IRMAA & Tax Rates & Roth

[Marc]

A bit of a conundrum and I would love input from others to help me figure this out.

Retired in 2017 and we are both on Medicare this year. Had to pay IRMAA based on 2021 income but arranged to keep income low enough to avoid IRMAA for next year. We have some very high expenses in 2023 and 2024 so I have "accepted" that I would need to pay IRMAA in 2025 and 2026.

Here has been my thinking . . .

Tax rates probably going to readjust higher starting in 2026. Paying the 3.8% ACA Medicare tax is foolish if I can avoid it. I am taking as much money out of my rollover IRA these first ten years of retirement (prior to my starting SS at 70).

Now my conundrum . . .

If I take around $25K from my Roth IRA this year I can avoid IRMAA in 2025 and stay below 24% tax bracket this year. However, I feel that I am being penny wise pound foolish as I will have to pay higher taxes in the future.

I also have around $350K in taxable QQQ gains in my brokerage account which I have not been touching as that could reset when one of us dies.

So, technically, I could probably arrange to not pay much in taxes or IRMAA for next several years by spending my ROTH IRA and selling QQQ but it seems foolish to me.

Should I just stay the course and pay IRMAA when required (I should be able to avoid for 2027 and longer due to 15% of SS not being counted) or should I readjust my overall long term tax planning.

thanks,

Marc

 

[SecondCor521]

I look at IRMAA and ACA subsidies and FAFSA EFC effects as additional parallel taxes with their own rules which are layered on top of federal and state income taxes.

So on Roth conversions I compare the marginal rate on each dollar of Roth conversion to what I'll pay on that marginal dollar if I convert it later (which for my spreadsheet I look at my late 70's / early 80's rates). I convert each year until I get up to that future marginal rate.

A couple of minor things to note:

1. IRMAA is a series of tax cliffs. If you go over an IRMAA bracket by $1, you pay the full next tier. So it will often make sense to convert up to just below the top of an IRMAA bracket.

2. IRMAA thresholds are adjusted for inflation. So the 2025 IRMAA brackets which will be applied to your 2023 MAGI will likely be somewhat higher. Up to you if you want to count on those inflation adjustments. Probably won't make much of a difference in the big scheme of things.

3. QQQ capital gains would add to AGI and provisional income, which would impact both SS taxation and IRMAA brackets even if income taxed lightly.

4. Most people looking at this type of question also have to decide what they think income brackets will do in 2026 when TCJA brackets expire. Absent action by Congress, brackets will get smaller and rates will go up a few percentage points.

5. Also consider what will happen taxwise after the first spouse passes away. Usually income drops somewhat (loss of second SS check) but now single brackets apply, which means higher tax rates for the surviving spouse.

Overall, most people think that paying approximately equal top marginal rates over one's lifetime is a good approach. I'm coming around to that way of thinking, except I tend to be somewhat of a tax avoider since I'm not sure I want to pay taxes now to avoid taxes when I'm 85 since I might be a deceased non-taxpayer by that point. Also, those higher rates in my case are based on an assumed rate of growth which may or may not occur.