Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

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texasgal47
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Joined: Thu Apr 25, 2013 11:30 am

Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by texasgal47 »

Hi fellow Bogleheads, I am a 75 year old widow who has been in the process of converting 100% of my T-ira to a R-ira to be divided equally among my heirs, two children and two grandchildren. The t-ira is now down to about $620,000 and the Roth has grown to $844,000. Beginning in 2021 and continuing until the t-ira is depleted, 100% of the RMD for each year is to be donated as a QCD for a scholarship fund. Obviously, this also helps with additional tax space for conversions. My typical pattern for converting is to allow around a $3,000 "safety" margin below the top of the Standard * 2.6 IRMAA bracket (top of the 24% tax bracket). For example, this year $94,000 has been converted, which with my other income, is estimated to add up to a Total Income/AGI of approximately $167,000, or just under $170,000. (For me, AGI = MAGI) So I've been staying within the 24% IRMAA bracket which is showing for the year of conversion.
However, if I understand the IRMAA rules, one is able to convert to the top of the IRMAA bracket that is used two years from the date of conversion. Social Security for 2023 shows my Medicare Part B Premium just as expected, within the third Part B & D IRMAA tier of $153,000.01 - $183,000.00. My AGI for 2021 was a little above $162,000, or $3000 below the 3rd IRMAA tier of $165,000 in 2021. However, based on these 2023 tier tables, there would have had more tax space for conversion. Based on the 2023 IRMAA tier tables and the finance buff's IRMAA projection of the 3rd tier as the following: Single Taxpayer<= $191,000 (2024) coverage for 2022 income. (Reference: thefinancebuff.com, 10/13/2022 article: 2022,2023, 2024 Part B IRMAA Premium MAGI Brackets). My question is how much would you feel safe converting in 2022, and still stay within my desired 3rd IRMAA tier bracket of around 24% taxable?
Using AARP's 1040 Tax Estimator, some projections have been run, changing only the amount converted in 2022 to provide some examples:

Amt. Converted-------Total Income/AGI---Total Taxable Income----Total Income Tax---Single Taxpayers--3rd IRMAA tier
-$94,000---------------$167,415--------------$152,715-------------------$28,849--------------($3,000 below $170,000 in the 2022 IRMAA table)
$100,000---------------$173,416--------------$158,716-------------------$30,289
$106,500---------------$179,916---------------$165,216------------------$31,849--------------($3,000 below $183,00 in the 2023 IRMAA table)
$110,000---------------$183,416---------------$168,716------------------$32,689
$114,500---------------$187,916---------------$173,216------------------$33,769---------------($3,000 below $191,000 projected for 2024 in thefinancebuff)

After reviewing these figures, I'm tempted to remain timid and add $12,500 to the $94,000 already converted, for the AGI of about $180,000.
However, forum members have never failed to add insight, and/or, knowledge I have lacked. So please accept my deep gratitude in advance for your generosity in providing assistance to an issue that has me stumped.
chemocean
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by chemocean »

Why convert 100% of your tIRA?
Why not leave some funds in your tIRA for lifetime QCDs. Also, if you decide later to leave a bequest to a charity you have paid tax unnecessarily.
Also, you may have high tax-deductible end-of-life medical expenses, of which some may result in your itemized deductions being above the standard deduction.
With four heirs spreading their inherited tIRA over 10 years, you could leave a $100,000s in your tIRA and still allow your heirs to manage their distributions in a tax-efficient manner. This would be especially true if the grandchildren are filing their own taxes.

I am doing annual partial conversions to the top of the first IRMMA threshold as MFJ. It will take me a few more years (in 2026 or later when tax rates are schedule to go up). I see no need to increase my marginal tax rate with IRMMAs when the majority of tax payers who will be receiving distributions will be in the 22% bracket (MFJ, MFS, one of two children).
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Elle_N
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by Elle_N »

Below I am only addressing the IRMAA issue. I do not have a comment at this time on concerns like what chemocean raises.
texasgal47 wrote: Mon Nov 28, 2022 1:04 amHowever, if I understand the IRMAA rules, one is able to convert to the top of the IRMAA bracket that is used two years from the date of conversion.
To review: In the Autumn of 2023 the government will set in stone the 2024 IRMAA brackets. The government will apply the 2024 IRMAA bracket to the OP's 2022 MAGI to determine the OP's Medicare "Income-Related Monthly Adjustment Amount" (IRMAA) for 2024.

This means federal law asks that a careful tax planner like the OP either possess a crystal ball, or make a best estimate of the 2024 IRMAA brackets as the OP completes her 2022 tax planning.

I looked at the reasoning the thefinancebuff.com October 2022 article used for its projections for the 2024 IRMAA brackets. So far, for the Standard x 2.6 bracket, and assuming a 0% inflation rate, thefinancebuff.com conservatively projects $191,000 as the 2.6 cutoff. How good is the projection of $191,000? The article observes this depends on a number of inflation data points in the future. If inflation goes negative in the coming months, there is a possibility that the government will have to set the cutoff lower than the thefinancebuff's conservative projection of $191,000.

The government formula is complicated, but in my opinion, thefinancebuff provides good justification for using the $191,000 as guidance.

Still, there is a risk here. To hedge this risk the OP proposes aiming for a 2022 MAGI of $180,000.

Ceteris paribus, the $180,000 sounds good to me.

Might other aspects of this calculation help one feel good about betting that the $180,000 MAGI will be a safe choice?

Suppose something wild happens and inflation does indeed go negative. In one wild ride as far as inflation is concerned, suppose the OP lands in the next higher 2024 IRMAA bracket (meaning the 3.2 bracket). How much more will she pay for her Medicare in 2024? For Part B, she will pay 23% more (= 3.2 / 2.6 ). For Part D, she will pay some higher number, but for the year, I would hope not more than $150 additional (while in the 3.2 bracket).

What the 2024 Medicare premiums will be is not yet known. But to ballpark this worst case possibility, let us assume the Medicare Part B 2024 premiums end up being the same as the 2023 Medicare Part B premiums. In 2023, the Part B base premium will be $164.90 per month. For the 2.6 IRMAA bracket, this means the OP would pay $428.74. If the OP accidentally lands in the next higher 2024 IRMAA bracket, then in 2024, she would pay about $99 (=~ 23% * $428.74) more each month due to back luck in forecasting.

Hence the OP's bet (on an $180,000 MAGI) could be said to risk about $99 * 12 for Part B + maybe another $150 for Part D, for a total of about $1350.

This is a small enough risk that I think I might be comfortable converting even more of my Traditional IRA to the Roth, to bump up my MAGI for 2022 to $185,000.

Next I might nose around the net a bit more to see if anymore intelligence about projecting 2024 IRMAA brackets appears.
72% individual stocks | 8% small cap value fund | 20% CDs & bonds
FactualFran
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by FactualFran »

The MAGI thresholds for IRMAA to be paid during 2024 will depend on the average CPI-U from Sep. 2022 to Aug. 2023. The CPI-U for Sep. 2022 and Oct. 2022 are known. Here is a table of what the average CPI-U from Nov. 2022 to Aug. 2023 needs to be relative to the Oct. 2022 CPI-U for the MAGI thresholds for 2024 premiums to be in what was the $183,000 bracket for 2023.

Code: Select all

-5.47%  183,000
-4.84%  184,000
-4.21%  185,000
-3.58%  186,000
-2.96%  187,000
-2.33%  188,000
-1.70%  189,000
-1.08%  190,000
-0.45%  191,000
 0.18%  192,000
 0.81%  193,000
 1.43%  194,000
 2.06%  195,000
 2.69%  196,000
If the average of the CPI-U for Nov. 2022 to Aug. 2023 turns out to be at least 0.18% higher than the CPI-U for Oct. 2022, then the MAGI for Medicare Part B premiums for 2024 being at least 3.2 times the standard premium will be $192,000.

When the CPI-U for Nov. 2022 is released in mid-Dec. 2022, the percent difference of the average CPI-U from Dec. 2022 to Aug. 2023 relative to Nov. 2022 will likely be different. How safe you feel about projecting MAGI thresholds depends on how safe you feel about projecting the change in the average CPI-U through Aug. 2023.

[edit: corrected "at least 24% higher" to be "at least 26% higher"; later replaced with "at least 3.2 times"]
Last edited by FactualFran on Mon Nov 28, 2022 7:31 pm, edited 3 times in total.
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Leif
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by Leif »

chemocean wrote: Mon Nov 28, 2022 8:47 am Why convert 100% of your tIRA?
Why not leave some funds in your tIRA for lifetime QCDs. Also, if you decide later to leave a bequest to a charity you have paid tax unnecessarily.
Also, you may have high tax-deductible end-of-life medical expenses, of which some may result in your itemized deductions being above the standard deduction.
With four heirs spreading their inherited tIRA over 10 years, you could leave a $100,000s in your tIRA and still allow your heirs to manage their distributions in a tax-efficient manner. This would be especially true if the grandchildren are filing their own taxes.

I am doing annual partial conversions to the top of the first IRMMA threshold as MFJ. It will take me a few more years (in 2026 or later when tax rates are schedule to go up). I see no need to increase my marginal tax rate with IRMMAs when the majority of tax payers who will be receiving distributions will be in the 22% bracket (MFJ, MFS, one of two children).
I'm thinking the same way. I have a big part of my portfolio in tIRAs so it would not make sense, tax wise, to convert 100%. But in addition, I'm self insured for LTCI (Long Term Care Insurance). If I need LTC then my tIRA essential becomes tax free for withdrawals. With an estimated $100,000/year for LTC I figure I may need $500K, from my tIRA, to be self insured.
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FiveK
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by FiveK »

texasgal47 wrote: Mon Nov 28, 2022 1:04 am Amt. Converted-------Total Income/AGI---Total Taxable Income----Total Income Tax
-$94,000---------------$167,415--------------$152,715-------------------$28,849
$114,500---------------$187,916---------------$173,216------------------$33,769
Assuming $30K in SS benefits (simply a round number), $29,715 from pension (or other ordinary income) and $18,200 in qualified dividends (the combination matching the AGI and federal income tax numbers above), the federal+IRMAA tax rates on the various conversion amounts are
Image

If you would like to reproduce that chart with your actual numbers, and can use Excel, the Personal finance toolbox will do so.

If you expect that your heirs will be paying higher marginal rates on inherited IRA distributions, you doing the conversions now is reasonable. But if you expect they will pay lower marginal rates (and any state taxes for you and/or your heirs should also be considered) then you being less aggressive on conversions is reasonable.
Topic Author
texasgal47
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by texasgal47 »

Mega thanks to all responders -- a huge help with much needed "hand holding."

First to respond to recommendations to leave some funds in the t-ira that would be tax deductable when large medical expenses occur. (a) The taxable account is over 1M with at least $16,000 in dividends spun off from VTSAX yearly so those funds could be deducted if medical treatment becomes really expensive. (b) There is a Long-term care insurance policy with a 5% compound inflation rider so premiums are covering this aspect. (c) The funds are split between two identical Roth accounts (one for children the other for grandchildren), each now with almost 4400 shares of VTSAX. After total conversions are complete in about five years, each account, even with very little growth, just from compounding, should be worth around $800,000, $550,000 in VTSAX and $250,000 in bonds. My IPS (Investor Policy Statement) includes a goal for each roth account to hopefully reach 1M, with each heir having the option of allowing their $500,000 grow for 10 years in his/her inherited account. This requires the full t-ira to meet this goal since I'm already mid-70's. One of my children is in the 32% tax bracket so a Roth account is most helpful to that individual to reduce their tax burden. (d) Remember the huge feeling of relief when your mortgage was paid off? Having the IRS removed from your t-IRA as part owner brings a similar sense of freedom when dealing with estate or legacy issues. (e) Tax space is needed from 2030 thru 2033 when I bonds in the portfolio reach their 30 year maturity dates and about $200,000 in interest will need to be paid. I don't want any RMDs added to that.

Getting back to the original question regarding the amount to convert, I believe the odds are on my side if I take the risk of converting up to $110,000 this year, which shows an AGI/MAGI of around $183,416.00 on the chart. Thanks to you incredibly generous bogleheads for the very helpful additional information. I'll see if any additional posts here change my mind. A year from now, I'll have to post again where we can see how my decision played in 2024. If I miscalculate, it won't be fun to pay more in IRMAA surcharges but I can live with that.
RetiredCSProf
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by RetiredCSProf »

I am in a similar situation -- filing as a single taxpayer, age 74, and reducing my tIRA through Roth conversions for legacy. I landed in the 3rd IRMAA tier (Standard * 2.0) in 2021 and plan to land there again in 2022.

Assuming a modest 0% inflation (using FinanceBuff calculations), MAGI <= $191K for 2022 stays within the 3rd IRMAA tier ... but the top of the 3rd IRMAA tier pushes above the bracket for marginal 24% federal income tax, assuming a standard deduction ($12,950) plus age deduction ($1,750).

To keep taxable income <= $170,050, keep MAGI <=$184,750. Keeping your MAGI below $181,000 would meet your goals (>$3K safety net). If you expect to itemize deductions, this would give you a bit more "Roth conversion space."

Also, make sure that you are paying enough in taxes (through withholding or estimated quarterly tax payments) to meet safe harbor for 2022
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Oicuryy
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by Oicuryy »

Did you tell that tax estimator about your QCD? Looks like it is using only the standard deduction.

Ron
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RetiredCSProf
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by RetiredCSProf »

Oicuryy wrote: Mon Nov 28, 2022 10:48 pm Did you tell that tax estimator about your QCD? Looks like it is using only the standard deduction.

Ron
QCDs are charitable deductions that are taken "above the line." No need to itemize to take a QCD -- it simply reduces the taxable portion of an RMD.
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Oicuryy
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Re: Request Recommendations for 2022 Conversion Amount within Desired IRMAA Bracket

Post by Oicuryy »

RetiredCSProf wrote: Tue Nov 29, 2022 12:13 am
Oicuryy wrote: Mon Nov 28, 2022 10:48 pm Did you tell that tax estimator about your QCD? Looks like it is using only the standard deduction.

Ron
QCDs are charitable deductions that are taken "above the line." No need to itemize to take a QCD -- it simply reduces the taxable portion of an RMD.
Thanks for the correction. That makes the 2024 IRMAA thresholds irrelevant if the OP stays in the 24% tax bracket without itemizing in 2022.

Ron
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