Age 62 Conversions

[Sandy & Shirley]

We are in the process of planning our retirement strategy and discovered that age 62 is a critical age for doing Roth conversions.


The cost of your Medicare premiums is determined by your Modified Adjusted Gross Income (MAGI), which includes the size of your conversions, on your tax return from 2 years prior to paying your Medicare premiums. Your first Medicare premiums at age 65 will be determined by your income the year you turned 63. Your age 66 premium depends on you age 64 MAGI, etc.


Your basic Medicare cost is $1,608 per year. If your MAGI at age 63 is over $85,000 that cost will increase by $642 to $2,250, over $107,000 and that extra cost will be $1,606.80 almost doubling your Medicare cost at age 65 to $3,214.80, and this continues as your income from 2 years prior continues to increase.


If you are planning to do any major Roth Conversions to avoid or minimize your Required Minimum Distribution at age 70, make sure you factor in the additional cost of your Medicare when you do those conversions after the age of 62.


Your conversions will also effect the amount of your Social Security income that is taxable, so doing the conversions BEFORE you start your benefits is also a factor.

 

[pb4uski]

To be clear, the above amounts are for a single... double them for a married couple. You had me worried there for a second.

https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

 

[Sandy & Shirley]

To be clear, the above amounts are for a single... double them for a married couple. You had me worried there for a second.

https://www.medicare.gov/your-medicare-costs/part-b-costs/part-b-costs.html

Yes, you are correct, those are per person income levels and they consider both married individuals as having half of the joint income.

Shirley and I are not married, and of course due to tax issues, which I why we always look at financial situations as single for each of us.

Sorry if this caused confusion, but the concept should be considered regardless of your marital status.

 

[Golden sunsets]

There are numerous threads on the topic of IRMAA supplemental payments on this forum.


Sent from my iPad using Early Retirement Forum

 

[Sandy & Shirley]

I have been familiar with IRMAA for a while. Since Shirley will turn 62 in 2018 and is on 80% of her late husband’s survivor benefits, her personal Tax Hump caused by the parallel taxation of her Social Security and normal income and dividends is relatively small and it will get even smaller when she turns 65 and gets her supplemental standard deduction. Plan A was to do a large conversion at that point because the cost of moving over her Tax Hump would be smaller. As we continued to run the figures using our spreadsheets, the additional cost of her increased Medicare premiums more than eliminated the savings she would get by waiting until age 65.

If we do the conversions at age 62, the cost of paying the extra Hump Taxes would be better than paying the extra Medicare premiums two years later.

We decided to make this post because the age when you incur the extra impact of the Roth Conversion can make a significant difference.

For those who are not familiar with “Hump Taxes”:

The Yellow line illustrates your normal tax rates when all of your income is taxable.

The dotted red line shows your standard tax brackets while receiving tax deferred Social Security and the dotted green line represents where your Social Security benefits slowly become taxable at the 50% and 85% levels as your income increases.

The blue line shows your Marginal Tax Rates. That line jumps to 49.95% when your taxable income plus your tax deferred Social Security plus your tax deferred LTCG are all being taxed at the same time (what I call parallel taxation). It drops back to 40.7% after all of your LTCG/Dividends have been taxed.

It is fairly obvious why I call this the “Tax Hump” and why a huge portion of our retirement income planning involves not paying any of these ridiculously high marginal rates.

The Hump ends when 85% of your tax deferred Social Security has been taxed and you return back to paying only the standard 22% tax bracket, parallel taxation has ended!
When your income levels are high, and you are “Over The Hump”, you merely look back and say that 15% of your Social Security was tax free. When you are at median income levels, you might very well be close to or into those ultra high brackets. If you are in that situation, proper planning before you start your SS benefits can be very rewarding.

 

[jazz4cash]

So if my share of MAGI is 50k and spouse's share is 150k, my premium is based on 100k MAGI?
Thanks for bringing this up. I may be on the brink and had no clue.

 

[pb4uski]

If your spouse was not yet of Medicare age it looks like you might be able to dodge it for a while by filing separately, but there might be other downsides to that to consider.

If you file your taxes as “married, filing jointly” and
your MAGI is greater than $170,000, you’ll pay higher
premiums for your Part B and Medicare prescription drug
coverage. If you file your taxes using a different status,
and your MAGI is greater than $85,000, you’ll pay higher
premiums. (See the chart on pages 5-6 for an idea of
what you can expect to pay.)

https://www.ssa.gov/pubs/EN-05-10536.pdf

 

[walkinwood]

Can someone recommend a calculator to figure out the impact of all these acronyms? I'm 57 and don't plan to take SS till 70, but based on this post, it looks like I need to start studying these topics now.

 

[Sandy & Shirley]

Can someone recommend a calculator to figure out the impact of all these acronyms? I'm 57 and don't plan to take SS till 70, but based on this post, it looks like I need to start studying these topics now.

I have a published WIKI page on bogleheads called “Social Security tax impact calculator”:

https://www.bogleheads.org/wiki/Social_Security_tax_impact_calculator

There is a downloadable spreadsheet, TheHump.xlsx which is still set up for the 2016 and 2017 tax. I have not updated that page yet, but I’m fairly certain that the only thing you will have to do is to update the [Setup] tab with all of the new tax brackets and percentages and it should give you a reasonable picture of what your personal Hump will look like.

Remember, your Hump is personal to you. Its shape changes based on your Social Security benefit level and your other investments (LTCG,Div,…).

Basically, smaller Social Security levels mean less tax deferred income, so you start paying taxes at earlier gross income levels, so you save less taxes, and your personal Hump is smaller because you have less to give back to the IRS. Larger level, more tax deferred income, start taxes at higher income levels, save more taxes, larger Hump because you have ore to give back.

=====

One thing you might want to consider is doing a few Roth conversions today so you don't get pushed into the huge Hump tax levels later.

The value of doing a conversion is based on your tax bracket when you convert vs your bracket when you use/need the money.

If you have $30,000 in your IRA and your combined Federal, State, and Local taxes come to 33.33%, assuming you do not use the conversion to pay the taxes from another source (basically an additional contribution to your Roth), then $10,000 of the $30,000 would go toward taxes and $20,000 would go into your Roth. Wait 10 or so years and all of your accounts double. With the conversion your Roth is now $40,000 and if you did not do the conversion your traditional IRA would be $60,000. If your tax rate was the same 33.33% then the withdrawal of that $60,000 would cost you $20,000 and the cash in your hand would be the same $40,000 as it would have been in the Roth.

There are a lot of factors to consider. How does your state handle IRA withdrawals? Are you planning to move to a tax free state when you retire? Will your standard of living / retirement income put you in your personal Tax Hump? And of course, are the federal brackets and rates the same?

A personal note: we did a few conversions at the 25% federal rate knowing that our marginal rate was going to be 27.75% during retirement, 15% of $185 = $27.75 for a $100 IRA withdraw, a small benefit even if we did not enter our Tax Hump. The rate was just lowered to 12% and 12% of $185 is only $22.20 or 22.2%, a small penalty for the early conversion.

We did plan ahead and used Recharacterizations to maximize the benefits of the Conversions that we kept, but recharacterization is no longer allowed under the new tax laws.

 

[Gotadimple]

OP:
So your analysis presumes that you would do a Roth conversion and convert all of your Traditional IRAs at once? Why not do partial IRAs between 62 and 70 keeping below the threshold for IIRMA?

You noted above that IIRMA applies at age 66. I'm not sure that is correct. Although full retirement age for Social Security for most is now age 66. Medicare eligibility begins at age 65 and you are expected to sign up before your 65th birthday, or be subject to a permanent delayed enrollment penalty. So, I would think that IIRMA becomes important at age 63 - because your age 65 Medicare premium is based on your income at age 63.

Rita

 

[Sandy & Shirley]

Maybe I should have included “of your” to be more specific! I wasn’t talking about the conversion of your entire IRA to Roth. I was giving an example with nice round numbers so no-one needs to get out there calculators. So change “If you have $30,000 in your IRA” to “If you want to convert $30,000 of your IRA”.

And, yes, you should do partial Roth conversions. One of the biggest things you can do is to do as much conversion “as you can afford” within the MAGI limits. “As you can afford” means the amount of tax you can pay from other sources. You do not have to take the example’s $10,000 in taxes out of the $30,000 that you convert and put just $20,000 in your Roth. You can use an alternate source to pay your estimated taxes and put the entire $30,000 in your Roth. It is like making an additional $10,000 Roth contribution, even if you are not working, the paid taxes do not have to come from paid income.

My original post said:

The cost of your Medicare premiums is determined by your Modified Adjusted Gross Income (MAGI), which includes the size of your conversions, on your tax return from 2 years prior to paying your Medicare premiums. Your first Medicare premiums at age 65 will be determined by your income the year you turned 63. Your age 66 premium depends on you age 64 MAGI, etc.

IRMAA, Income-Related Monthly Adjustment Amount, was brought into the conversation yesterday by Golden Sunsets.

Not sure what IIRMA stands for!

 

[Gotadimple]

Maybe I should have included “of your” to be more specific! I wasn’t talking about the conversion of your entire IRA to Roth. I was giving an example with nice round numbers so no-one needs to get out there calculators. So change “If you have $30,000 in your IRA” to “If you want to convert $30,000 of your IRA”.

OK!

And, yes, you should do partial Roth conversions. One of the biggest things you can do is to do as much conversion “as you can afford” within the MAGI limits. . . .

My original post said:

The cost of your Medicare premiums is determined by your Modified Adjusted Gross Income (MAGI), which includes the size of your conversions, on your tax return from 2 years prior to paying your Medicare premiums. Your first Medicare premiums at age 65 will be determined by your income the year you turned 63. Your age 66 premium depends on you age 64 MAGI, etc.

IRMAA, Income-Related Monthly Adjustment Amount, was brought into the conversation yesterday by Golden Sunsets.

Not sure what IIRMA stands for!

IIRMA is the process you defined in the paragraph that begins "The cost of your Medicare premiums" above.

So we both are saying the same thing. Any conversions to a Roth IRA requires considering the total impact of the conversion to your MAGI, because, your Medicare premium is based on the MAGI two years before the current one AND if you exceed the maximum MAGI allowable your Medicare premiums will increase following the IIRMA rule.

Rita

 

[Sandy & Shirley]

Which is the reason for the title of this thread, “Age 62 Conversions”. The conversions you do the year you turn 62 are the last conversions you can do without worrying about how they will effect your Medicare premiums.