[Updated on March 12, 2024 after the release of the inflation number for February 2024.]
Seniors 65 or older can sign up for Medicare. The government calls people who receive Medicare beneficiaries. Medicare beneficiaries must pay a premium for Medicare Part B which covers doctors’ services and Medicare Part D which covers prescription drugs. The premiums paid by Medicare beneficiaries cover about 25% of the program costs for Part B and Part D. The government pays the other 75%.
What Is IRMAA?
Medicare imposes surcharges on higher-income beneficiaries. The theory is that higher-income beneficiaries can afford to pay more for their healthcare. Instead of doing a 25:75 split with the government, they must pay a higher share of the program costs.
The surcharge is called IRMAA, which stands for Income-Related Monthly Adjustment Amount. This applies to both Traditional Medicare (Part B and Part D) and Medicare Advantage plans.
According to the Medicare Trustees Report, 7% of Medicare Part B beneficiaries paid IRMAA. The extra premiums they paid lowered the government’s share of the total Part B and Part D expenses by two percentage points. Big deal?
MAGI
The income used to determine IRMAA is your Modified Adjusted Gross Income (MAGI) — which is your AGI plus tax-exempt interest and dividends from muni bonds — from two years ago. Your 2022 MAGI determines your IRMAA in 2024. Your 2023 MAGI determines your IRMAA in 2025. Your 2024 MAGI determines your IRMAA in 2026.
There are many definitions of MAGI for different purposes. The MAGI for subsidies on health insurance from the ACA marketplace includes untaxed Social Security benefits. The MAGI for IRMAA doesn’t include untaxed Social Security benefits. If you read somewhere else that says that untaxed Social Security benefits are included in MAGI, they’re talking about a different MAGI, not the MAGI for IRMAA.
You can use Calculator: How Much of My Social Security Benefits Is Taxable? to calculate the taxable portion of your Social Security benefits.
As if it’s not complicated enough while not moving the needle much, IRMAA is divided into five income brackets. Depending on the income, higher-income beneficiaries pay 35%, 50%, 65%, 80%, or 85% of the program costs instead of 25%. As a result, they pay 1.4 times, 2.0 times, 2.6 times, 3.2 times, or 3.4 times the standard Medicare premium.
The threshold for each bracket can cause a sudden jump in the monthly premium amount you pay. If your income crosses over to the next bracket by $1, all of a sudden your Medicare premiums can jump by over $1,000/year. If you are married filing a joint tax return and both of you are on Medicare, $1 more in income can make the Medicare premiums jump by over $1,000/year for each of you.
* The last bracket on the far right isn’t displayed in the chart.
So if your income is near a bracket cutoff, see if you can manage to keep it down and make it stay in a lower bracket. Using the income from two years ago makes it more difficult to manage.
2024 IRMAA Brackets
The income on your 2022 IRS tax return (filed in 2023) determines the IRMAA you pay in 2024.
Part B Premium | 2024 Coverage (2022 Income) |
---|---|
Standard | Single: <= $103,000 Married Filing Jointly: <= $206,000 Married Filing Separately <= $103,000 |
1.4x Standard | Single: <= $129,000 Married Filing Jointly: <= $258,000 |
2.0x Standard | Single: <= $161,000 Married Filing Jointly: <= $322,000 |
2.6x Standard | Single: <= $193,000 Married Filing Jointly: <= $386,000 |
3.2x Standard | Single: < $500,000 Married Filing Jointly: < $750,000 Married Filing Separately < $397,000 |
3.4x Standard | Single: >= $500,000 Married Filing Jointly: >= $750,000 Married Filing Separately >= $397,000 |
Source: Medicare Costs, Medicare.gov
The standard Part B premium is $174.70 in 2024. Higher-income Medicare beneficiaries also pay a surcharge for Part D. The income brackets are the same. The Part D IRMAA surcharges are relatively smaller in dollars.
I also have the tax brackets for 2024. Please read 2024 Tax Brackets, Standard Deduction, Capital Gains, etc. if you’re interested.
2025 IRMAA Brackets
We have six data points out of 12 right now for the IRMAA brackets in 2025 (based on 2023 income). However, you can make some preliminary estimates and give yourself some margin to stay clear of the cutoff points.
If annualized inflation from March 2024 through August 2024 is 0% (prices staying flat at the latest level) or 3% (approximately a 0.25% increase every month), these will be the 2025 numbers:
Part B Premium | 2025 Coverage (2023 Income) 0% Inflation | 2025 Coverage (2023 Income) 3% Inflation |
---|---|---|
Standard | Single: <= $105,000 Married Filing Jointly: <= $210,000 Married Filing Separately <= $105,000 | Single: <= $106,000 Married Filing Jointly: <= $212,000 Married Filing Separately <= $106,000 |
1.4x Standard | Single: <= $133,000 Married Filing Jointly: <= $266,000 | Single: <= $133,000 Married Filing Jointly: <= $266,000 |
2.0x Standard | Single: <= $166,000 Married Filing Jointly: <= $332,000 | Single: <= $166,000 Married Filing Jointly: <= $332,000 |
2.6x Standard | Single: <= $198,000 Married Filing Jointly: <= $396,000 | Single: <= $199,000 Married Filing Jointly: <= $398,000 |
3.2x Standard | Single: < $500,000 Married Filing Jointly: < $750,000 Married Filing Separately < $395,000 | Single: < $500,000 Married Filing Jointly: < $750,000 Married Filing Separately < $394,000 |
3.4x Standard | Single: >= $500,000 Married Filing Jointly: >= $750,000 Married Filing Separately >= $395,000 | Single: >= $500,000 Married Filing Jointly: >= $750,000 Married Filing Separately >= $394,000 |
Because the formula compares the average of 12 monthly CPI numbers over the average of 12 monthly CPI numbers in a base period, even if prices stay the same in the following months, the average of the next 12 months will still be higher than the average in the previous 12 months.
To use exaggerated numbers, suppose gas prices went up from $3/gallon to $3.50/gallon over the last 12 months. The average gas price in the last 12 numbers was maybe $3.20/gallon. When gas price inflation becomes 0%, it means it stays at the current price of $3.50/gallon. The average for the next 12 months is $3.50/gallon. Brackets based on an average gas price of $3.50/gallon in the next 12 months will be higher than brackets based on an average gas price of $3.20/gallon in the previous 12 months.
If you really want to get into the weeds of the methodology for these calculations, please read this reply on comment page 2 and this other comment on page 4.
2026 IRMAA Brackets
We have no data right now for the IRMAA brackets in 2026 (based on 2024 income). We can only make some preliminary estimates and plan for some margin to stay clear of the cutoff points.
If annualized inflation from March 2024 through August 2025 is 0% (prices staying flat at the latest level) or 3% (approximately a 0.25% increase every month), these will be the 2026 numbers:
Part B Premium | 2026 Coverage (2024 Income) 0% Inflation | 2026 Coverage (2024 Income) 3% Inflation |
---|---|---|
Standard | Single: <= $106,000 Married Filing Jointly: <= $212,000 Married Filing Separately <= $106,000 | Single: <= $109,000 Married Filing Jointly: <= $218,000 Married Filing Separately <= $109,000 |
1.4x Standard | Single: <= $133,000 Married Filing Jointly: <= $266,000 | Single: <= $137,000 Married Filing Jointly: <= $274,000 |
2.0x Standard | Single: <= $166,000 Married Filing Jointly: <= $332,000 | Single: <= $171,000 Married Filing Jointly: <= $342,000 |
2.6x Standard | Single: <= $199,000 Married Filing Jointly: <= $398,000 | Single: <= $205,000 Married Filing Jointly: <= $410,000 |
3.2x Standard | Single: < $500,000 Married Filing Jointly: < $750,000 Married Filing Separately < $394,000 | Single: < $500,000 Married Filing Jointly: < $750,000 Married Filing Separately < $391,000 |
3.4x Standard | Single: >= $500,000 Married Filing Jointly: >= $750,000 Married Filing Separately >= $394,000 | Single: >= $500,000 Married Filing Jointly: >= $750,000 Married Filing Separately >= $391,000 |
Roth Conversion Tools
When you manage your income by doing Roth conversions, you must watch your MAGI carefully to avoid accidentally crossing one of these IRMAA thresholds by a small amount and triggering higher Medicare premiums.
I use two tools to help with calculating how much to convert to Roth. I wrote about these tools in Roth Conversion with Social Security and Medicare IRMAA and Roth Conversion with TurboTax What-If Worksheet.
Nickel and Dime
The standard Medicare Part B premium is $174.70/month in 2024. A 40% surcharge on the Medicare Part B premium is about $840/year per person or about $1,700/year for a married couple both on Medicare.
In the grand scheme, when a couple on Medicare has over $206,000 in income, they’re already paying a large amount in taxes. Does making them pay another $1,700 make that much difference? It’s less than 1% of their income but nickel-and-diming just makes people mad. People caught by surprise when their income crosses over to a higher bracket by just a small amount are angry at the government. Rolling it all into the income tax would be much more effective.
Oh well, if you are on Medicare, watch your income and don’t accidentally cross a line for IRMAA.
IRMAA Appeal
If your income two years ago was higher because you were working at that time and now your income is significantly lower because you retired (“work reduction” or “work stoppage”), you can appeal the IRMAA initial determination. The “life-changing events” that make you eligible for an appeal include:
- Death of spouse
- Marriage
- Divorce or annulment
- Work reduction
- Work stoppage
- Loss of income from income producing property
- Loss or reduction of certain kinds of pension income
You file an appeal with the Social Security Administration by filling out the form SSA-44 to show that although your income was higher two years ago, you had a reduction in income now due to one of the life-changing events above. For more information on the appeal, see Medicare Part B Premium Appeals.
Not Penalized For Life
If your income two years ago was higher and you don’t have a life-changing event that makes you qualify for an appeal, you will pay the higher Medicare premiums for one year. IRMAA is re-evaluated every year as your income changes. If your higher income two years ago was due to a one-time event, such as realizing capital gains or taking a large withdrawal from your IRA, when your income comes down in the following year, your IRMAA will also come down automatically. It’s not the end of the world to pay IRMAA for one year.
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James M says
December 2023 CPI Indexes
The governments numbers for CPI indexes can be found here: https://www.bls.gov/news.release/cpi.t01.htm
The government reports 12/22 = 296.797, 11/23 is 307.051 and 12/23 is 306.746 which calculates to 3.4% for 12/22 to 12/23 and -0.1% for 11/23 to 12/23.
Yet the press reported the number as 3.4% for 12/22 to 12/23 and 0.3% for 11/23 to 12/23.
What am I missing with respect to the 11/23 to 12/23 percentages. Government says inflation went down -0.1% but the press reported it went up 0.3%
Harry Sit says
Trust the government, not the press. The 0.3% number reported in the press is a seasonally-adjusted number, which isn’t useful for the purpose of IRMAA.
Jeff Enders says
see the first line, right most column.
https://www.bls.gov/news.release/cpi.t01.htm
Paul G says
For the 2025 Standard Premium, why is there no difference in the 2023 income levels between the 0% and 3% inflation numbers?
Jeff Enders says
it has to do with the rounding requirements.
for Single filing:
Without rounding, the 0% forecast limit would be $104,660, which rounds to $105,000
Without rounding, the 3% forecast limit would be $105,448, which rounds to $105,000.
Joint is simply double SIngle (Single is rounded first then double to get to the Joint limits)
the two forecasts do converge over the 12 months and since Harry began with only 3% inflation on the high end, they can converge quite quickly, given the rounding requirements.
(some may come up with slighly different unrounded results, but the jist is the same)
nicolaas rykhoff says
Harry, thank you for doing this .. splendid updates, and prompt!
One thing I don’t get, and I know you mention 12 months of averages vs the next 12 months averages. But showing the 2025 column 3% average, how can your Nov/Dec/Jan #’s drop from 200/199/198. Why aren’t they fixed at 200 ? (but my calc gets 204.7, see below)
( if 2023 was 193, so 3% is 199 rounded for 2024, and a further 3% would be 204.7 in 2025.)
No ?
Harry Sit says
CPI has gone down in recent months. The 0% and 3% projections are based on the latest number. When the latest number is lower, the projected numbers for all future months are also lower, which brings down the average. If you’re referring to the 2.6x standard bracket for single, you’re off by one year. It’s $193,000 in 2024, not 2023.
Gene Lawson says
Thank you so much for this informative and understandable article. Just finished doing my 2023 taxes and inadvertantly went over the IRMAA limit as you predict for 2025 putting me in the 1.4 penalty zone, but like you say, it really isn’t all that much. My calculations, which included a Roth Conversion, for my predicted IRMAA-MAGI for 2023 were fatally flawed due to operator error, won’t make those mistakes again.
Ed Fogle says
“It isn’t really all that much money”. Perspective. It’s a lot to me..
Ros says
This site is amazing it allows me to manipulate my interest income and Roth conversions to stay below the lowest mark for single. My children are in or near their 60’s and I want them to inherit the IRA’s etc with no income tax on them when they retire or pay a higher medicare premium because of anything they inherit from me. That 10 year rule is not good for them. At least I am happy that I disclaimed my husband’s IRA’s in 2012 and the children have the rest of their lives to take their RMD’s. I have about 1/2 of my mother’s IRA left and she passed in 2006.
I share this site with all my friends, though few convert to Roths.
JP says
I will be 65 in 2025. I had high income in 2023 and 2024 but due to layoffs in January 2024, there is a chance I will retire. If I do; can I file for appeal at the first time I sign for Medicare in 2025, to prevent IRMAA?
John J Sullivan says
yes,
see https://www.ssa.gov/medicare/lower-irmaa
for instructions, but recent retirement is one of the acceptable reasons for an IRMMA adjustment exemption.
jack allen says
For any given tax year when is the official IRMAA tax bracket information announced for that given tax year?
As an example…….
I am currently trying to do 2024 tax planning and income adjustments to avoid an IRMAA medicare Part B surcharge in 2026. What is the best strategy for keeping my income within the unknown IRMAA income brackets? Is this Mission Impossible?
Thank you for your help. I look forward to clarification from anyone.
Jeff Enders says
Jack – the best strategy is to follow the forecasts that Harry describes at the top of this website. IRMAA will adjust by inflation.
The dilemma is that while your AGI for 2023 was “locked in” on December 31, 2023, the IRMAA tranches for 2025 are not “locked in” until Sept, 2024.
Likewise, your 2024 AGI will be “locked in” on December 31, 2024, but the IRMAA tranches for 2026 will not be”locked in” until September, 2025. Look at Harry’s forecast above using a 0% inflation rate and a 3% inflation rate. That will guide you.
jack allen says
Jeff-Thank you for the information and quick response. I will monitor IRMAA projections on the website as you suggested.
Zachary says
This site has proven extremely useful over the last several years in staying out of IRMAA territory for my wife (I am currently 62). I’ve also managed to keep us in the 22% income tax bracket (my refund was $16 this year, so I know my planning is sound). Given that the current historically low tax brackets are set to expire in two years absent congressional action, I am inclined to make as large a Roth conversion as I can this year this year and “eat” the first IRMAA bracket for 2026, while also bumping into the 24% bracket, and depending on the political winds at the end of this year, repeat the process next year and “eat” my own IRMAA bracket when I turn 65 in 2027. Thoughts from the peanut gallery on this approach?
GeezerGeek says
I hope that is a sound strategy because it is what I’ve done the previous two years and plan to do again this year. Next year, I’ll have to start RMDs so I will have to include that in my future plans.
I’ve been doing partial Roth conversions for more than 10 years, primarily to reduce RMDs. When I started doing that, I only did a conversion up to the top of my tax bracket but after the 2017 Tax Cuts and Jobs Act, I started taking Roth conversions to the start of the IRMAA bracket, thus moving into a higher tax bracket but avoiding an IRMAA penalty. However, in 2022, I decided to do a Roth conversion up to the top of the first IRMAA bracket, incurring a 40% IRMAA penalty on future Part B payments and an additional Part D penalty of an unknown, but smaller magnitude. I did the math, assuming that the future IRMAA penalty would be the same amount as the current penalty, and the IRMAA penalty caused about a 4% additional tax on the incremental income above the bracket, provided that the incremental income was all the way up to the bottom of the bracket. That may sound like a wash to most folks but as Powell said “In the long run, the U.S. is on an unsustainable fiscal path.” I expect that tax rates for folks at my income level will increase in the future and will be higher than they were before the 2017 Tax Cuts and Jobs Act.
Jeff Enders says
Zachary – things to think about
1) do you think will consume your entire TRAD IRA in your lifetime? meaning will your rollover strategy plus the money you may need to live on come from the TRAD IRA over your life leaving very little remaining in the TRAD IRA when you pass. If so, sounds like you have a great plan. And I agree that best to be aggressive in 2024 and 2025 as it may be cheaper to pay IRMAA than pay whatever additional tax increases come in 2026.
2) but if you don’t think you will consume your entire TRAD IRA in your lifetime, what is your plan for the rest of the money? if you are going to leave it to your children, they are likely to inherit it in their high income earning years and only have 10 years to distribute it. It may turn out that their tax bracket when they are forced to distribute it is even higher than your tax bracket plus IRMAA. (IRMAA to me is just additional income tax paid via Medicare). And if you leave more for them in a ROTH IRA (which means being more aggressive with rollovers during your life time), then they get 10 years of tax free appreciation / earning on that money. Something to think about
jimdog says
Zachary,
I believe your approach all depends on high big your tax deferred acct. is and how much taxable income you have. If your IRA is under 750M you likely do not need to convert that much over the next two years. However, if you’re lucky to have several million in a taxable IRA, that sounds like a plan.
Hans Heijmans says
Very useful site. I wonder if a typo has slipped in. Some of the amounts in the 2025 and 2026 coverage columns under the 3% inflation assumption are smaller than the corresponding amounts under the 0% inflation assumption.
Harry Sit says
For married filing separately? That’s just how it works. See this previous reply for the explanation.
https://thefinancebuff.com/medicare-irmaa-income-brackets.html/comment-page-8#comment-32775
Hans Heijmans says
Thank you Harry. Still bizarre that it works like that.
Teresa Durden says
Love the comments. I’m doing the same thing over the next few years. Converting a 403b to a traditional IRA to a Roth IRA. Having to pay the next level IRMAA fees. However, with the Roth interest being tax free, this is the way to go, before I have to take RMDs in 4 yrs. And if money left over when I die, my spouse or kids will get money tax free.
FrustratedbyIRMAA says
My wife and I are each 71, living in NYC, both retired fed CSRS employees. Unfortunately, we were a little slow to become aware of IRMAA and higher medicare premiums. We are Fidelity customers. We met with one of their financial advisors asking for any further advice to avoid IRMAA. He did not think a G fund conversion to a Roth was worth it at this point. Last year, due to inflation, we had a lot of taxable interest from regular taxable bank MM funds, which raised our IRMAA. The fidelity adviser recommends we take a large chunk of the bank MM funds and place the proceeds into a deferred annuity. It pays about 4.9 percent for either 3 or 4 years and then goes down to 3 percent. He thought it was wise as the interest is not taxable nor does it add to MAGI on tax return (AS LONG as you don’t ask for withdrawals). It allows only 10 percent withdrawals in each of the first 3 years, After 3 years you can withdraw any amount which is taxable and raises IRMA. The annuity would end when we were 90 if we were still here. I would love to hear from others, in a similar situation who learned the best way to adapt to IRMA. Our RMDS will start in 2025 when we reach age 73. It is hard to adapt to IRMA as the RMDS in the G fund will rise each year. At the end of each year, we have been taking an additional G fund distribution that would keep us from going into the next IRMA bracket. We would love to hear any constructive advice. Thanks
Harry Sit says
I don’t like the deferred annuity idea either. I would consider the NY muni money market fund instead of the taxable money market fund. The tax-free interest still counts toward the MAGI for IRMAA but the yield is lower because it’s tax-free. Suppose you’re getting $5,000 interest from a taxable money market fund and the tax-free money market fund only pays $3,000, you’re getting $3,000 added to MAGI as opposed to $5,000. See Which Fidelity Money Market Fund Is the Best at Your Tax Rates.
jimdog says
Conversions are worth it only if you feel your taxes will be higher in the future than they are today. Taxes will indeed be higher since starting in 2026, all tax brackets jump about 3-4 percent! I’ve been converting my large IRA since I don’t won’t to pay 3% higher taxes. It’s likley a good time for you to convert if your deferred accts are greater than $750,000 and you are not working and not taking RMDs. I don’t think the Fidelity advice was that great. Also, the IRMMA surcharge is adjusted year to year so it’s not a permanent hit. I’m convinced due to higher rates ahead you likely pay lower taxes in the long run by doing some conversions now before RMDs hit.
Jeff Enders says
I will take Jimdog’s post one step further.: Conversions are only worth it if you DON’T believe you can spend / QCD your entire TRAD IRA is your lifetime. if your TRAD IRA is large enough that you can’t spend it all, then attempting to avoid IRMAA or INCOME TAX is a TERRIBLE strategy. Why? because you are letting the TRAD IRA grow which means more money is subject to tax down the road (and income tax rates could be higher on top of that). As you age the amount you must distribute annually continues to increase (figure 4% at age 73 but around 10% at age 90). And then if your children inherit what remains of the TRAD IRA, it is likely they will pay even more in taxes than you would in your remaining lifetime as they are likely to inherit during their high income earning years and then only have 10 years to liquidate the entire TRAD IRA. So any strategy to DEFER taxes further, including avoiding IRMAA and distributing just the required minimum each year related to TRAD IRAs (as taxed can not be AVOIDED can be “fools gold”.
Mike says
Following on to Jim Ender’s comment. I trade in my accounts. A lot. I trade in my Roth’s and in my TIRA’s. I have had years where after I took my RMD my IRA’s, mine and my wife’s, were bigger the following year than the prior year even with the RMD’s because my trading profits exceeded my RMD’s PLUS my Roth conversion amounts. I was losing the war. The question became do I stop trading, or even move to 100% cash, to avoid paying more taxes by allowing the IRA to go to zero. Even going to cash, which means no growth when the market goes up, isn’t perfect because I still get interest on the MM Fidelity keeps cash in. My conclusion was that even if I could never spend it all before we both died I didn’t want to stop something I enjoyed, wanted to be absolutely sure that no unforeseen incident or need cropped up, and I had the money to pay the taxes. We have no children to pass it on to and our wills pass everything to charities. So I stopped Roth conversions. And though I may rail at the IIRMA concept and growth I have less wasted effort to avoid the inevitable rise in taxes.
FrustratedbyIRMAA says
Thank you all for your constructive advice. Jimdog, you said it would not be worth a TSP to IRA to Roth conversion unless the TSP balance was greater than 750K. Our balance is approx. 600K. The fidelity advisor also felt it was not worth a conversion. So far this is how we approached the TSP withdrawals considering IRMAA: In 2022 we each withdrew about 16K to be within 5K of Harry’s basic IRMAA threshold and as a result we have standard Medicare premiums in 2024. Thank you, Harry! However, in 2023, due to high inflation, the 60K we made in bank-taxable MM, plus our CSRS pensions bumped up us up to around 230 K (to the 1.4 IRMAA level). We withdrew about 15k each from each TSP to keep within the top tier of the 1.4 level. As a result, we reduced the total balance in our TSPs, reducing future RMDs (which start at age 73 in 2025). We will have to each pay higher Medicare premiums at the 1.4 IRMAA tier in 2025. I think the biggest cause of future IRMAA will be rising RMDS from the TSP. We can mitigate that by placing our taxable MM into the Fidelity NY Municipal MM fund per Harry’s recommendation but to be certain we have no IRMAA, to reduce the odds of going into higher RMDS at the TSP, and to consider the effect of a very significant tax increases in 2026 unless Congress reverses them, I think the best approach is to each move 100K to a Fidelity IRA and then to our Fidelity Roths. Here is Harry’s predicted IRMA bracket for 2026 based on 2024 income.
1.4x Standard Single: <= $133,000
Married Filing Jointly: <= $266,000 Single: <= $137,000
Married Filing Jointly: <= $274,000
2.0x Standard Single: <= $166,000
Married Filing Jointly: <= $332,000 Single: <= $171,000
Married Filing Jointly: <= $342,000
Here is the tax table for 2024 vs 2026:
2024 2026 2024 Brackets* 2026 Brackets** 2024 Brackets* 2026 Brackets**
10% 10% $0-$11,600 No change $0-$23,200* No change
12% 15% $11,601-$47,150 No change $23,201-$94,300 No change
22% 25% $47,151-$100,525 $47,151-$114,200 $94,301-$201,050 $94,301-$190,325
24% 28% $100,526-$191,950 $114,201-$238,250 $201,051-$383,900 $190,326-$290,050
32% 33% $191,051-$243,725 $238,251-$517,875 $383,901-$487,450 $290,051-$517,875
I think it would be wise to withdraw 100K from each TSP to Fidelity IRAs and then to Fidelity Roths. We would have double Medicare premiums in 2026, but afterward, I don’t think we will have to worry about IRMAA, and the Roths can grow tax-free, and less preoccupation about this entire topic. I don't want to convert more as that would place us in a higher tax bracket What are your thoughts? Does this make sense? Jimdog, since you said it was not worth converting unless your IRA was greater than 750K would it be worth partial conversions of 100 K for each of us, since our balance of 600K is below your threshold?
Jeff Enders says
Frustrated by IRMAA: Please read my comment above. With a large TRAD IRA that is not expected to be distributed in your lifetime, is attempting to avoid IRMAA the tail wagging the dog? The primary strategy should be to reduce the size of the TRAD IRA before it grows and grows, which is what can otherwise occur with a good investment strategy. If the investment strategy results in 7% annual growth, then RMD will not require a 7% distribution until you are 88 years old! Meaning, the trad IRA and hence “the problem” just gets bigger and bigger! and if you are leaving your TRAD IRA to your children, you have passed on this tax liability to them and it can be even worse for them if they inherit in their high earning years, resulting in a higher tax rate than you are experiencing today. IRMAA only adds up to 2%-3% to the overall tax rate. Recommendation: if you have a large Trad IRA, don’t focus on IRMAA, focus on how to convert dollars to a Roth. (p.s. in the “worst case scenario, convert 100% of the Trad to Roth now, and for many IRMAA will never surface again – not recommending this, but just making the point).
Terry says
I don’t understand why $750,000 balance or any specific balance for that matter only makes it worthwhile to do a Roth IRA conversion. I am 74 and did some much smaller conversions than that before I reached Medicare age. Doing so allowed me to have lower RMD’s than I otherwise would have plus any earnings are tax free rather than just tax deferred — not only for me but for my heirs. I wish now that I had done more conversions back then and had not worried so much about moving into a higher tax bracket. The higher tax bracket only affects the income over the bracket level.
RobI says
Jimdog and others. I appreciate all your thoughtful ideas here. I now wonder if there is limit on how much you’d choose to convert in a SINGLE YEAR to prepay taxes in anticipation of future higher tax rates?
Taken to extremes, how high an IRMAA or Tax band would you choose when in converting large retirement accounts to Roth in order to cut future Trad IRA/401k RMD growth? Would you max out marginal income tax to 32% (or even 35%?) and IRMAA to the x3.4 level in years 2024/2025?
(Also worth noting it’s not just tax rates going back up in 2026, but the prior steeper income tax bracket steps above 28% in in the pre 2017 tax code that may hit us hard).
FrustratedbyIRMAA says
Hi jimdog, Thanks again for your very helpful recommendations. I will attempt to summarize your recommendations and Harry’s, to see if my understanding is on target with yours. I believe Harry, based on his earlier remarks to me, recommends transferring our FDIC-insured MM fund assets should be transferred to Fidelity® New York Municipal Money Market Fund – Premium Class. Harry like you is not a fan of deferred annuities. I am a little concerned that putting all this in one non-FDIC MM fund is secure enough, but I think Harry’s advice is very sound. Jimdog, I believe you recommended converting our traditional TSP G fund into our individual Fidelity Roths. The TSP complicates that transfer in that we would first have to roll over our TSP traditional accounts to Fidelity IRAs Then we could transfer the proceeds to individual Fidelity Roths. We already have Fedelty Roths that include the Fidelity Contra Fund and Small Cap Growth fund. I wish to clarify we will attain age 73 in 2025 so if I am correct the RMDS will start in 2025 (probably in April 2025 but I think we should start them earlier in 1/2025 for simplicity) Am I correct? If I am I don’t have much time to make this conversion. Since our TSP funds are approx 300 K each I thought, a 100K transfer would be sensible for each of us for 2024. We could make another transfer in 2025 but I am not sure if doing so in the middle of RMDS starting is smart or not. As of 2036 with much higher taxes likely I think our best option is to avoid transfers in 20236 and try to make them in 2024 and 2025 (if possible in 2025 during RMD distributions. I’m angry at myself for not starting this earlier. I guess my excuse is that the low-interest rates before 2023 kept my eyes off the ball. In any case, I am trying to rectify the situation now, and it is a lot harder than I realized. The fidelity advisor did not recommend the conversions as he felt the TSP treasury G fund is extremely secure with no risk to the principal and he thinks interest rates will soon drop. Even though the G fund is currently relatively high at approx 1.5 percent, he thinks it will drop, and if it does down to let’s say 2 or 2.5 percent then the RMDS would be lower and there would not be the need to make the conversion. In my mind, I don’t think I can count on those rates dropping and it would be sensible to at least make the conversion on about 100k each for my wife and myself and maybe do the same next year if possible during RMDS. While the deferred annuity has no RMDS, the fact I would lose nearly all control of such an investment vehicle and would just add more delayed income that would add more taxable income to a later required withdrawal date makes it a scary choice that I am not comfortable with either. I think it is too based on short-term thinking. Thanks again for your support. FrustratedbyIRMAA
LizaBBBB says
Can get better rates on annuities, if you really want to do.
Jeff Enders says
ROBL – because it is becoming very evident that taxes “remain on sale” for 2024 and 2025, I’ve rationalized myself to the top of the 32% tax bracket and let the IRMAA fall where it may (it adds 2.5% to the tax rate). IRMAA is the tail to this dog. If I can convert my Trad IRA to a ROTH (with some help from QCDs) over the next 8-10 years, I won’t have IRMAA to worry about after that (as Trad IRA balance will be zero) – either my income will be much lower or I am dead! Also, my kids won’t have to pay even higher taxes when the inherit what is left. I am being more aggressive each day I think about this dilemma, fearing Congress will be forced to raise taxes due to budget deficits or they are so evenly divided they will simply permit the 2017 tax cuts to expire. “RMD” is no longer in my vocabulary as my plan is to convert at much higher rates than RMD.
Gary says
Jeff, I find that the answer to Roth Conversions seems to vary for everyone. Not necessarily because their math differs, but because we all seem to have a different objective in mind. Some are minimizing taxes, some are avoiding IRMAA’s, some have inheritance as their main priority.
For us, we start out projecting our net worth over time to age 100, trying different Roth conversion strategies. We include spending, investment returns, taxes, IRMAAs, etc. We are age 71 right now and our optimal Roth conversions produce lower net worth thru age 85 when the tax free investment returns begin to produce increasing net worth values.
While this optimization produces marginal improvements, the real reason we continue to push our conversions is twofold. 1) USA looks like it will need higher tax rates in near future and 2) A surviving spouse will benefit from avoiding their single tax rates as much as possible. So conversions now are kind of like an insurance policy against future contingencies.
Hope this helps!
The Wizard says
jimdog is partly correct on the tax rate arbitrage issue for Roth conversions. But there are additional considerations.
Doing Roth conversions up close to the top of your current IRMAA tier helps lower your RMDs in future years and keep you from going into the next higher IRMAA tier.
Having a good sized Roth IRA gives you flexibility when buying a new car or similar. You don’t necessarily need to incur higher taxable income for the year.
Married couples often like Roth conversions so that eventual surviving spouse won’t be paying way higher taxes…
jimdog says
Frustrated by IRMAA: I too am generally against annuities because of the high fees and loss of flexibility. When I said I didn’t think it was worth it to convert to a Roth if your balance was under 750M, I was assuming you had a more normal taxable balance and smaller level of income. Based on your latest reply, indicating you high taxable income balance, it definitely makes sense to start conversions, before your RMDs and future IRMMA levels kick in. You’re really in the sweet spot for the next several years, if not working, to do those conversions before the RMDs start. Converting up to your highest tax bracket and/or IRMMA level is the way to go to reduce that IRA and have lower taxes in the future. Also, since you have a high balance of MM funds available, pay as much conversion tax directly to the IRS and don’t hold it out of your conversion. That way, you get a much bigger Roth conversion amount. Everybody’s situation is a little different based on income and IRA balances. Good luck
The Wizard says
Roth converting at a higher rate than current or past year sounds like a noble exercise, but it is not.
You could die this year, then what?
So stay the course and just convert enough to levelize your AGI.
Thank me later…
The Wizard says
Also, there’s nothing wrong with paying a little IRMAA to help subsidize poor people; lots of we wealthy retirees pay it to some level.
I’d like to be in the highest IRMAA tier forever (AGI > $500K filing Single) but that’s not gonna happen.
🙁
So anyway…
Terry Koch says
There’s also nothing wrong with trying to save on your taxes.
Ed Fogle says
I already paid a heavy subsidy for Medicare while working. Most anyone possibly subject to IRMAA did as well. It’s a double whammy and extremely unfair.
The Wizard says
Absolutely!
I always strive to pay minimum income taxes, averaged over a few years…
The Wizard says
Extremely unfair?
I’m pretty sure that the basic cost of Medicare doesn’t come anywhere close to paying 100% of what the average cost of healthcare for Old People comes to.
If you’re happy to keep yourself on welfare for low income people, that’s fine.
I’m happy to be paying a healthier percentage of my true healthcare costs.
I’m just glad I’m a wealthy bastard, basically…
The Wizard says
An important point for younger folks who haven’t retired yet is that you need to view your tax-deferred tIRA and 401(k) for what they are: Deferred Compensation, NOT wealth accumulation.
As such, you REALLY want to begin withdrawing some of that deferred compensation in starting the first year of your retirement. In the years prior to your age 73 or 75, those withdrawals can be some combination of money to spend and Roth conversions.
Once you begin RMDs at 73 or 75, those withdrawals will have to go into a taxable account until you complete your RMD for the year.
With proper planning, including QCDs after age 70.5, you can “levelize” your AGI, meaning annual increases of maybe 3% per year, thus staying in roughly the same tax bracket and IRMAA tier indefinitely…
Mike says
Well said. If I had known when I wasn’t yet 65 what I know now, and I am 83, I would have put my money in Roth’s only. But wanting to live a good life I wanted to put as much as I could in any savings and growth vehicle. That is how we get to this point. But now that we’re here the trick is to make the most of the good position we are in. Can you imagine a billionaire, or multi-millionaire, fretting about paying IIRMA? Spending even one minute trying to figure out how to avoid paying 40% or 60% more on Medicare premiums? My view now, since I doubt I will ever have a year where my IRA gets to zero, or even goes down below last year (granted if the market crashes 30% as it has my IRA will go down, but it will be back up a year later, two at most), it’s a losing battle, I’m fortunate, and I’ve got other things to do in the short time Ive got left on earth. This is the kind of thing you need to address when you are 40 and not 60.
Teresa Durden says
In response to Mike’s comment, you can always have your RMD from your financial institution sent to a charity. We give money to our church, so next year we will start having the IRA financial institution send a check and donate pretax dollars to the church. That way, we don’t pay taxes on that money and don’t count it as income. Win, win. Of course, you can’t count it on your taxes as a gift, but we’re not worried about that.
The Wizard says
That’s what’s called a Qualified Charitable Distribution (QCD) Teresa.
I’ve just started doing them myself.
QCDs count toward your RMD if you have one but aren’t included in your AGI. And of course you can’t deduct them on Schedule A, that would be double counting…
Mike says
That’s true, but I live on my RMD and add to it from withdrawals from my Roth.
jimdog says
Based on your age, the amount of your trad. IRA and you taxable income, I would not convert higher than the 24% bracket. Likely converting to the top of the 22% bracket and taking IRRMA brackets into consideration, you will be fine. Do this over the next 5-7 years and you will be in good shape. You can over do it on conversions, so don’t fall into that trap.
Rosemary says
Mike,
I am 80 and was not offered the Roth until 1998. 2012 was the first I could convert to a Roth. I am still doing it as much as I can with out raising
my Medicare premium. My husband passed in 2012 and I disclaimed all of his traditional IRA’s that I have funded for him since 1978. One of the smartest things I could have done. The children are now in their 60’s and can also use it for their retirement and take out more if they choose or continue to take the RMD’s until they die. When I pass they will have mine if any left and a lot in the Roth from my husband’s and my Roths but have to spend it in 10 years but it will not count for IRMA. I have funded the IRA’s yearly for both of us until I had to retire in 2008 to care for him. Only had 10 years in the Roth. My husband was put on 100% disability in 1995 but I continued with the spousal IRA.
I have signed papers for the kids to convert everything if there is any traditional IRA left if I am in hospice and mail it before I die and my medicare premium will not go up. I have enough to pay the taxes on it. It is their choice. My oldest is a doctor and my youngest works in finance as I did. Best of both worlds for me. The bad thing is that interest rates are so high on my savings that I could not convert any last year and probably won’t be able to this year without paying more in Medicare. I gift to them each year and purchase I bonds to keep income down. I am 100% in CD’s and cannot sleep when I was in the market in the late 90’s when making 20-30 and 40% in mutual funds. Balance sheets were not any better and it was all momentum buying. I got out with 8-9-and 10% CD’s and went out as long as I could and still do that. I do not have the income that many of the readers in the blog have but we built a new home in 2010, and bought everything new and I have everything I could ever want, and do everything I would like to do. I am sure that with all of the information given you have a lot to think through but you can’t make a good choice without good information .