A 67-year-old principal with a portfolio of $1.4M and a nice pension discovers she has an IRMAA issue.
If I am not careful, I may end up with a similar challenge. So I will take the article as advice to start planning a little more on my part. I have the advantage of having a few more years before the years catch up with me
The thing about IRMAA is that it is a cliff. If you go one dollar over, you are locked in to the higher premium tier. That’s why there is a need for awareness.
The article however is wrong. The person in the article (filing single) exceeded the $109K IRMAA threshold by $5,000 which triggered Tier 1 IRMAA premium of an extra $81.20/month, plus the Tier 1 Part D IRMAA surcharge of $14.50/month, which totals $95.70/month or $1,148/year. NOT $3,444/year. An extra $96/month on a $114K MAGI isn’t a big deal.
On retirement forums, IRMAA causes stress far out of proportion of the actual problem. The main issue seems to be Roth conversions, which obviously increase your MAGI, which can push you into the next IRMAA tier.
But the Roth conversions mitigate future RMD spikes, widow/widower tax issues, future lower tax brackets, and so on.
So if you are higher-ish income in retirement–which I’m going to say most people reading these boards are–you are almost certainly better off blowing through the IRMAA tiers if it means increasing your Roth conversions.
@McLovin1981 - I think the article is suggesting her income is actually higher i.e. additional income generated from 403(b) withdrawal.
It says "Core issue: Pension alone crossed IRMAA tier 1; $50,000 annual 403(b) draws push MAGI to roughly $160,000, landing in tier 3 "
Anyone dealing with ACA for insurance prior to 65 will appreciate the much higher IRMAA cliff.
I would strongly agree with this. Even with IRMAA, Medicare is still a lot cheaper than ACA is for anyone in their late 50s or early 60s. And since ACA premiums are based primarily on the age of the insured, I don’t even want to think of what a 70+ year old who gets Medicare now would have had to pay on ACA. My guess is that there would be many fewer insured people.
I will also point out that in most cases, Medicare is better coverage than ACA, at least in my rural area. I am certainly looking forward to the day I get to drop my ACA and get on Medicare, even if I have to pay IRMAA for some years. My health insurance costs will be decreasing significantly even in those years.
AJ
Perhaps. I turned 65 this year and traded ACA for Medicare coverage. The monthly (if unsubsidized) cost of my ACA family coverage dropped from about $4600 to $2200, a massive drop. However, as a family of 4 with income under the 400% of FPL, we received a 100% subsidy on the $4600, so my cost was zero. With only 3 family members on the ACA plan, the subsidy dropped dramatically as well, leaving me with a monthly premium of $180 to pay. Plus I now pay for Medicare Part B, D, and G, a monthly total of about $200. (Although I could have opted for a Medicare Advantage plan and would not have that $200 payment).
Bottom line to me, my family monthly insurance cost went from $0 to just under $400 when I switched to Medicare. I would add that my deductible under Medicare is FAR lower than under the ACA plan, and the coverage is MUCH better.
So, as a 64 year old, your unsubsidized premium was apparently about $2400. Gosh, I feel like I’m getting away cheap at only about $900. But since 400% of FPL for a single person is $63,840, I’m not planning on qualifying for any subsidies, so my premium cost is $900/month or $10,800 a year.
The IRMAA surcharges that I potentially would have to pay are maybe the first or second tier. The second tier would add an extra ~$250/month to my premiums. So based on your costs of $200/month for Medicare premiums, I’d be paying ~$450/month, including IRMAA. That’s still a 50% savings from what I’m currently paying.
Once you factor in savings from the lower deductible and better coverage, you’re probably going to come out closer to break-even, depending on how much medical care you require. And I suspect that my circumstances are much more typical than your circumstances.
AJ
True. It wouldn’t take much of a medical event to make the Medicare the much cheaper deal.
I think we know the best solution to the IRMA problem is Roth conversions to reduce the IRA balance especially when you have low income tax years. Notice that the problem compounds. RMDs that put you into IRMA rates ratchet upward each year as your life expectancy shortens. It’s rare that RMD reduces your IRA balance as investment success often increases the balance more. My rough calcs show balance begins to fall only after age 88.
You can deal with this problem other ways that reduce your IRA balance. Charitable donations is one way.
It’s best to plan ahead and do Roth conversions when you can. Once RMDs begin you must do RMDs first and then Roth conversions increasing taxable income more. Best to do Roth conversions before RMD age.
That is certainly not universal, especially since IRMAA can be triggered by doing Roth conversions. It is very dependent on each person’s particular circumstances.
AJ
You are also missing my point that even if I end up in the 2nd IRMAA tier, Medicare will be significantly cheaper than my current ACA, for better coverage. Which just reinforces @McLovin1981’s point that on retirement forums, IRMAA causes stress far out of proportion to the actual problem.
AJ
Yes, you need to do the Roth conversions before RMDs begin, ideally before Medicare age. Plan ahead.
There are other ways. Such as defer taking Social Security and/or pensions for a while and living off of IRA to work down the balance and future RMDs.
No, you don’t. Actually, for those who are using ACA, doing conversions before being on Medicare can be significantly more expensive than waiting until they are on Medicare to do conversions. This is because IRMAA has multiple cliffs, rather than just one, and the IRMAA cliffs are much less expensive than the ACA cliff.
Since you never used ACA, I wouldn’t expect you to have any experience with this, but you seem to totally ignore these issues no matter how many times you are told about them. Please stop ignoring these issues when you give advice, because it’s bad advice for many.
And doing conversions after RMDs can still be a reasonable option, depending on one’s specific facts, circumstances and goals.
AJ
To your point, I spent tens of hours reading posts and watching trendy RIA YT videos about the wonders of Roth conversions, followed by tens of hours of my own scenario calculations. To come to these same conclusions.
For those with less than a few million in traditional IRAs, it probably is a waste of time to worry about Roth conversions.
The closer you get to retirement/Medicare age, the less conversions help. (5 year rule), and…
For pre-SS retirees specifically (in other words, early retirees or unemployed after 60) needing medical insurance, they get hosed out of ACA subsidies by conversions (combined with pensions and spousal social security payments necessary to support living expenses), driving up net health insurance costs, offsetting future tax reduction benefits.
Once you reach 59 1/2 and have had any Roth IRA open and funded for at least 5 years, there is no other 5 year rule that applies. All withdrawals will be qualified withdrawals, so you don’t have to worry about the 5 year conversion clock.
AJ
Looking back at my history, I question that, because I sure wish I’d started doing conversions far earlier. Doing them before my traditional IRA had grown would have been far more efficient, tax wise. For me at least, that few million in traditional IRAs came years later, through growth in investment. Converting before the growth would have been way better.
I began managing my investments 27 years ago, a few years after I retired. I had accumulated about 4 1/2 years of what had been my gross at retirement. Definitely not enough. Almost all of that was in an IRA, the rest ROTH. I now have more than ten times what I started with, despite withdrawals. Even before I started taking RMDs, the amount I could convert before the next tax bracket was trivial compared to my IRA balance. Had I begun conversions earlier, a higher percentage of the subsequent growth would have been tax free.