IRMAA question

[lawman]

Trying to avoid IRMMA I have been trying to make as much money as I can each year without going over the threshold for IRMMA penalty..I have been taking money from my IRA thinking that in future years when RMD'S kick in maybe if my IRA is small enough I can still avoid the penalty..I think there is a flaw to my logic though..If I take $10,000.00 from my IRA I will not spend it which means I will invest it in my regular brokerage account..Since I will still have it invested it doesn't seem like I have helped myself any..Is there really any point in me taking distributions from my IRA?

 

[Car-Guy]

Trying to avoid IRMMA I have been trying to make as much money as I can each year without going over the threshold for IRMMA penalty..I have been taking money from my IRA thinking that in future years when RMD'S kick in maybe if my IRA is small enough I can still avoid the penalty..I think there is a flaw to my logic though..If I take $10,000.00 from my IRA I will not spend it which means I will invest it in my regular brokerage account..Since I will still have it invested it doesn't seem like I have helped myself any..Is there really any point in me taking distributions from my IRA?

Depends on what you invest in and/or do with the money.
For me, I spent a lot of mine on collectables, gold and silver, hobbies and travel... Still hit the top tiers a few years, but I "think" I'll be able to keep below the limits now. (Maybe)

Terrible problem to have.

By the way it's IRMAA (not IRMMA)

 

[Chuckanut]

Why not roll the $10,000 into a Roth IRA? After that no tax issues and no IRRMA issues on that money.

 

[retire48in2018]

You’d have to have earned income (pay social security taxes) for Roth contributions

 

[PaunchyPirate]

You’d have to have earned income (pay social security taxes) for Roth contributions

Correct, but I think the previous post was actually suggesting a (partial) "conversion" of Traditional IRA to a Roth IRA. This triggers taxes on the amount converted but is not limited by contribution limits. The OP is already withdrawing money from the traditional IRA and apparently not needing it, since they re-invest it in a taxable account. So why not convert it into a Roth IRA instead.

 

[Gumby]

That is indeed the strategy. Roth convert now to avoid higher brackets and IRMAA once RMDs kick in. We regularly have long Roth conversion threads on the forum that explore every detail.

 

[RetiredAndLovingIt]

You’d have to have earned income (pay social security taxes) for Roth contributions

Not for Roth conversions, I do them every year to increase my Roth balance and decrease my Traditional IRA. Of course I have to pay taxes on the conversion but that's okay better now than when taxes are higher

 

[Exchme]

Yes, lawman is doing it wrong and may be worse off than if he had just left the money in the IRA where it is not subject to annual tax drag until RMDs force withdrawal.

Roth Conversions are what he needed to be considering. But the top of the base IRMAA tier isn't all-powerful, it's quite possible the best answer is conversions to a completely different spot or even none at all. The only answer is to model it and even then accept that you need to re-check the model each year. The required conversions I modeled at the start of 2022 don't much resemble those I get now, especially for future years.

 

[pb4uski]

Agree that from this point forward lawman should do Roth conversions instead of tIRA withdrawals. [-]However, for what he's withdrawn so far, he could invest in muni bonds and that interest income would not be included in IRMAA.[/-]

 

[TrvlBug]

Agree that from this point forward lawman should do Roth conversions instead of tIRA withdrawals. However, for what he's withdrawn so far, he could invest in muni bonds and that interest income would not be included in IRMAA.

Interest income is included when calculating IRMAA. IRMAA is based on MAGI, not AGI.

 

[audreyh1]

Agree that from this point forward lawman should do Roth conversions instead of tIRA withdrawals. However, for what he's withdrawn so far, he could invest in muni bonds and that interest income would not be included in IRMAA.

Muni bond interest (tax exempt interest) is in fact included in the MAGI for IRMAA.

 

[euro]

Muni bond interest (tax exempt interest) is in fact included in the MAGI for IRMAA.

That's right. So, putting the money in non-dividend growth stocks is perhaps a better way to keep the IRMAA in check. Or invest in a pure appreciation play in real estate.

 

[pb4uski]

Agree that from this point forward lawman should do Roth conversions instead of tIRA withdrawals. [-]However, for what he's withdrawn so far, he could invest in muni bonds and that interest income would not be included in IRMAA.[/-]

Interest income is included when calculating IRMAA. IRMAA is based on MAGI, not AGI.

Muni bond interest (tax exempt interest) is in fact included in the MAGI for IRMAA.

My bad. I'm careful to manage my income to stay away from IRMAA so was unaware that muni income counted.

 

[lawman]

Agree that from this point forward lawman should do Roth conversions instead of tIRA withdrawals. [-]However, for what he's withdrawn so far, he could invest in muni bonds and that interest income would not be included in IRMAA.[/-]

How does a Roth conversion work? I can only take $10.000.00 to maybe $20,000.00 off my traditional rollover IRA without putting me over the IRMAA threshold. I know I pay the tax on what I withdraw but how do I then put that into a Roth?
I already have 1 very small Roth..Can I contribute to that or does a conversion work differently?

 

[RetiredAndLovingIt]

It's as simple as filling in a form at your broker or bank to move the money. In my case I pay estimated taxes every quarter which includes my conversion amount so I don't have any taxes withheld at the time of the conversion. Whether to pay the taxes from your IRA or savings is
hotly debated on this site. Yes you can move the money into an existing Roth account.

https://www.fidelity.com/building-savings/learn-about-iras/convert-to-roth

https://www.navyfederal.org/content/dam/nfculibs/pdfs/certificates-ira-trust/nfcu_621.pdf

 

[NW-Bound]

For IRMAA calculation, speaking of MAGI including non-taxable interest income, I happened to see the following from a financial Web site:

Your MAGI for Medicare Part B is the sum of (a) your AGI plus (b) tax-exempt interest income (line 2a on IRS Form 1040). Examples of tax-exempt interest income include income from municipal bonds and income producing assets inside a Roth retirement account.

What?!? Interest income from Roth is included in MAGI? Is this baloney or what?

 

[audreyh1]

My bad. I'm careful to manage my income to stay away from IRMAA so was unaware that muni income counted.

Yeah, so folks who put all their money in muni bonds to avoid taxes like Suze Orman still have to pony up for IRMAA if their income is large enough.

 

[PaunchyPirate]

How does a Roth conversion work? I can only take $10.000.00 to maybe $20,000.00 off my traditional rollover IRA without putting me over the IRMAA threshold. I know I pay the tax on what I withdraw but how do I then put that into a Roth?
I already have 1 very small Roth..Can I contribute to that or does a conversion work differently?

If the Traditional IRA and your existing Roth IRA are at the same brokerage, it should be very easy. Call them and ask about doing a conversion from the Traditional to the Roth in the amount you want. They should be able to do it in a fully automatic way. Vanguard even lets you do it yourself on their website. You do NOT want to do a Roth Contribution. That is not the same thing.

I’m not sure of the exact steps if your Roth and tIRA are at different brokers. You could move the Roth so that it is at the same broker and then do the conversion.

You can do these conversions every year once you have a clear idea of the amount of income you can tolerate.

You will receive a 1099-R from the broker with proper identification codes that will tell the IRS that you converted $xxxx and that will trigger the taxes due.

 

[jimbee]

Just a few clicks on Vanguard's website and my annual Roth conversion is done each December.

 

[NW-Bound]

If the Traditional IRA and your existing Roth IRA are at the same brokerage, it should be very easy. Call them and ask about doing a conversion from the Traditional to the Roth in the amount you want. They should be able to do it in a fully automatic way. Vanguard even lets you do it yourself on their website. You do NOT want to do a Roth Contribution. That is not the same thing.

I’m not sure of the exact steps if your Roth and tIRA are at different brokers. You could move the Roth so that it is at the same broker and then do the conversion.

You can do these conversions every year once you have a clear idea of the amount of income you can tolerate.

You will receive a 1099-R from the broker with proper identification codes that will tell the IRS that you converted $xxxx and that will trigger the taxes due.

Yes, it's very easy if the two accounts are with the same broker.

If the tIRA and Roth IRA are at two different brokers, you can talk to them to do a trustee-to-trustee transfer. Or you can just get a withdrawal from the tIRA, then write a check yourself to deposit the money into the Roth. You have 60 days to do this. The withdrawal must be done before Dec 31. The deposit into Roth must be done no later than 60 days after the withdrawal.

If you withdraw say $10K from tIRA, you can deposit the entire $10K into the Roth. You then need to come up with money to pay the taxes on that $10K.

Or you can keep a portion, say $2K for taxes, and deposit only $8K into the Roth. However, if you do this and are under 59-1/2, you will owe an additional 10% penalty on the $2K.

 

[lawman]

Yes, lawman is doing it wrong and may be worse off than if he had just left the money in the IRA where it is not subject to annual tax drag until RMDs force withdrawal.

Roth Conversions are what he needed to be considering. But the top of the base IRMAA tier isn't all-powerful, it's quite possible the best answer is conversions to a completely different spot or even none at all. The only answer is to model it and even then accept that you need to re-check the model each year. The required conversions I modeled at the start of 2022 don't much resemble those I get now, especially for future years.

I think it makes sense to convert to my Roth the the amount of money I would otherwise take from my rollover IRA....Can you explain what you mean by "the top of the IRMAA tier isn't all-powerful? "

 

[pb4uski]

For IRMAA calculation, speaking of MAGI including non-taxable interest income, I happened to see the following from a financial Web site:



What?!? Interest income from Roth is included in MAGI? Is this baloney or what?

That can't be right. I've never heard of any definition of MAGI or income including inside buildup in a Roth IRA. Besides, how would they ever know what your income in a Roth was? It's not reported to them that I can recall. Sounds like a financial reporter with an overactive imagination.

 

[TheWizard]

That can't be right. I've never heard of any definition of MAGI or income including inside buildup in a Roth IRA. Besides, how would they ever know what your income in a Roth was? It's not reported to them that I can recall. Sounds like a financial reporter with an overactive imagination.

Correct.
Nothing having to do with a Roth account is included in MAGI...

 

[audreyh1]

That can't be right. I've never heard of any definition of MAGI or income including inside buildup in a Roth IRA. Besides, how would they ever know what your income in a Roth was? It's not reported to them that I can recall. Sounds like a financial reporter with an overactive imagination.

+1

And why ever would you hold tax-exempt muni bonds inside your Roth IRA anyway?