​IRMAA​ and Roth Conversion​ Q

Financial Planning Tax Strategies
1

I’m considering ?starting Roth conversion?s? this year. One of the factors I’m considering is IRMAA. I retired at 61 and I will be 63 in November. My understanding is that AGI (plus some other ?misc ?items) on my 2022 tax return will be used to determine my IRMAA when I’m eligible for Medicare in Nov 2024.

Will my 2022 tax return be used to calculate irm?aa for just? two months (Nov and Dec 2024?)? and then my 2023 return for 2025? IRMAA?, or ?will the 2022 return ?be ?used for 12 months?

?In general, I’m struggling to determine if it makes sense for me to do Roth conversions. Between changing tax rates, IRMAA, expected portfolio returns, ACA premiums (which I will need to use for one year and my wife for 5 years before she is eligible for Medicare)? etc, it seems there are many factors and unknowns to take into consideration.

If I attempt to model this out with a convoluted spreadsheet, am I missing any significant factors to what I listed above? Or, am I overthinking this and should really just focus on our tax rate at the time of conversion versus the expected income and tax rate when we start taking RMDs?

Thanks,
bclstu

2

bc1stu,

Your 2022 return will affect IRMAA for the 2 months of Medicare for 2024.
Your 2023 return will affect IRMAA for all of 2025.

If married, filing a joint return and you are both on Medicare, then both Medicare accounts would be affected.

It’s a calendar year situation.

The RMD amounts added to your income plus pensions and other income all come into play.
Social Security Benefits are added also. RMD amounts may push up your income and with SSA benefits, You also have to see what part of SSA benefits could then be taxable. Depending on income You could have Tax free SSA, or be taxed on 50% or 85% of benefits. They all get intertwined.

Depending on what your Ira balances will be in the future, will RMDs be too high or more in line with what you were planning to receive to support your expenses.

In 2022 the market did not do well. For that reason it might make sense to do some conversions now, so as the the markets recover, some gains will be in ROTH to avoid future taxes…

Best of luck in deciding what fits your needs the best.

3

Just watch what conversions will do to ACA premiums each year. I don’t know ACA limits at all.

Look up IRMAA income limits. If a conversion puts you over the limit then you pay IRMAA 2 years later. Married filing joint the MAGI for IRMAA is somewhere near $180000.
The MAGI for 22% tax bracket MFJ is about $178000 for 2022.
ACA. I don’t know.

So if your AGI is under 170000 for both of you combined then a conversion up to fill the gap up to this limit makes sense.

Going above the limits for a year will cause higher tax brackets this year and IRMAA 2 years later.

The IRMAA Penalty will just be your Medicare until wife is 65.

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4

If I attempt to model this out with a convoluted spreadsheet, am I missing any significant factors to what I listed above? Or, am I overthinking this and should really just focus on our tax rate at the time of conversion versus the expected income and tax rate when we start taking RMDs?

Thanks,
bclstu

I have been doing Roth conversions aggressively for several years. I wish I had started even sooner but since I didn’t I started bumping up against IRMAA considerations two years ago. Her is the perspective I came to in my spreadsheet.

I target my Roth Conv to max out the 24% bracket. So there is that number. For single in 2022, it is $170,050. So putting IRMA aside for a minute I would covert enough to Roth got get me to around $165,000 (allowing a little room to errors and unknowns). Lets say that equates to $100K of other income and thus leaves room for $65K Roth Conversion.

Now for IRMA. Here the brackets for 2022 (reminder 2020 income would be used to charge me for medicare if I was on medicare which I am not.


Income Single           Income Married          Part B Premium  Part D Premium 
under $91,000           $182,000 	        $170.10 	Premium (varies)
$91,000 – $114,000 	$182,000 – $228,000 	$238.10 	Premium + $12.40
$114,000 – $142,000 	$228,000 – $284,000 	$340.20 	Premium + $32.10
$142,000 – $170,000 	$284,000 – $340,000 	$442.30 	Premium + $51.70

Now for the hard part, what will these bracket be in 2024 when my 2022 income will be used to determine my rate. What I do is escalate the brackets by 8% per year and use that to adjust my 2022 Roth Conversion amount. So that $142,000 number in 2022, I estimate will be $165,600 in 2024.

Based on that I would scale by 2022 Roth Conversion back to $55,000. That would give me a 2022 Income of $155,000 keeping me in the that third tier for IRMAA in 2024. I want to be sure to stay under the cap for that third bracket because if you go over by even $1, the next higher tier kicks in which using the table above would cost $102 more per month or just over $1,200 for the year.

This illustrates the concept. Once you have the spreadsheet set up, it is easy to plug in the numbers and play around with each year. Hope this helps.

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5

I did some conversions over the past few years that caught IRMAA for each of us for 1 year.
I am not paying IRMAA now.

In 2022 I am on the same fence as You are. I may make larger conversions this year as the final conversions. This will cause us to both pay IRMAA for the 2024 year.
This will probably be my last conversion and will wait a 4 more years until RMDs kick in.
Only doing this because my IRA is down 30% this year. Otherwise I would do smaller conversions each year over next 3-4 years.

Still deciding….

6

If I attempt to model this out with a convoluted spreadsheet, am I missing any significant factors to what I listed above?

These are things that you didn’t specifically mention (under current law):

  • Through 2025, ACA premiums are limited to 8.5% of your AGI
  • Beginning 1/1/26 (along with the reversion to prior tax rules/rates), ACA premium subsidies go back to the 400% of Federal Poverty Limit (FPL) cliff model, so if you are $1 over 400% of the FPL for your size family, you will have to pay the full premium
  • Net Investment Income Tax (NIIT) that adds an additional 3.8% in taxes on investment income (including Roth conversion income, capital gains, dividends and interest) kicks in at $250k for MFJ, $125k for MFS and $200k for Single/HOH. (These income limits are not indexed to inflation.)
  • If you are charitably minded, beginning at age 70 1/2, you can make Qualified Charitable Distributions (QCDs) out of your Traditional accounts directly to a charity without adding to your AGI (The SECURE Act changed the RMD age from 70 1/2 to 72, but didn’t change the QCD age from 70 1/2
  • Speaking of RMD age, the House has passed, and the Senate has under consideration, bills that would change the RMD age to 75. If the Senate passes the bill, there are still differences that would need to be ironed out (and possibly voted on again) before it would become law. If it does become law, that would give you an extra 3 years to do conversions before RMDs kick in. (I’m not sure if QCD age is mentioned in the bills.)
  • The latest you can claim SS is age 70, which is before RMDs, so you will need to consider the additional tax on SS income. (I will also mention that you should consider when you and your wife each want to claim SS - since different claiming strategies add to the amount that you, as a couple, will get from SS over your lifetime.)
  • What will happen to the surviving spouse’s taxes when one of you dies is also a big consideration, since the survivor’s income is likely to be more than half of your joint income, meaning the survivor will likely be in a higher tax bracket when being taxed at Single rates.

Or, am I overthinking this and should really just focus on our tax rate at the time of conversion versus the expected income and tax rate when we start taking RMDs?

Unfortunately, if you’re trying to optimally minimize your payments to the government, you’re probably not overthinking it, since everything that’s been mentioned actually changes what you are paying to the government. On the other hand, laws can change (see SECURE Act and TCJ Act) and make the things you did in prior years sub-optimal - so trying to optimize based on current law doesn’t always result in an optimal result in the long run. For instance, it’s always possible that Congress could make the TCJA rules permanent, instead of expiring as of 12/31/25. Or they could come up with a completely different tax law by then.

My suggestion would be to look at what various levels of Roth conversion would do to your current year taxes/subsidies and decide which one, if any, you want to live with, and then do the conversion, or not. Re-look each year. You probably won’t totally optimize, but as long as you get something that you can live with, it will be the correct decision for you.

AJ

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7

Thanks all for the thoughtful replies, ideas and suggestions. Much to think about. I actually enjoyed the macro planning for retirement but this, not so much. Oh well. Time to figure out my Cap Gains/Losses, Interest and Divs for the year as that is the only income we have now. This may be the best year to do the largest conversion due the stock market decline and only 2 months of IRMAA. The ACA will be the larger concern in future years.

Thank!

8

You didn’t mention your wife’s employment. If she is working then the year in which she retires, you can request a reconsideration for IRMAA for the reduced income.

9

This may be the best year to do the largest conversion due the stock market decline and only 2 months of IRMAA. The ACA will be the larger concern in future years.

Before the change to ACA subsidies that aj mentioned, you really only had to worry about one or the other - IRMAA or ACA subsidies. The high end to get a subsidy is half (or less) of the starting point for IRMAA. If you want some ACA subsidy, your income will be well below the IRMAA figure. If you’re struggling to stay below the first IRMAA increase, you’re already well over the ACA subsidy amount.

Remember, that anyone can get ACA coverage no matter what their income. The income amounts only affect how much premium assistance the Feds will kick in.

Also keep in mind that once you start medicare, you cannot get an ACA subsidy. The only years that will affect your IRMAA increases AND your ACA subsidy are the years you are 63, 64, and the first part of the year you turn 65. Before those years, your income can’t affect your IRMAA increases. After those years, you can’t get an ACA subsidy.

–Peter

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10

My wife is not working. We are still on my prior employer health plan until Feb 2024. I pay for the plan but it is a better plan at about the same cost that aca would provide.

I will need aca for only 9 months after that but my wife will be on it for another 5 years.

Based on this I’m thinking this year and next will be the best chance I get at conversions.

We have only 25% of our financial net worth in retirement accounts so there is not as much to convert as some others may have and the RMDs may not be as bad, tax wise. If the RMDs are painful that will be a good thing as it means that we had strong returns from our investments. Still, seems to make sense to convert up to at least the 22% tax rate and maybe 24%

11

If I attempt to model this out with a convoluted spreadsheet, am I missing any significant factors to what I listed above?

These are things that you didn’t specifically mention (under current law):

One factor that hasn’t come up is inheritance. Some of us 60-year-olds might be getting some assets from our 80-90 year old parent(s). Inheriting a house or stocks with stepped-up basis won’t upset our spreadsheet-optimized plans. But, inheriting a traditional IRA would affect one’s taxable income in some years out of the following ten.

Most of us made our FI and RE plans based on not counting on any inheritance. But, anything we get could affect how things turn out. It may be mostly good*, but there will be effects that result in “if I’d only thought about that, I’d have done XYZ differently.” If nothing else, inheriting something with no tax due, like some assets with stepped up basis or a Roth IRA could provide you with that year’s living expenses, allowing some amount of Roth conversion and still keeping your taxable income below whatever line you wanted (no IRMAA, only 50% of SS taxed, etc.). Well, assuming you’re not at RMD age or that your RMD isn’t too high to prevent doing that.

You don’t have to obsess over every nickel, but it’s prudent to make some “directionally correct” decisions earlier. I believe that my parents, who grew up during the Depression and were frugal with money for ~65 years of marriage, would not find it ghoulish to keep more of what they had saved/invested/built.

*Good financially. This post, dealing with just the numbers, separates out the financial aspect from the emotional sadness/grief.

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12

bc1stu,

Now that You have filled in some more detail, I agree that this is probably a good idea that you are onto.

Best of luck ….

Mike

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One factor that hasn’t come up is inheritance. Some of us 60-year-olds might be getting some assets from our 80-90 year old parent(s). Inheriting a house or stocks with stepped-up basis won’t upset our spreadsheet-optimized plans. But, inheriting a traditional IRA would affect one’s taxable income in some years out of the following ten.

This is a good point. My father died last year. In my case, dividend payments from the inherited taxable account would have kicked me over the 400% Federal Poverty Limit for ACA subsidies if it had still been in place. I am fortunate that premiums are currently limited to 8.5% of AGI. Full ACA premiums for a 59-year-old are expensive, even for a bronze plan with a deductible over $8000.

And, of course, I am very grateful for the inheritance. My parents would also “NOT find it ghoulish to keep more of they had saved/invested/built.”