Steering through the shoals of IRMAA past the SS Tax Torpedo
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Practical advice based on this thread for people earlier in their careers... forget traditional 401k/IRA and just always go all Roth?
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Not that easy.
In the absence of a pension or other "unavoidable" ordinary income, at a bare minimum one would want enough traditional funds to withdraw the annual standard deduction amount and pay 0% tax on that.
- ResearchMed
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Don't go "all Roth" (or taxable/after-tax). Keep some pre-tax money in case there are eventual expenses that are tax deductible... medical, long-term care... who knows... If you've already paid the taxes on everything, there's no way to take advantage of the possible tax savings.
Just keep that in mind.
Also, not everyone has the opportunity to put large amounts in Roths early on.
For example, there is a limit to direct Roth contributions, and direct TIRAs, which can be converted.
And if much of one's money is in 403b (or 401k) plans, then that money might not be able to be removed (or converted to Roths) until separation from employer or retirement, etc.
Recently, it seems there is an opportunity for Roth 403b accounts, so that would help with the previous problem, now. But that might be up to the employer.
Finally, if one is at a higher tax bracket earlier than one might be in after retirement, it might not make sense to pay the higher taxes to convert a lot of it, earlier.
But these are definitely issues to consider.
RM
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- teen persuasion
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
I think the practical advice is to retire earlier, and begin Roth conversions earlier than age 67, when you have a sizeable stash.
This has prompted me to create projections of Roth conversions over many years, to compare taxes for us at MFJ vs S rates. It appears we can convert everything (currently 65% TDA, 35% Roth) by age 76 if MFJ thru then, staying within the 10% bracket. We could convert less aggressively if we knew we'd both live to our nineties, but a widower has higher taxes if we don't run the TDA down. And the top of the 10% bracket is really only about $2k/yr in tax.
It'll also be conceptually easier to get to the point of just SS and Roth accounts to deal with, whoever survives the other, and for heirs. I like optimizing this stuff and doing taxes; DH does not.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Forum rules prohibit explicit discussion or speculation about potential future law changes, but there are many non-political risks we can discuss that make any kind of precise spreadsheet calculations impossible. E.g., market might explode or implode greatly throwing off all projections, Cheryl or her niece’s tax bracket might radically change due to vicissitudes of life, including unexpected inheritance from another relative, marital status change, disability, a lawsuit, etc.McQ wrote: ↑Sat Jan 14, 2023 5:01 pm
Thanks for those references, bsteiner. And I agree that there can be "non-financial" utility to making more rather than fewer Roth conversions. But I think those factors tip the decision mostly in cases where the conversion is near-breakeven. In Cheryl's case, a conversion at 24%, that might save only 22%, but might perhaps save 25%, could be elected based on the non-financial utility.
But there is also risk when more Roth conversions are done without a clear tax benefit (BHs like to convert at 12% to save 25% later; that's low-hanging fruit, an easy call, and a good example of a clear tax benefit). By risk I mean
… stuff we are not permitted to discuss here…
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
I agree with simplification goal.teen persuasion wrote: ↑Mon Jan 16, 2023 11:02 pm
It'll also be conceptually easier to get to the point of just SS and Roth accounts to deal with, whoever survives the other, and for heirs. I like optimizing this stuff and doing taxes; DH does not.
I was widowed almost 10 years ago and while i happened to be the spouse who liked optimizing taxes, filing my previously complicated taxes when I unable to do so because of age/disability is not a burden I care to impose on my prospective POA even while I am alive. i am definitely streamlining my finances in part to hopefully delay the point at which I need to delegate and to simplify the task when it becomes necessary to delegate.
i am grateful that my late husband jumpstarted the Rothification process and had some very aggressive investments in his Roth which fortunately did very well. His tax-deferred was in far more conservative assets (TIAA trad and TIPS). While I am not as aggressive as he was, simply locating equity in Roth and fixed income in Trad is likely to improve my tax simplification picture.
Not as extreme simplification as Teen Persuasion’s goal of just Roth and SS. Charitable giving is a important part of my budget priorities and QCDs are very tax efficient vehicles. Also if/when expensive LTC becomes needed, withdrawals from tax deferred will be more tax efficient. RMD triggering IRMAA will be the least of my worries if I need LTC. (At least Medicare premiums including IRMAA, if any, can be included in my large deductible medical expenses at that point.)
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
I concur. And since the 10% bracket is about 80% as large as the standard deduction, withdrawals through that bracket have an average tax burden of less than 5%.
And since the 12% bracket is about 50% larger than the sum of those two, average tax at it's top is a bit under 10%. That top, a bit over $115,000 for a married couple, corresponds to a TDA balance of about $3 million ($1.5 million for a single), if this is the first RMD. No reason to reduce the TDA below that level unless you find a tax rate in retirement of <10% to be onerous ...
But if social security and pension fill the 12% bracket, then the payoff from reducing the TDA balance is of course much greater. In fact, near the bottom of the 22% bracket is where the Social Security tax torpedo may kick in, depending, and almost all of us would like to avoid paying tax of 40.7% on our RMDs.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Thanks to all who posted and to every reader that made it this far.
Takeaways
1. It does no good to save IRMAA if the present value of the future dollar savings is less than the income tax incurred to make the conversion.
2. Because IRMAA bands are so narrow, and concentrated in the 24% bracket, conversions large enough to move the needle may require payment of income tax at 32% and 35%, thus triggering #1. DO NOT do those conversions.
3. And because IRMAA bands are so narrow, even moderate size conversions may require payment of IRMAA #2, #3, and #4—which are 50% larger in dollar amount--to save future IRMAA #1. That can’t work.
4. The general rule for the mass affluent: stay below IRMAA in your conversions. Practical maximum is to fill the 22% bracket up to but not across IRMAA (if and only if this does not trigger the SS tax torpedo). If you are too young for conversions to trigger IRMAA (<63), you might go through the 24% bracket, but only if you anticipate a TDA larger than $2 million (single) / $4 million couple (in 2023 dollars).
Now let me customize these takeaways. Your projected TDA balance is either small, medium, or large. Here are my recommendations for each case.
Small
In Cheryl’s case, with near-max age-70 Social Security, a projected investment return of 6%, and an age of 68, “small” was a balance less than $850,000. YMMV.
My advice here: stop worrying about IRMAA. Probably not gonna happen. Focus on having enough money to live well and not be a burden to your family.
Medium size
In Cheryl’s case, this was a balance of $1 – 1.25 million. You are at risk of IRMAA, but there are a lot of things you can do even with only a few years of flexibility remaining:
1. Voluntary withdrawals up to the top of your projected tax bracket or IRMAA #1, whichever is lower
2. And/or Roth conversions under the same rule
3. Qualified charitable distributions once these cease to avail.
4. If you don’t hit IRMAA until your mid-80s using these maneuvers … worry about it then.
Large size
In Cheryl’s case, this was a balance of about $1.5 million (for couples, about $3 million); it would be more if her social security payments had been well below the max.
Put bluntly: you are hosed. There is really no way for you to avoid paying IRMAA for the rest of your life. Attitude adjustment is your best strategy. The bite from IRMAA is small, relative to the income tax hit you would have to accept to do a large enough conversion to make a difference. Accept that and move on.
Enjoy your prosperity … and maybe look into your heart to see how charitable you wish to be. You may be able to do year after year of quite large contributions deductible at a rate you never enjoyed before.
Bottom line for a large enough TDA: do not attempt to prepay IRMAA. The numbers don’t pencil out.
To all:
Convert all you can, so long as you calculate the income tax rate differential, now versus later, to be favorable. But stop short of incurring IRMAA.
Takeaways
1. It does no good to save IRMAA if the present value of the future dollar savings is less than the income tax incurred to make the conversion.
2. Because IRMAA bands are so narrow, and concentrated in the 24% bracket, conversions large enough to move the needle may require payment of income tax at 32% and 35%, thus triggering #1. DO NOT do those conversions.
3. And because IRMAA bands are so narrow, even moderate size conversions may require payment of IRMAA #2, #3, and #4—which are 50% larger in dollar amount--to save future IRMAA #1. That can’t work.
4. The general rule for the mass affluent: stay below IRMAA in your conversions. Practical maximum is to fill the 22% bracket up to but not across IRMAA (if and only if this does not trigger the SS tax torpedo). If you are too young for conversions to trigger IRMAA (<63), you might go through the 24% bracket, but only if you anticipate a TDA larger than $2 million (single) / $4 million couple (in 2023 dollars).
Now let me customize these takeaways. Your projected TDA balance is either small, medium, or large. Here are my recommendations for each case.
Small
In Cheryl’s case, with near-max age-70 Social Security, a projected investment return of 6%, and an age of 68, “small” was a balance less than $850,000. YMMV.
My advice here: stop worrying about IRMAA. Probably not gonna happen. Focus on having enough money to live well and not be a burden to your family.
Medium size
In Cheryl’s case, this was a balance of $1 – 1.25 million. You are at risk of IRMAA, but there are a lot of things you can do even with only a few years of flexibility remaining:
1. Voluntary withdrawals up to the top of your projected tax bracket or IRMAA #1, whichever is lower
2. And/or Roth conversions under the same rule
3. Qualified charitable distributions once these cease to avail.
4. If you don’t hit IRMAA until your mid-80s using these maneuvers … worry about it then.
Large size
In Cheryl’s case, this was a balance of about $1.5 million (for couples, about $3 million); it would be more if her social security payments had been well below the max.
Put bluntly: you are hosed. There is really no way for you to avoid paying IRMAA for the rest of your life. Attitude adjustment is your best strategy. The bite from IRMAA is small, relative to the income tax hit you would have to accept to do a large enough conversion to make a difference. Accept that and move on.
Enjoy your prosperity … and maybe look into your heart to see how charitable you wish to be. You may be able to do year after year of quite large contributions deductible at a rate you never enjoyed before.
Bottom line for a large enough TDA: do not attempt to prepay IRMAA. The numbers don’t pencil out.
To all:
Convert all you can, so long as you calculate the income tax rate differential, now versus later, to be favorable. But stop short of incurring IRMAA.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
As someone who bookmarked this thread because it went over my head (and was eagerly waiting for your takeaways), thank you for the above post! Still several decades out, but the first principles of how you've laid out your takeaways are something that I've saved for future use.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
"To all:McQ wrote: ↑Wed Jan 18, 2023 5:20 pm Thanks to all who posted and to every reader that made it this far.
Takeaways
1. It does no good to save IRMAA if the present value of the future dollar savings is less than the income tax incurred to make the conversion.
2. Because IRMAA bands are so narrow, and concentrated in the 24% bracket, conversions large enough to move the needle may require payment of income tax at 32% and 35%, thus triggering #1. DO NOT do those conversions.
3. And because IRMAA bands are so narrow, even moderate size conversions may require payment of IRMAA #2, #3, and #4—which are 50% larger in dollar amount--to save future IRMAA #1. That can’t work.
4. The general rule for the mass affluent: stay below IRMAA in your conversions. Practical maximum is to fill the 22% bracket up to but not across IRMAA (if and only if this does not trigger the SS tax torpedo). If you are too young for conversions to trigger IRMAA (<63), you might go through the 24% bracket, but only if you anticipate a TDA larger than $2 million (single) / $4 million couple (in 2023 dollars).
Now let me customize these takeaways. Your projected TDA balance is either small, medium, or large. Here are my recommendations for each case.
Small
In Cheryl’s case, with near-max age-70 Social Security, a projected investment return of 6%, and an age of 68, “small” was a balance less than $850,000. YMMV.
My advice here: stop worrying about IRMAA. Probably not gonna happen. Focus on having enough money to live well and not be a burden to your family.
Medium size
In Cheryl’s case, this was a balance of $1 – 1.25 million. You are at risk of IRMAA, but there are a lot of things you can do even with only a few years of flexibility remaining:
1. Voluntary withdrawals up to the top of your projected tax bracket or IRMAA #1, whichever is lower
2. And/or Roth conversions under the same rule
3. Qualified charitable distributions once these cease to avail.
4. If you don’t hit IRMAA until your mid-80s using these maneuvers … worry about it then.
Large size
In Cheryl’s case, this was a balance of about $1.5 million (for couples, about $3 million); it would be more if her social security payments had been well below the max.
Put bluntly: you are hosed. There is really no way for you to avoid paying IRMAA for the rest of your life. Attitude adjustment is your best strategy. The bite from IRMAA is small, relative to the income tax hit you would have to accept to do a large enough conversion to make a difference. Accept that and move on.
Enjoy your prosperity … and maybe look into your heart to see how charitable you wish to be. You may be able to do year after year of quite large contributions deductible at a rate you never enjoyed before.
Bottom line for a large enough TDA: do not attempt to prepay IRMAA. The numbers don’t pencil out.
To all:
Convert all you can, so long as you calculate the income tax rate differential, now versus later, to be favorable. But stop short of incurring IRMAA.
Convert all you can, so long as you calculate the income tax rate differential, now versus later, to be favorable. But stop short of incurring IRMAA."
Assuming you do not have nor expect none of these:
- more time prior to collecting SS/other income(s)
- pensions
- large after-tax accounts
- SPIA's or other annuities
- inheritances
In any case before doing any Roth conversions, a suggestion would be to slug your personal numbers, variables, and goals into a program such as RPM and/or Pralana to run some future scenarios.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
I guess I'm the only one on this thread who don't complain about having to pay IRMMA. I'm 70 and have paid IRMAA 4 out of last 5 years.
TravelforFun
TravelforFun
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
If available, using an HSA as an investment account provides a mitigation opportunity against IRMAA.
Since it’s likely that the ‘RMD years’ (75 for me) are when IRMAA will bite, it at least gives us some additional years of potential HSA account growth.
Since it’s likely that the ‘RMD years’ (75 for me) are when IRMAA will bite, it at least gives us some additional years of potential HSA account growth.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
That's pretty amazing. We lived very frugally and followed the rule of never pay more than you have to. I guess that's why it rubs me wrong to think my surviving spouse will have to pay more for her Medicare, although at least when she is alone, it will just be one instead of two.TravelforFun wrote: ↑Wed Jan 18, 2023 6:40 pm I guess I'm the only one on this thread who don't complain about having to pay IRMMA. I'm 70 and have paid IRMAA 4 out of last 5 years.
TravelforFun
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Complaining about it (except to your Congressperson if he/she can get the law changed). If I ever sign up for Medicare B I’ll simply pay it.TravelforFun wrote: ↑Wed Jan 18, 2023 6:40 pm I guess I'm the only one on this thread who don't complain about having to pay IRMMA. I'm 70 and have paid IRMAA 4 out of last 5 years.
TravelforFun
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
There is another option - converting all tIRA to Roth for us. Even as a single, spouse could avoid IRMAA if it's a small to none RMD plus SS and pensions, and would still have over a mil in Roth. I just have to live to be late 70's. We all gotta have goals!andypanda wrote: ↑Thu Jan 19, 2023 7:57 am My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
How do we convert three million or so in taxable to Roth? Does it involve going back to work? This is my 11th year of retirement and I don't think I'd be happy punching a clock.
My RMDs are another contributing factor. They made me begin taking them last year.
My RMDs are another contributing factor. They made me begin taking them last year.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Really great post, McQ. What a morass. I am 73 and am in the middle of this alphabet soup. I just do Roth conversion and try to keep below 24% bracket. I get nicked by IRRMA every year, but what can I do? I'm probably losing a ton of $$$ by not doing a more precise analysis, but I've got to live my life.
If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man. Mark Twain
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Well that is disheartening . So I guess approach it like the tax torpedo. It sucks, but just be thankful I’m in a position where it is even an issue.
Thanks for this thread. It was great to finally get one targeting singles and on such a relevant topic!
Thanks for this thread. It was great to finally get one targeting singles and on such a relevant topic!
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Congratulations to McQ on getting quoted in the New York Times this past weekend: https://www.nytimes.com/2023/01/13/busi ... Position=1.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
I'm not a marriage counselor, andypanda, but that sounds exactly like something I would sayandypanda wrote: ↑Thu Jan 19, 2023 7:57 am My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Actually, bwatts849, if you are in my 'large' TDA category, I think it is both sane and rational to ignore IRMAA. Back away from the spreadsheet and head out to beach, golf course or cooking class. You won the game.bwatts849 wrote: ↑Thu Jan 19, 2023 11:34 am Really great post, McQ. What a morass. I am 73 and am in the middle of this alphabet soup. I just do Roth conversion and try to keep below 24% bracket. I get nicked by IRRMA every year, but what can I do? I'm probably losing a ton of $$$ by not doing a more precise analysis, but I've got to live my life.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Good reminder for me, CrazyCatLady--most of my other posts had assumed MFJ (like my situation). In this case, a single family member was part of the Cheryl composite, and there you are.CrazyCatLady wrote: ↑Thu Jan 19, 2023 9:06 pm Well that is disheartening . So I guess approach it like the tax torpedo. It sucks, but just be thankful I’m in a position where it is even an issue.
Thanks for this thread. It was great to finally get one targeting singles and on such a relevant topic!
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Thanks bsteiner. I'm always looking for opportunities to promote the market history work I did (https://papers.ssrn.com/sol3/papers.cfm ... id=3805927). Endless hours of sweat equity.bsteiner wrote: ↑Thu Jan 19, 2023 9:18 pmCongratulations to McQ on getting quoted in the New York Times this past weekend: https://www.nytimes.com/2023/01/13/busi ... Position=1.
When bonds began to tank in 2022, I was in a position to load up the spreadsheet history, calibrate just how bad 2022 was, and make assertions with some authority. That got the attention of Jeff Sommer at NYTimes and also Jason Zweig at the WSJ: https://www.wsj.com/articles/asset-allo ... os3&page=1
If interested, this thread at BH has charts of the carnage: viewtopic.php?t=387649
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Maybe you could talk with the guy who described Why Roth conversions always pay off—if you can hold on long enough and reconcile those viewpoints.
Of course the answer might start with "it depends...".
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Congress has gone back and forth over the years in trying to balance the equities among singles, one-earner couples, and two-earner couples. The Tax Cuts and Jobs Act widened more of the joint return brackets to twice the width of the single brackets. But that change is only effective for 2018 through 2025. We don't know how it will be after 2025.McQ wrote: ↑Thu Jan 19, 2023 9:36 pm ... my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672
Except in this forum, I think most people ignore it. In the big picture, the amount isn't all that much. For me, it may be a factor in deciding whether to take Medicare B if I should ever retire. (My wife is a retired Federal employee and in addition to good coverage through my firm, we have relatively inexpensive Federal coverage that she can change from year to year.)McQ wrote: ↑Thu Jan 19, 2023 9:39 pmActually, bwatts849, if you are in my 'large' TDA category, I think it is both sane and rational to ignore IRMAA. Back away from the spreadsheet and head out to beach, golf course or cooking class. You won the game.bwatts849 wrote: ↑Thu Jan 19, 2023 11:34 am Really great post, McQ. What a morass. I am 73 and am in the middle of this alphabet soup. I just do Roth conversion and try to keep below 24% bracket. I get nicked by IRRMA every year, but what can I do? I'm probably losing a ton of $$$ by not doing a more precise analysis, but I've got to live my life.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
The issue of Roth conversions is complicated, but I think they're underused rather than overused. There are many benefits to Roth conversions to the extent you can do them at a tax rate less than, equal to, or not too much higher than the tax rate that would otherwise apply to distributions.FiveK wrote: ↑Thu Jan 19, 2023 9:57 pmMaybe you could talk with the guy who described Why Roth conversions always pay off—if you can hold on long enough and reconcile those viewpoints.
Of course the answer might start with "it depends...".
Our clients generally provide for their children in trust rather than outright to keep their inheritances out of their estates for estate tax purposes, and to protect their inheritances from their creditors and spouses. To the extent the trustees want to retain the IRA distributions for these reasons, the tax rate will generally be 37%.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Fun story. But so much chit-chat that I lost the purpose of the thread.Parkinglotracer wrote: ↑Fri Jan 06, 2023 4:12 am I loved the story although It’s a little over my head - I’ll understand it better as I live it and complain after I do my taxes the next two decades lol
The good news for Cheryl and myself - lately the market decline is taking care of the projected high TDA RMDs.
I
I don't carry a signature because people are easily offended.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
"I'm not a marriage counselor, andypanda, but that sounds exactly like something I would say
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672"
Thank you. I'll read it after the next cup of coffee.
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672"
Thank you. I'll read it after the next cup of coffee.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Can't speak to the purpose but the findings show that Roth conversions should be approached with caution. Some on this board are almost fanatical about recommending Roth conversions even when it makes no economic sense. This thread SHOULD be a wake up call to those folks. To some, if you have a hammer (Roth conversion), every retirement investing issue looks like a nail.AlphaLess wrote: ↑Thu Jan 19, 2023 10:24 pmFun story. But so much chit-chat that I lost the purpose of the thread.Parkinglotracer wrote: ↑Fri Jan 06, 2023 4:12 am I loved the story although It’s a little over my head - I’ll understand it better as I live it and complain after I do my taxes the next two decades lol
The good news for Cheryl and myself - lately the market decline is taking care of the projected high TDA RMDs.
I
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
[/quote]
Actually, bwatts849, if you are in my 'large' TDA category, I think it is both sane and rational to ignore IRMAA. Back away from the spreadsheet and head out to beach, golf course or cooking class. You won the game.
[/quote]
But he won the game by staying in the spreadsheet. Old habits are hard to break.
Actually, bwatts849, if you are in my 'large' TDA category, I think it is both sane and rational to ignore IRMAA. Back away from the spreadsheet and head out to beach, golf course or cooking class. You won the game.
[/quote]
But he won the game by staying in the spreadsheet. Old habits are hard to break.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Thank you for the series of posts on this topic, Since I'm essentially a "Cheryl" teetering between the large and medium TDA situations, I was curious about the results. I was fortunate to find Bogleheads around 2005. I learned about maxing out both my 403b and 457 at a very fortunate time period! Seeing posts by Celia and others about the potential pitfalls of having a large TDA, I retired and started living off of the TDA while also making modest Roth conversions. The RPM model seemed to support that tactic of leveling out my tax burden throughout my life. I've gone from no Roth to just under 10% of my portfolio in Roth and I still have 8 years to go before RMDs. It's always refreshing to see that the cumulative minds of the Boglehead community gives pretty good insight.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Very interesting paper!McQ wrote: ↑Thu Jan 19, 2023 9:36 pmI'm not a marriage counselor, andypanda, but that sounds exactly like something I would sayandypanda wrote: ↑Thu Jan 19, 2023 7:57 am My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672
However, I think you have overlooked something here:
"And inasmuch as term insurance rapidly becomes prohibitively costly after age 65, if there is a role for life insurance
to play in addressing a widowed survivor’s postmortem loss of income, it must be permanent insurance, in the example below, ordinary whole life."
Have you considered that the loss of income early in retirement is more costly than the loss of income later in retirement, because at the later point there are fewer years' marginal expenses (i.e., in excess of Social Security payments) to be taken from savings?
Given that, whole life is not the only possible answer. You give an example of a $2,000 premium for a $50,000 benefit at age 55 (total premium and benefit for both spouses). That much premium might buy $200,000 total death benefit of 20 year term at age 64 (for example). The $100,000 death benefit paid on the first spouse's death (before age 84) could provide enough money to replace 10 or more years of the lost lower Social Security payment. On the other hand, if the first death is after that age, the widow/er would have a much shorter life expectancy than at age 64, thus significantly reducing the number of years that the remaining savings would have to last on the death of the first spouse.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Completely understandable. It seems like an overwhelming majority here are married (so larger audience) plus we always default to our own circumstances. That is why it was such a nice treat to have the protagonist of the thread being single! . People always say “just cut it in half,” but that never worksMcQ wrote: ↑Thu Jan 19, 2023 9:41 pmGood reminder for me, CrazyCatLady--most of my other posts had assumed MFJ (like my situation). In this case, a single family member was part of the Cheryl composite, and there you are.CrazyCatLady wrote: ↑Thu Jan 19, 2023 9:06 pm Well that is disheartening . So I guess approach it like the tax torpedo. It sucks, but just be thankful I’m in a position where it is even an issue.
Thanks for this thread. It was great to finally get one targeting singles and on such a relevant topic!
I keep living in hope Livesoft will redo his how to withdraw $100,000 and pay $0 tax for a singleton! Maybe your thread will inspire him to do that!
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
How does pension income that automatically drives up your tax bracket figure into all of this? I am assuming your small, medium and large portfolio values corresponds to a certain percentage withdrawal to live on (whether it is an RMD or before they kick in), in addition to SS income that places you in the IRMAA range and various tax brackets.
Should we consider an approximate annuity value of a pension (that will be taxed just as the deferred tax savings account) and add that to our deferred portfolio value and SS to see how it affects IRMAA, tax brackets, etc? And what if the pension is not COLA'd but has a fixed 1% adjustment annually?
Thanks.
Should we consider an approximate annuity value of a pension (that will be taxed just as the deferred tax savings account) and add that to our deferred portfolio value and SS to see how it affects IRMAA, tax brackets, etc? And what if the pension is not COLA'd but has a fixed 1% adjustment annually?
Thanks.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
A fair joust, FiveK. Here is a three-part answer.FiveK wrote: ↑Thu Jan 19, 2023 9:57 pmMaybe you could talk with the guy who described Why Roth conversions always pay off—if you can hold on long enough and reconcile those viewpoints.
Of course the answer might start with "it depends...".
1. Although prefacing and appending "It depends" is an all-purpose prophylactic against error in offering financial advice, I tend to take the Harry Truman position, who grumbled one day that he only wanted to talk to one-armed economists from now on...
2. I'm a work in progress, and I know more about Roth conversions now. Marcopolo ultimately convinced me that the mark to market taxation used in that thread was problematic, and cas convinced me that converting at 22% to avoid RMDs at 12% was an uncorrectable error, as long as capital gains and qualified dividends are untaxed in the 12% bracket.
That said, I didn't apply either re-investment of RMDs or asset re-location to the Cheryl case, which might--might--have rescued those large conversions I had her attempt. So I leave the old thread up as a useful thought experiment. Still working on the asset re-location question. Bonus post coming in a bit.
3. But I might rework the title to something like "Why your IRMAA-free Roth conversions will ..." I've certainly come to appreciate the IRMAA threat more now than then.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
That's a key point I never found a chance to mention: if you aren't taking Medicare B in the next two years, IRMAA is not a factor. My spouse kept working six years after I retired and four years after I turned 65, and I didn't take Medicare B or worry about IRMAA.bsteiner wrote: ↑Thu Jan 19, 2023 10:11 pm ...
Except in this forum, I think most people ignore [IRMAA]. In the big picture, the amount isn't all that much. For me, it may be a factor in deciding whether to take Medicare B if I should ever retire. (My wife is a retired Federal employee and in addition to good coverage through my firm, we have relatively inexpensive Federal coverage that she can change from year to year.)
Although specific to state and Federal employment for the most part, some people need never take Medicare B, making IRMAA a non-issue.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
That's very helpful feedback, technovelist. I'm not trained in insurance at all, and I wasn't aware you could get a reasonably priced 20-year level term policy in your mid-60s.technovelist wrote: ↑Fri Jan 20, 2023 12:50 pmVery interesting paper!McQ wrote: ↑Thu Jan 19, 2023 9:36 pmI'm not a marriage counselor, andypanda, but that sounds exactly like something I would sayandypanda wrote: ↑Thu Jan 19, 2023 7:57 am My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672
However, I think you have overlooked something here:
"And inasmuch as term insurance rapidly becomes prohibitively costly after age 65, if there is a role for life insurance
to play in addressing a widowed survivor’s postmortem loss of income, it must be permanent insurance, in the example below, ordinary whole life."
Have you considered that the loss of income early in retirement is more costly than the loss of income later in retirement, because at the later point there are fewer years' marginal expenses (i.e., in excess of Social Security payments) to be taken from savings?
Given that, whole life is not the only possible answer. You give an example of a $2,000 premium for a $50,000 benefit at age 55 (total premium and benefit for both spouses). That much premium might buy $200,000 total death benefit of 20 year term at age 64 (for example). The $100,000 death benefit paid on the first spouse's death (before age 84) could provide enough money to replace 10 or more years of the lost lower Social Security payment. On the other hand, if the first death is after that age, the widow/er would have a much shorter life expectancy than at age 64, thus significantly reducing the number of years that the remaining savings would have to last on the death of the first spouse.
The problem with "...would have a much shorter life expectancy than at age 64..." is that life expectancy is an average and doesn't decline one-for-one. On the latter, it is only reduced fifteen years over those twenty years to 84. On the former, the median age of survival is a little longer than life expectancy. If you switch to an odds perspective, and set "20% odds of still alive" as the standard, it can be 2X the remaining life expectancy at an age like 84: 12, 15 or more years.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Glad you asked, it lets me make a clarification on what is "small, medium, large."utvolfan wrote: ↑Fri Jan 20, 2023 4:34 pm How does pension income that automatically drives up your tax bracket figure into all of this? I am assuming your small, medium and large portfolio values corresponds to a certain percentage withdrawal to live on (whether it is an RMD or before they kick in), in addition to SS income that places you in the IRMAA range and various tax brackets.
Should we consider an approximate annuity value of a pension (that will be taxed just as the deferred tax savings account) and add that to our deferred portfolio value and SS to see how it affects IRMAA, tax brackets, etc? And what if the pension is not COLA'd but has a fixed 1% adjustment annually?
Thanks.
1. These are 2023 dollars. So if you are in your early 50s, RMDs are 24 years away. With inflation at 3%, you have to double all the dollar values I stated.
2. Let me answer the pension question in two parts.
A. If full COLA, then it is just like having a larger social security payment. The portfolio boundaries I stated assumed social security alone at just over $50,000. If your (single person) social security plus pension is more than that, then the boundaries tighten up. As a rule of thumb, for each $10,000 over that $50,000, the boundary contracts by about $265,000. At $97,000 social security plus pension, you hit IRMAA without any TDA / RMD. Except, this is a very coarse rule, because with no TDA, you don't have any income growing at the assumed 6%, which is what creates the RMD hump, and drives people into IRMAA later.
B. a small escalator clause, no COLA, like 1%, complicates the analysis. Can't use the rule of thumb above, because future IRMAA thresholds retreat faster than that portion of your income grows. I'd add a third column to the spreadsheet; if the pension is substantial, you may find that if you start out below IRMAA, you never quite rise into it; or you drop out of it after a decade.
Got to run the numbers for your own case.
You can take the academic out of the classroom by retirement, but you can't ever take the classroom out of his tone, style, and manner of approach.
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Much earlier in life I was training to be an actuary so I do have a fair understanding of these issues. Of course I realize that life expectancy doesn't decline year-by-year, but if it is roughly 17 at age 64 and 7 at age 84, then that still reduces the expected number of years that the widow/er's assets will need to last by 10.McQ wrote: ↑Fri Jan 20, 2023 5:22 pmThat's very helpful feedback, technovelist. I'm not trained in insurance at all, and I wasn't aware you could get a reasonably priced 20-year level term policy in your mid-60s.technovelist wrote: ↑Fri Jan 20, 2023 12:50 pmVery interesting paper!McQ wrote: ↑Thu Jan 19, 2023 9:36 pmI'm not a marriage counselor, andypanda, but that sounds exactly like something I would sayandypanda wrote: ↑Thu Jan 19, 2023 7:57 am My wife does not like IRMAA. My wife, being 5 years younger, does not like the idea of probably having to pay even more taxes and IRMAA as a widow. Every four or five months she rants about it for a minute or two.
My canned response, "Do you want to give it all away now and live on our pensions and SSA retirement? That will solve the problem."
Alternatively, my paper debunking the widow tax hit may give you (and her) additional reassurances: https://papers.ssrn.com/sol3/papers.cfm ... id=3896672
However, I think you have overlooked something here:
"And inasmuch as term insurance rapidly becomes prohibitively costly after age 65, if there is a role for life insurance
to play in addressing a widowed survivor’s postmortem loss of income, it must be permanent insurance, in the example below, ordinary whole life."
Have you considered that the loss of income early in retirement is more costly than the loss of income later in retirement, because at the later point there are fewer years' marginal expenses (i.e., in excess of Social Security payments) to be taken from savings?
Given that, whole life is not the only possible answer. You give an example of a $2,000 premium for a $50,000 benefit at age 55 (total premium and benefit for both spouses). That much premium might buy $200,000 total death benefit of 20 year term at age 64 (for example). The $100,000 death benefit paid on the first spouse's death (before age 84) could provide enough money to replace 10 or more years of the lost lower Social Security payment. On the other hand, if the first death is after that age, the widow/er would have a much shorter life expectancy than at age 64, thus significantly reducing the number of years that the remaining savings would have to last on the death of the first spouse.
The problem with "...would have a much shorter life expectancy than at age 64..." is that life expectancy is an average and doesn't decline one-for-one. On the latter, it is only reduced fifteen years over those twenty years to 84. On the former, the median age of survival is a little longer than life expectancy. If you switch to an odds perspective, and set "20% odds of still alive" as the standard, it can be 2X the remaining life expectancy at an age like 84: 12, 15 or more years.
I also had wrote a program a few years ago to calculate safe expenditure levels based on insurance ratings (implying life expectancy), assets in various tax categories, Social Security payments and tax effects. That's how I discovered that having a term policy could cut off the left tail of results for people who had a significant portion of their income from Social Security (or any other annuity that wasn't joint and 100% to survivor).
By an amazing coincidence, I had purchased such policies for myself and my wife at age 64 for both, and my program calculated that I had purchased the correct amount by accident, which isn't as unlikely as it sounds because our purchase was at the break point where the costs go way down.
In theory, theory and practice are identical. In practice, they often differ.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
With mega back door Roth available in the last few years before retirement, I poured nearly every dollar of my income into my 401k, essentially living off of my taxable savings until late each year. As a result my Roth 401k is pretty large. I placed my 60/40 portfolio allocation to the asset location you're recommending to have exactly percentage of us stocks funds in my Roth/taxable combined. Then the downturn hit and I began withdrawals for retirement. The percentage is at 96, but if the downturn continues, it will slide further as I'm tax gain harvesting and then exchanging in my IRA from bonds funds to stock funds to rebalance back to 60/40. After this year's tax gain harvesting (which will get rid of a actively managed tax inefficient fund) I'll consider Roth conversions to increase my Roth space a bit. Perhaps up to the first IRMAA bracket. It will depend on where the market ends up in December.furwut wrote: ↑Sat Jan 14, 2023 8:57 amIf one has taxable, tax deferred, and tax-free accounts maybe concentrate your equites in the taxable and tax-free and leave tax deferred for bonds?CrazyCatLady wrote: ↑Thu Jan 05, 2023 10:35 pm
My related question is is there anything Cheryl could have done 10-15 years out to lessen the impact? If she is single, childless and in the 32% bracket (and maybe even 24% bracket) I don’t think there are a lot of options.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Perhaps true in general, but especially in the case of traditional vs. Roth, where high marginal rates due to EITC and/or saver's credit can make traditional a better choice for a low income person, and the tax drag due to a 35.1% combined federal + state rate on qualified dividends in taxable accounts can make Roth a better choice for a high income person. In both cases, "it depends" on further details such as expected tax rates in retirement, etc.
I spent much more time looking at the analysis in that previous thread than I've time for on this one. The previous thread's conclusions (with exceptions as noted here) seemed sound at the time. Reading Cheryl's case only superficially (and with Cheryl expecting to be in the 22% bracket at the least) I was expecting the re-investment of RMDs would - given time - indicate that the higher marginal rates due to IRMAA would in the end be no different than higher marginal rates due to nominal tax brackets, and be covered by situation c) in “Traditional plus taxable” vs. Roth. What do you think?2. I'm a work in progress, and I know more about Roth conversions now. Marcopolo ultimately convinced me that the mark to market taxation used in that thread was problematic, and cas convinced me that converting at 22% to avoid RMDs at 12% was an uncorrectable error, as long as capital gains and qualified dividends are untaxed in the 12% bracket.
That said, I didn't apply either re-investment of RMDs or asset re-location to the Cheryl case, which might--might--have rescued those large conversions I had her attempt. So I leave the old thread up as a useful thought experiment. Still working on the asset re-location question. Bonus post coming in a bit.
3. But I might rework the title to something like "Why your IRMAA-free Roth conversions will ..." I've certainly come to appreciate the IRMAA threat more now than then.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
The taxable/brokerage assets do get cost basis reset upon demise ; in essence, only dividends leaking rate (and any possible withdrawals) gets taxed (if that: assuming MFJ income below $108k). Essentially any tax-drag on brokerage dividends do-matter/un-avoidable.FiveK wrote: ↑Fri Jan 20, 2023 8:07 pm …
Reading Cheryl's case only superficially (and with Cheryl expecting to be in the 22% bracket at the least) I was expecting the re-investment of RMDs would - given time - indicate that the higher marginal rates due to IRMAA would in the end be no different than higher marginal rates due to nominal tax brackets, and be covered by situation c) in “Traditional plus taxable” vs. Roth. What do you think?
It’s hard to beat Roth with “taxable plus TDA” — assuming the monies that went into Roth didn’t incur high marginal taxes/tax-rates!
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Can I ask you a side question, since you mention the marginal rate. I'm trying to once again wrap my head around the meaning of "marginal rate" and thought I understood it, but then I made a table to see if it played out as expected, and not sure it does. I looked up MFJ tax brackets:FiveK wrote: ↑Fri Jan 20, 2023 8:07 pmPerhaps true in general, but especially in the case of traditional vs. Roth, where high marginal rates due to EITC and/or saver's credit can make traditional a better choice for a low income person, and the tax drag due to a 35.1% combined federal + state rate on qualified dividends in taxable accounts can make Roth a better choice for a high income person. In both cases, "it depends" on further details such as expected tax rates in retirement, etc.
I spent much more time looking at the analysis in that previous thread than I've time for on this one. The previous thread's conclusions (with exceptions as noted here) seemed sound at the time. Reading Cheryl's case only superficially (and with Cheryl expecting to be in the 22% bracket at the least) I was expecting the re-investment of RMDs would - given time - indicate that the higher marginal rates due to IRMAA would in the end be no different than higher marginal rates due to nominal tax brackets, and be covered by situation c) in “Traditional plus taxable” vs. Roth. What do you think?2. I'm a work in progress, and I know more about Roth conversions now. Marcopolo ultimately convinced me that the mark to market taxation used in that thread was problematic, and cas convinced me that converting at 22% to avoid RMDs at 12% was an uncorrectable error, as long as capital gains and qualified dividends are untaxed in the 12% bracket.
That said, I didn't apply either re-investment of RMDs or asset re-location to the Cheryl case, which might--might--have rescued those large conversions I had her attempt. So I leave the old thread up as a useful thought experiment. Still working on the asset re-location question. Bonus post coming in a bit.
3. But I might rework the title to something like "Why your IRMAA-free Roth conversions will ..." I've certainly come to appreciate the IRMAA threat more now than then.
10% Bracket: ($20,550)-0=20550 x 10% = $2,055.00
12% Bracket: ($83,550-20,551)= 62999x 12% = $7559.88
22% Bracket: ($178,150-83,551)= 94599x 22% = $20,811.78 so total tax would be 30,426.66. Correct?
Then I plugged in my numbers within a table:
top of bracket--bottom of bracket----amount w/in bracket ------tax w/in bracket
$20,550.00 ----------- 0................. $20,550.00 0.1 $2,055.00
$83,550.00 $20,551.00 ................ $62,999.00 0.12 $7,559.88
$169,210.78 $83,551.00 ................ $85,659.78 0.22 $18,845.15
------------------------------------------------------total tax ..............$28,460.03
So I added one dollar to the 169,210.78, for 169,211.78, and it only added 22 cents tax. So would that mean that is the 22% marginal rate, since the last dollar added got taxed at 22%? Would that stay in the 22% marginal rate until going just a dollar over the top of the 22% bracket, getting into income of 178,151? am I missing something? Thanks in advance.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
The marginal tax rate of something is, in short, the result of dividing (the change in tax) by (the change in something). E.g., if tax changes by $220 for a $1000 change in something, the marginal rate is $220/$1000 = 22%.
The wiki article linked above goes into more details.
Yes! That's for a 2022 MFJ return with $178,150 of ordinary taxable income, e.g., an AGI of $204,050 (from which the $25,900 standard deduction is subtracted to get taxable income) all from W-2 wages for a couple both under age 65 and no other income.I looked up MFJ tax brackets:
10% Bracket: ($20,550)-0=20550 x 10% = $2,055.00
12% Bracket: ($83,550-20,551)= 62999x 12% = $7559.88
22% Bracket: ($178,150-83,551)= 94599x 22% = $20,811.78 so total tax would be 30,426.66. Correct?
Yes and yes. If the taxable income were, say, $179,250, then the $1000 in the 24% bracket would be taxed at that rate, adding $240 to the tax liability for a taxable income of $178,150.Then I plugged in my numbers within a table:
top of bracket--bottom of bracket----amount w/in bracket ------tax w/in bracket
$20,550.00 ----------- 0................. $20,550.00 0.1 $2,055.00
$83,550.00 $20,551.00 ................ $62,999.00 0.12 $7,559.88
$169,210.78 $83,551.00 ................ $85,659.78 0.22 $18,845.15
------------------------------------------------------total tax ..............$28,460.03
So I added one dollar to the 169,210.78, for 169,211.78, and it only added 22 cents tax. So would that mean that is the 22% marginal rate, since the last dollar added got taxed at 22%? Would that stay in the 22% marginal rate until going just a dollar over the top of the 22% bracket, getting into income of 178,151?
Not that I can tell. Does it all (including the chart in the wiki cited above) make sense to you?am I missing something? Thanks in advance.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
McQ, fist off thank you!McQ wrote: ↑Fri Jan 20, 2023 5:37 pmGlad you asked, it lets me make a clarification on what is "small, medium, large."utvolfan wrote: ↑Fri Jan 20, 2023 4:34 pm How does pension income that automatically drives up your tax bracket figure into all of this? I am assuming your small, medium and large portfolio values corresponds to a certain percentage withdrawal to live on (whether it is an RMD or before they kick in), in addition to SS income that places you in the IRMAA range and various tax brackets.
Should we consider an approximate annuity value of a pension (that will be taxed just as the deferred tax savings account) and add that to our deferred portfolio value and SS to see how it affects IRMAA, tax brackets, etc? And what if the pension is not COLA'd but has a fixed 1% adjustment annually?
Thanks.
...
2. Let me answer the pension question in two parts.
A. If full COLA, then it is just like having a larger social security payment. The portfolio boundaries I stated assumed social security alone at just over $50,000. If your (single person) social security plus pension is more than that, then the boundaries tighten up. As a rule of thumb, for each $10,000 over that $50,000, the boundary contracts by about $265,000. At $97,000 social security plus pension, you hit IRMAA without any TDA / RMD. Except, this is a very coarse rule, because with no TDA, you don't have any income growing at the assumed 6%, which is what creates the RMD hump, and drives people into IRMAA later.
Got to run the numbers for your own case.
Emphasis mine ... ouch. This appears to be me (50M single). I guess I knew it already from playing around with i-ORP in the past but still hadn't fully sunk in. With a Military pension + disability (both COLA'ed) I'm at $54k gross today [ETA: corrected from $74k accounting for tax free VA disability] and my SS benefit would be $43k if I retired today and claimed at 70. So I have no way of avoiding IRMAA? And maybe even some Torpedoes?
No doubt I have a LOT of math to do to consider Roth conversion strategies to stay out of higher IRMAA levels. Ideally if I can do them well before 63; yes? Is that going to be generally correct or is your analysis showing that it's hardly even worth the effort in such a case?
For the record, I know these are good problems to have.
If it matters for such a "course rule", my TDA is 50% G-Fund/Bonds on a 75/25 portfolio AA, and I anticipate that to be true for the foreseeable future. So my TDA growth is going to be much slower than my 100% equities Taxable and Roth accounts.
Last edited by mouth on Sat Jan 21, 2023 3:16 pm, edited 1 time in total.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Excellent discussion although a lot of it is over my level of understanding. But, I was thinking. If you're going to do large Roth conversions, say in your early 60's, to avoid IRMAA what if you're receiving subsidies from ACA insurance. You're going to greatly reduce or even eliminate those subsidies. Shouldn't that loss of subsidies be included in the cost of doing the Roth conversions?
Francis
Francis
"Success is getting what you want. Happiness is wanting what you get." |
Dale Carnegie
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Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
If your talking about VA disability, it isn't taxable. So only your taxable pension part counts.
Earned 43 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Yes, thank you. I just wanted to make sure I understood the marginal rate issue correctly, especially in the context of IRMAA and the "tax torpedo". Since we're both over 65, the standard deduction is a little more, which keeps us from getting close to a change in the marginal rate. Staying under the IRMAA MAGI threshold is our main goal (have about 3k in tax free bonds), even though many here feel it's no big deal. Thanks again.FiveK wrote: ↑Sat Jan 21, 2023 2:18 amThe marginal tax rate of something is, in short, the result of dividing (the change in tax) by (the change in something). E.g., if tax changes by $220 for a $1000 change in something, the marginal rate is $220/$1000 = 22%.
The wiki article linked above goes into more details.
Yes! That's for a 2022 MFJ return with $178,150 of ordinary taxable income, e.g., an AGI of $204,050 (from which the $25,900 standard deduction is subtracted to get taxable income) all from W-2 wages for a couple both under age 65 and no other income.I looked up MFJ tax brackets:
10% Bracket: ($20,550)-0=20550 x 10% = $2,055.00
12% Bracket: ($83,550-20,551)= 62999x 12% = $7559.88
22% Bracket: ($178,150-83,551)= 94599x 22% = $20,811.78 so total tax would be 30,426.66. Correct?
Yes and yes. If the taxable income were, say, $179,250, then the $1000 in the 24% bracket would be taxed at that rate, adding $240 to the tax liability for a taxable income of $178,150.Then I plugged in my numbers within a table:
top of bracket--bottom of bracket----amount w/in bracket ------tax w/in bracket
$20,550.00 ----------- 0................. $20,550.00 0.1 $2,055.00
$83,550.00 $20,551.00 ................ $62,999.00 0.12 $7,559.88
$169,210.78 $83,551.00 ................ $85,659.78 0.22 $18,845.15
------------------------------------------------------total tax ..............$28,460.03
So I added one dollar to the 169,210.78, for 169,211.78, and it only added 22 cents tax. So would that mean that is the 22% marginal rate, since the last dollar added got taxed at 22%? Would that stay in the 22% marginal rate until going just a dollar over the top of the 22% bracket, getting into income of 178,151?
Not that I can tell. Does it all (including the chart in the wiki cited above) make sense to you?am I missing something? Thanks in advance.
Re: Steering through the shoals of IRMAA past the SS Tax Torpedo
Of course it should - as well as NIIT if that applies. And if you happen to plan for charitable contributions throw that into the plan as well.fsrph wrote: ↑Sat Jan 21, 2023 10:21 am Excellent discussion although a lot of it is over my level of understanding. But, I was thinking. If you're going to do large Roth conversions, say in your early 60's, to avoid IRMAA what if you're receiving subsidies from ACA insurance. You're going to greatly reduce or even eliminate those subsidies. Shouldn't that loss of subsidies be included in the cost of doing the Roth conversions?
Francis
These are some of the reasons why everyone needs to run their own numbers and plan.