That makes perfect sense and is what I probably should do because I am 67 now so I think I can probably take $30,000.00 a year for the next five years without putting me into the second IRMAA tier...I wish I knew how to do it but I may learn..Thanks!

[audreyh1]

I don’t know if you are single or not. But I assume you do know where to find the IRMAA tiers for your case. IRMAA tiers are indexed to inflation. And the impact is 2 years later. So in 2025 the IRMAA will be based on your 2023 MAGI and the IRMAA tiers should be higher than 2023 tiers. So you get a little extra headroom.

The downside is you are paying taxes earlier rather than later with your RMD.

Roth conversion is something your broker can help you with. They know how to do it for you and will get you the tax documents at tax time.

The only thing I get confused about is the 5 year rule after you are already 59 1/2. I think you can withdraw contributions tax free, but you have to wait 5 years before you withdraw earnings within the account tax free. I guess they just go by balance? Don’t know.

[lawman]

Quote:

Originally Posted by lawman That makes perfect sense and is what I probably should do because I am 67 now so I think I can probably take $30,000.00 a year for the next five years without putting me into the second IRMAA tier...I wish I knew how to do it but I may learn..Thanks!

So just to be clear, withdrawals from a Roth IRA does NOT count towards IRMAA penalty...Correct?

[SevenUp]

Quote:

Originally Posted by lawman So just to be clear, withdrawals from a Roth IRA does NOT count towards IRMAA penalty...Correct?

Correct. See MAGI for Medicare premiums (IRMAA tiers)