Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Filling Income Brackets to Avoid IRMAA
Old 01-20-2023, 12:14 PM   #1
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,035
Filling Income Brackets to Avoid IRMAA

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?
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 01-20-2023, 12:23 PM   #2
Full time employment: Posting here.
 
Join Date: Oct 2017
Posts: 772
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.
Stormy Kromer is offline   Reply With Quote
Old 01-20-2023, 01:12 PM   #3
Full time employment: Posting here.
 
Join Date: Apr 2007
Posts: 973
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.
joesxm3 is offline   Reply With Quote
Old 01-20-2023, 01:22 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 34,660
Quote:
Originally Posted by Stormy Kromer View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-20-2023, 01:41 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 7,160
Quote:
Originally Posted by lawman View Post
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.
__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Old 01-20-2023, 01:42 PM   #6
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 630
Quote:
Originally Posted by lawman View Post
...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.
SevenUp is offline   Reply With Quote
Old 01-20-2023, 02:05 PM   #7
Recycles dryer sheets
 
Join Date: Dec 2020
Posts: 153
Quote:
Originally Posted by joesxm3 View Post
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.
oldtimer is offline   Reply With Quote
Old 01-20-2023, 03:14 PM   #8
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,035
I don't even try to maximize my tax avoidance..My question is strictly regarding avoiding higher IRMAA brackets..
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Old 01-20-2023, 03:20 PM   #9
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 34,660
Quote:
Originally Posted by lawman View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-20-2023, 03:34 PM   #10
Full time employment: Posting here.
 
Join Date: Jul 2014
Location: Undisclosed
Posts: 948
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
N02L84ER is offline   Reply With Quote
Old 01-20-2023, 04:30 PM   #11
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,035
Quote:
Originally Posted by N02L84ER View Post
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..
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Filling Income Brackets to Avoid IRMAA
Old 01-20-2023, 05:43 PM   #12
Recycles dryer sheets
 
Join Date: Nov 2013
Posts: 218
Filling Income Brackets to Avoid IRMAA

Quote:
Originally Posted by lawman View Post
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 todayís MFJ rates than at higher single rates when one is widowed.
Done is offline   Reply With Quote
Old 01-20-2023, 05:57 PM   #13
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 34,660
Quote:
Originally Posted by lawman View Post
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 View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-20-2023, 06:47 PM   #14
Full time employment: Posting here.
 
Join Date: Oct 2017
Posts: 772
Quote:
Originally Posted by audreyh1 View Post
If you donít need the money why not do a Roth conversion? Then all future growth is tax free.
Because I don't know how.
Stormy Kromer is offline   Reply With Quote
Old 01-20-2023, 06:53 PM   #15
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 34,660
Quote:
Originally Posted by Stormy Kromer View Post
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-20-2023, 07:13 PM   #16
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 630
Quote:
Originally Posted by audreyh1 View Post
If you donít need the money why not do a Roth conversion? Then all future growth is tax free.
Quote:
Originally Posted by Stormy Kromer View Post
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.
SevenUp is offline   Reply With Quote
Old 01-20-2023, 07:26 PM   #17
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,035
Quote:
Originally Posted by audreyh1 View Post
I donít understand either. If you do the $10,000 a year distribution and put it in a Roth IRA (convert it) it wonít contribute to your future taxable investments and also will reduce your RMD. You pay the same taxes on the distribution whether itís 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. Thatís what you would have to figure out. Youíd have to pay more taxes now, instead of paying more taxes on a larger RMD later. Thatís 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!
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Old 01-20-2023, 07:45 PM   #18
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
audreyh1's Avatar
 
Join Date: Jan 2006
Location: Rio Grande Valley
Posts: 34,660
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.
__________________
Retired since summer 1999.
audreyh1 is online now   Reply With Quote
Old 01-20-2023, 08:22 PM   #19
Thinks s/he gets paid by the post
 
Join Date: Jul 2008
Location: Weatherford, Texas
Posts: 1,035
Quote:
Originally Posted by lawman View Post
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?
__________________
Life is good. Then you die.
lawman is offline   Reply With Quote
Old 01-20-2023, 08:25 PM   #20
Full time employment: Posting here.
 
Join Date: Jul 2014
Posts: 630
Quote:
Originally Posted by lawman View Post
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)
SevenUp is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
IRMAA - how to avoid with this xtra tax workmyfingerstothebone FIRE and Money 70 11-03-2022 07:24 AM
Tax software or CPA for filling taxes MRHARDROCKCAFE Other topics 22 04-13-2020 04:02 PM
Mechanics of Filling the B.S. Bucket RenoJay FIRE and Money 36 12-22-2019 03:39 PM
Filling the Day Tekward Life after FIRE 21 07-02-2018 03:13 PM
BS bucket is filling up kgtest Young Dreamers 12 12-16-2014 01:14 PM

» Quick Links

 
All times are GMT -6. The time now is 04:48 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2023, vBulletin Solutions, Inc.