<<The tax on the RMDs (plus whatever other income you have) is going to be ten times the IRMAA penalty whether you’re single, married or widowed. It’s letting the tail wag the dog if IRMAA is your focus.>>
While it’s true that IRMAA isn’t a huge tax for someone with upper middle class retirement income, the fact remains that IRMAA hits widows harder than it does MFJ couples.
My Dad is a classic case- his income is just over $170k, which puts him in IRMAA Tier 4, paying an extra $4,488/year for Medicare after my Mom passed.
If she were still around, $170k MFJ is $12k under IRMAA Tier 1 of $182k for 2022, so no surcharge. OTOH, If she were living, she would be paying for basic Medicare for herself at $170/month, or $2040/year.
Thus- my Dad’s net extra IRMAA is $4,488-$2,040= $2,448/year. Assuming my math is right, about 1.4% of $170k.
Again, not a big number in context, but another example of the widow’s tax trap.
Again, not a big number in context, but another example of the widow’s tax trap.
I don’t know that I’d call it the “widow’s tax trap”. Your Dad is just no longer getting the preferential treatment of the “married” tax table and returning to the higher tax liability single folks have been suffering with all along.
I think that some people are maybe a little too simplistic when it comes to drawing from this or that pot of money - e.g., do your traditional IRA or 401K first, then your regular investments, and your Roth accounts last. And that is a very commonly advocated approach, especially with regard to what you leave your children or other beneficiaries.
I don’t think one size fits all, and I don’t think that saving the Roth accounts for last is always in everyone’s best interest. I don’t think that going through one pot of money after the other in a serial progression is necessarily going to be better than taking a mix from different pots as you go along.
And I’m looking at it as what’s the best result for US, (me and my wife) not just our kids. About 30% of our assets are in Roth IRAs, and I have to think that when we can, we will use those funds to keep ourselves out of a higher tax bracket, where possible.
We can almost live on just Social Security and her pension. I do take some money from my two trad. IRA accounts now. The smaller one is inherited so there’s already an RMD on it, from the old rules. And we’re still in the 12% bracket, by the skin of our teeth. (I still think that’s true for 2021, with more numbers to come in.) The bigger IRA’s RMD will kick in at age 72 and will probably nudge us into the 22% bracket. At that point, we probably will have about all the income we need, and if we need more, I’ll probably want to take some out of the Roth IRAs.
And if either of us ends up with LTC or large medical expenses, those will shelter the income that we’d get by using the trad. IRA money.
As for our kids, if the worst thing I ever do to them is leave them money, some of which they have to pay income tax on, I will die with a clear conscience.
We can almost live on just Social Security and her pension. I do take some money from my two trad. IRA accounts now. The smaller one is inherited so there’s already an RMD on it, from the old rules. And we’re still in the 12% bracket, by the skin of our teeth. (I still think that’s true for 2021, with more numbers to come in.) The bigger IRA’s RMD will kick in at age 72 and will probably nudge us into the 22% bracket. At that point, we probably will have about all the income we need, and if we need more, I’ll probably want to take some out of the Roth IRAs. - Wradical
You would be well served by converting some TIRA to Roth to use whatever is left of the 12% bracket. Pay 12 now or 22 later seems like an easy decision.
hairymike writes:I think there is a greater likelihood of taxes trending up over the long run, government appetite for spending being what it is. Exploiting the tax codes as they exist in the present is probably a better strategy than maintaining a status quo for years or decades waiting for rates to drop. Anyway, that is why I am being aggressive with Roth Conversions before the rates pop up as they are programmed to do in a few years. YMMV.
It’s quite possible that tax rates will not rise significantly in the near-ish future. With inflation, higher receipts will naturally accrue to the states and feds. This is how we “inflate out of debt.” It may be a net “win” for those of us at retirement age…assuming we manage the cost of living inflation that is.
Caveat- this has not been my experience with local real estate taxes, which I have to say bugs me way more than state or federal taxes. I can see pretty clearly where my local tax money goes. Home valuations have sky-rocketed and our city still feels the need to raise the rate. grrrrr…
The tax on the RMDs (plus whatever other income you have) is going to be ten times the IRMAA penalty whether you’re single, married or widowed. It’s letting the tail wag the dog if IRMAA is your focus.
I’m not sure if the dog is wagging his tail or not; however, my Medicare Part B premium will be 160% greater in 2023 than it will be in 2022. If one considers IRMMA a tax, what percentage one pays on one’s RMD is a mere pittance.
Taxable is inherited at stepped up basis meaning they pay no taxes on your gains. That’s even better than paying capital gains rates on it. I’d suggest taxable is your last choice.
There are different types of assets that one might have in a taxable account. For example:
stocks that were purchased long ago and are mostly capital gains
recently purchased stocks with little or no gains
stocks that are below their cost basis
cash
It is very easy to see that with just these examples there are different choices as to which you’d liquidate first or as a group.
You can just withdraw the cash at any time. You could sell some big gains and offset with losses.
You can pick stocks with gains to sell now and buy back, if desired (for example if they are dividend stocks)
You can blend any of the above with selling IRA/401K RMDs.
I would make Roth last since your heirs pay no taxes on your gains, PLUS they pay no taxes on another ten years of their gains after that.
It would pay to model out your actual scenario. By paying the taxes now to make annual Roth conversions, I am:
-Paying taxes at the 22% marginal rate rather than 25% that the bracket reverts to in a few years
-Paying taxes at 22% on “just the conversion,” rather than 22% on the same amount I might spend after starting social security, which would push the taxable part of my SS from 50% to 85%
-Reducing the amount subject to RMDs, so more able to avoid IRMAA later
-Reducing the amount subject to taxes beyond where it would affect me and my spouse as we file taxes jointly, to where there’s less pain when one of us is filing singly
You would be well served by converting some TIRA to Roth to use whatever is left of the 12% bracket. Pay 12 now or 22 later seems like an easy decision.
Understood. But we’re right on the cusp of the two brackets, and have been for years. And you have to do a conversion during the year, while your total income is still a work in progress. And you can’t recharacterize conversions after the fact like you used to be able to do.
The bigger IRA’s RMD will kick in at age 72 and will probably nudge us into the 22% bracket.
Which, under current law, will become the 25% bracket again in 2026. So, you might be better off taking money from the bigger IRA while it’s still the 22% bracket, even if it’s to do conversions.
It’s quite possible that tax rates will not rise significantly in the near-ish future. With inflation, higher receipts will naturally accrue to the states and feds.
Keep in mind that the Feds (and any states that use the same bracketing scheme as the Feds) have built in a kicker for themselves by linking the brackets and standard deduction to the chained CPI, which grows at a rate that’s 0.25% - 0.5% less than the previous CPI that was used for the brackets, and is still used by SS. So, even if your income only grows ‘with the CPI’ (like SS) it’s going to grow faster than the chained CPI will move the brackets. That means that it will be harder to stay in the lower tax brackets, as they won’t be increasing as fast as your income. So, your tax rate will be increasing.