Death of 1poormom

Financial Planning Tax Strategies
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So mom died in June. I was co-trustee of her trust. She was getting RMDs. After her death, they paid me the rest of the 2023 RMDs. So we’re good for this year. I already got an EIN number for her trust, and plan to have her accountant do her final (and the trust’s final) returns for this year. Then I plan to move all those trust assets to our trust, thereby eliminating(??) the need to file a future return for that trust. I will still have the 10-yr RMDs for that.

Still almost 5 years from Medicare, but I retired last year due to some health scares. We are (mostly) fine, but realized that our health will be fine until it isn’t. And then it’s too late. Want to enjoy things while we still can, because someday we won’t be able to. So I’m thinking about a few actions.

  1. Accelerate the RMD from mom’s assets, maybe to 5 years instead of 10. We also have IRAs that will have to start RMDs in about 10 years, and I’d rather not have overlapping with mom’s trust assets.

  2. We had been thinking that 1poorlady would take SS at 62, and then I would wait until 70. She will have less SS than me at any given age, and when I expire, she can take over my larger SS payments. But with the “found money” of mom’s assets, maybe there is no advantage to that now.

  3. Probably going to have to worry about IRMAA in 5 years. Right now we’re on the exchanges. We have dividends from equities, mom’s (now our) RMDs, and we want to start conversions from IRA to ROTH, which not crossing into the higher tax brackets. I think the 24% bracket starts in the $80K range. And in 5 years, I’d like to avoid IRMAA, if at all possible. I think I’ll just have to convert as much as I can to ROTH, take the RMDs, and take my chances when I hit 65. I didn’t want mom to leave me anything, to spend it on herself, but that didn’t work out.

Is it better to pay some taxes now to minimize IRMAA later, or minimize taxes now, and take our chances with IRMAA? What else am I overlooking?

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Since you’re putting it into a trust, you need to check with the accountant and be sure that you will have 10 years to distribute the inherited IRA. Inherited IRAs in a trust can be subject to a 5 year distribution requirement. I would point out that they can also be subject to the (much) higher trust tax rates if the trust owns the IRA, rather than you personally owning the IRA.

Just remember that your income 2 years before you claim Medicare will determine any IRMAA premium. So if you will be claiming Medicare in 2028 (almost 5 years), your 2026 tax return will be used to determine IRMAA.

The SECURE Act raised the RMD age to 72 in 2020. Then, SECURE 2.0 raised the RMD age again - from 72 to 73 - beginning in 2023, and bumped it up to 75 in 2033. Since you are “almost 5 years from Medicare” (at 65) you should be “almost 15 years” from RMDs, so 2038 or so. Since you need to fully disburse onepoormom’s IRA by 2034, there shouldn’t be any overlap in the RMD timeframes.

That said - to avoid IRMAA, you may want to distribute the bulk of the inherited IRA account in 2025 or before (assuming that it’s your 2026 income that will determine IRMAA, as noted above). I will also note that under current law, the tax brackets will be returning to their previous (higher) rates beginning in 2026, which would be another reason to distribute the bulk of the account in 2025 or before.

Please keep in mind that just because you distribute the inherited IRA money doesn’t mean that it has to be out of the market - you can invest it in a taxable account, and then spend that taxable account down over whatever timeframe works for you.

Not exactly. For 2024, the 24% bracket for MFJ starts at $201,051 and the 22% bracket will start at $94,301 Keep in mind that these brackets are for taxable income, which is after taking your deductions into account. With a 2024 MFJ standard deduction of $29,200, that means that your marginal bracket is 12% until your AGI exceeds $123,500

The rates are adjusted for inflation every year, so have had some pretty large increases recently after many years of very small increases.

ACA premiums until you are 65?

AJ

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Sorry about your mom. Mine passed away in 2021. Thanks for the reminder on health. I haven’t retired, but I should.

V

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Yes, ACA premiums are a concern. But it looks like our taxable income is going to go up, and so the ACA subsidy will go down. I could sell all my stock that pays dividends, but those stocks have done well for me, and I really don’t want to sell them. I’m going to get 1099Rs for the two RMD from mom’s estate, for less than $10K. So this year that shouldn’t be a big deal. But if I do what you suggest, next year I’ll probably lose most of the subsidy. I believe you lose it all at 400% FPL, and her assets remaining are somewhere north of $200K. Without that, it would be easy to keep our AGI under $123K. If I want to distribute that before 2026, I won’t be able to keep the AGI below that. Obviously, the multiple of the FPL will be higher as well. Interesting.

Yeah, it’s a good problem to have, I suppose. Trying to minimize income to minimize tax hits. I’d rather have that than be in a situation where I don’t have to worry about taxes and subsidies because we don’t have enough income.

Didn’t know that about IRMAA. So I need to minimize my 2026 taxable income as much as possible. I had expected that to be recalculated every year, in case a person gets a bump in income (or drop in income).

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Another huge factor in the subsidy is the cost of the 2nd lowest silver plan that’s available to you. In my county, they added a new insurance company for 2024 that is offering plans that are significantly less expensive than the other companies were offering. Because this insurer is offering 2 different silver plans, the 2nd lowest cost silver plan that’s available to me dropped by almost $200/month. That dropped the subsidy significantly.

No, for 2020 and 2021 (during COVID), the tax credits were increased so that someone getting the 2nd highest silver plan that was available to them would only pay 8.5% of their MAGI for premiums. Then, the Inflation Reduction Act extended that through 2025. Unless another law extends the credit again, or otherwise recalculates it, the tax credits will go back to having a cliff at 400% of FPL in 2026. Maybe one more reason to get the bulk of the inherited IRA distributed in 2024 and 2025?

It is recalculated every year. But rather than using income estimates to calculate your premium and then doing a reconciliation when you file your taxes (like ACA does), the SS administration uses the income from the most recent tax return that’s available when determining your premium. So for 2028 premiums (calculated in late 2027), the most recent tax return that would be available would be the 2026 return, which, for most people was filed by April, 2027 (October, 2027 if you got an extension). For the 2029 premiums, the income from the 2027 tax return would be used, etc.

So, if you are planning on doing Roth conversions after age 65, you need to be cognizant of IRMAA premium bracket impacts, not just tax bracket impacts.

AJ

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On IRMAA, keep in mind its determined by Adjusted Gross Income plus tax free dividend income. Some minimize AGI by investing in stocks that don’t pay dividends. A friend prefers Berkshire Hathaway for this reason. You collect capital gains when you sell, but it does not give AGI until you sell.

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I don’t seek out stocks that pay dividends, but it happens that two or three of them do. In fact, my largest holding is my former employer (ESPP is good!), and when I was hired there was no dividend. Probably 15 years ago they implemented one.

Dividends are our only “ordinary” income now. Well, until the RMDs from mom’s accounts. I had hoped to keep us under $94K per year so that cap gains would not be taxed. But the ACA premiums and future IRMAA I think have to trump that. As you say, if I don’t sell then there are no cap-gains. Liquidating her retirement accounts would provide enough cash to live for a few years, so we wouldn’t need to sell anything else.

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You may want to examine your single stock risk. I would also point out that even if you are no longer employed, so your employer isn’t reporting the discount when selling ESPP shares on a W-2, you are still responsible for reporting that discount as ordinary income when you sell the shares.

I will point out that qualified dividends are not ‘ordinary’ income - they are taxed at capital gains rates.

AJ

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Good point about the discount. Before it appeared on my W2, so I didn’t worry about it. HR provided us a formula to calculate our reportable gains. I’ll have to pull out that paper again (I kept it). It factored in the discount, but also what was reported on the W2. I wonder if I’m supposed to report to them the qualifying/disqualifying dispositions. I did keep our stocks in ETrade, in the account the company opened for us, since they have all the grant and purchase info over the years. I did sell some earlier this year, so I guess I’ll have to learn how to account for no W2 reporting.

I know about single-stock risk. It’s not my first choice, but it would be a big tax hit to diversify quickly. I worked for them for over 25 years, and only sold some a few times.

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