IRMAA not worth getting excited over unless LARGE IRA

[CoachKandSportsguy]

My financial expertise is in building models for future decision making about whatever the topic is, doesn't matter, there are thousands of financial decision topics.

So, since I (Sportsguy) am now retired and my wife (CoachK) is still working but will retire next year, I have built out the retirement model even further to include medical insurance premiums and Roth Conversions to understand when to take Social Security and what is the status of our IRA savings and investment savings to weather the future expenses in TV, for taxes and a cash flow statement to see when additional withdrawals may be required. (I have not factored in the latest increase in AUTO insurance premiums :eek:)

After researching IRMAA, a hot topic du jour for some, I modeled out a married couple, with both at current max social security, again maybe us :shrug:, with IRAS with RMDs, as everyone has. With the model being dynamic, the starting point is we are both 65 at the end of this year, start taking Social security on Jan 2025, when I qualify for full retirement benefits for both. At that time, i am assuming 5 k in additional taxable income above SS from any other sources, investments, part time work, etc.

Using inflation and other annual increasing assumptions (IRMAA threshold increased at nearly 6 % and Social security increased at 4%+ for CY24) and market returns for investments are 6% out for 20 years, the effect of RMDS can be seen in AGI and in taxes and tax brackets.

By entering an CY22 ending IRA balance as a total for a married couple, here is the age and year we would have to pay IRMAA penalties based upon current RMD percentages, based on max SS, RMD and taxable income year by year

Conclusion: Its not worth ROTH conversions and paying taxes now to save future IRMAA penalties in the future for married couples with IRAs less than $3,000,000

certainly its a non issue for us, and i suspect many others.

I am more than willing to share the workbook after I detail out the IRMAA penalties by taxable income bracket, I just used the max penalty in the example, and since its per person for a couple, it gets a bit detailed to calculate out which person in a couple, so i just doubled the per person penalty. . (may need to research the married couple scenario a bit as well), however, i am still looking for a CFP willing to review it for reasonableness. There are a few financial types here who can PM me to discuss validation of formulas, but not assumptions)

[manaboutown]

Some of us are stuck paying confiscatory IRMAA Medicare premium surcharges no matter what we do or don't do short of giving most of our hard savings and investments to charity,.

[blueash]

Some of us are stuck paying confiscatory IRMAA Medicare premium surcharges no matter what we do or don't do short of giving most of our hard savings and investments to charity,.

Confiscatory? You are making so much money on your money that you are required to pay extra for government health insurance. Poor you. So much confiscation going on. Maybe they should rework the medicare premiums so the super rich get a better break and the average retiree pays more to make up the difference. Let them eat cake comes to mind.

[Stu from NYC]

Confiscatory? You are making so much money on your money that you are required to pay extra for government health insurance. Poor you. So much confiscation going on. Maybe they should rework the medicare premiums so the super rich get a better break and the average retiree pays more to make up the difference. Let them eat cake comes to mind.

So what percentage tax rate is our fair share. Govt is not exactly efficient in spending ⁸

[Caymus]

Confiscatory? You are making so much money on your money that you are required to pay extra for government health insurance. Poor you. So much confiscation going on. Maybe they should rework the medicare premiums so the super rich get a better break and the average retiree pays more to make up the difference. Let them eat cake comes to mind.


Are the "super rich" actually on Medicare? Don' t they use some sort of Concierge System?

[manaboutown]

To me it is like going into a McDonalds and buying a hamburger. If one is 'poor' he pays $5.00; if he is upper middle class he pays $50.00. Health insurance should cost the same for folks of similar age and health regardless of their income. Successful folks who usually started with little, worked hard, saved their money and invested wisely should not be forced to pay health insurance for profligate wastrels and deadbeats. That is socialism. Now if someone is or becomes disabled through no fault of their own then that is an entirely different matter. They need to be assisted.

[Boomer]

Sorry, guy, I do not nor will I ever like generic financial advice. Every situation is different.

This one is not just about IRAs. It could be about a large capital gain from a stock sale in a taxable account or a sale of a secondary residence or one not held for 2 years as the primary.

I am not a high net worth woman. I just happen to be an aware woman and if IRMAA is lurking around the corner, I think people should know they have a choice — if they want it — to give the amount that crosses the threshold to charity by using QCDs for some or all of the amount of the RMD.

As far as those sweet-spot conversions go, I remain a proponent of at least learning about what you might be able to do. A conversion could end up being money for yourself down the road, not just for your heirs. You might need it to pay for your own healthcare someday.


Like a previous poster here, I, too, am appalled at the “I got mine. Too bad ya don’t got yours” philosophy of those who cannot see that especially for those younger than us, there are many hard-working people who have been hit with obscene medical insurance and pharmaceutical costs, student loans that often look like usury lending, and ridiculous costs of housing.

And about that tax cut for high net worth taxpayers and corporations — well, how’s that working for us regular people now?

I am not into giveaways, but I am waaaaay into fairness — and I am worried that as a country, we could collapse under greed — and hate.

Ya know, sometimes it’s good to be old.

:boom:er

Oh my, I sure jumped the track on that one. Not mad at you, guy. Just plain mad right now.

[manaboutown]

So what percentage tax rate is our fair share. Govt is not exactly efficient in spending ⁸

Top Federal rate is now 37% + 3.8% NIIT = 41.8%. That ain't chicken feed. Moreover a substantial percentage of people pay no income tax whatsoever.

" In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax. In that same year, about 47.1 percent of U.S. households with an income between 40,000 and 50,000 U.S. dollars paid no individual income taxes."

From: Households paying no income tax by income level U.S. 2022 | Statista (https://www.statista.com/statistics/242138/percentages-of-us-households-that-pay-no-income-tax-by-income-level/)

[Stu from NYC]

Top Federal rate is now 37% + 3.8% NIIT = 41.8%. That ain't chicken feed. Moreover a substantial percentage of people pay no income tax whatsoever.

" In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax. In that same year, about 47.1 percent of U.S. households with an income between 40,000 and 50,000 U.S. dollars paid no individual income taxes."

From: Households paying no income tax by income level U.S. 2022 | Statista (https://www.statista.com/statistics/242138/percentages-of-us-households-that-pay-no-income-tax-by-income-level/)

More and more think we will spend the country into bankruptcy

[blueash]

To me it is like going into a McDonalds and buying a hamburger. If one is 'poor' he pays $5.00; if he is upper middle class he pays $50.00. Health insurance should cost the same for folks of similar age and health regardless of their income. Successful folks who usually started with little, worked hard, saved their money and invested wisely should not be forced to pay health insurance for profligate wastrels and deadbeats. That is socialism. Now if someone is or becomes disabled through no fault of their own then that is an entirely different matter. They need to be assisted.

You're not buying Medicare or don't you know that? If you were paying the cost your premium would be huge, not a few hundred a month. The people paying for your health insurance right now are the workers of the US. And they are paying your premiums for you because, well Socialism. See how you benefit when the government takes money from somebody and gives it to you?

But you with your portfolio and your bonds and your IRAs and your 401Ks which just make you money while you do nothing contribute to the GNP, you make so much from being rich that a little more gets asked of you so the workers who are actually paying your medical costs and the other people on Medicare put in a little less.

It is not McDonalds. It never has been. And now you want to base health insurance premiums on the health and age of the insured. Thank your lucky stars that ACA and Medicare did away with such things. Decency, do onto others, share your toys... Did you miss those lessons in basic humanity before you decided dollars are so golden??

[spinner1001]

This thread deviated quickly from the OP’s financial modeling post.

[GoRedSox!]

Top Federal rate is now 37% + 3.8% NIIT = 41.8%. That ain't chicken feed. Moreover a substantial percentage of people pay no income tax whatsoever.

" In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax. In that same year, about 47.1 percent of U.S. households with an income between 40,000 and 50,000 U.S. dollars paid no individual income taxes."

From: Households paying no income tax by income level U.S. 2022 | Statista (https://www.statista.com/statistics/242138/percentages-of-us-households-that-pay-no-income-tax-by-income-level/)It is not 37% on all your income, though, only the portion of your income over $693,750 for couples or over $578,125 for singles. And if your income is coming from qualified dividends, the top rate is 15% for that income unless you make over $553,851 for couples, or $492,301 for singles. Above that, your qualified dividends are still only taxed at 20% plus the aforementioned NIIT of 3.8% on the investment income for couples over $250,000. I just think it’s misleading to throw 41.8% out there, no one is actually paying that much across all their income.

[Rwirish]

This is spot on.

[spinner1001]

It is not 37% on all your income, though, only the portion of your income over $693,750 for couples or over $578,125 for singles. And if your income is coming from qualified dividends, the top rate is 15% for that income unless you make over $553,851 for couples, or $492,301 for singles. Above that, your qualified dividends are still only taxed at 20% plus the aforementioned NIIT of 3.8% on the investment income for couples over $250,000. I just think it’s misleading to throw 41.8% out there, no one is actually paying that much across all their income.

For people in the top 10% of adjusted gross income (AGI), the average US income tax rate for 2020 (latest available data) was 20.3% of AGI.

https://www.irs.gov/pub/irs-soi/20in41ts.xls

[TomPerry]

Boy, and I thought I was Anal-litical!!

[Eclas]

[QUOTE=blueash;2265854] You're not buying Medicare or don't you know that? If you were paying the cost your premium would be huge, not a few hundred a month. The people paying for your health insurance right now are the workers of the US. And they are paying your premiums for you because, well Socialism. See how you benefit when the government takes money from somebody and gives it to you?

Not true. I and everyone else has paid for their medicare thru your wages when working. I'm tired of hearing my social security and medicare are giveaways. I PAID for many years.
Now uncle sam likes to say they "give' us that. I call BS!

[dewilson58]

Not true. I and everyone else has paid for their medicare thru your wages when working. I'm tired of hearing my social security and medicare are giveaways. I PAID for many years.
Now uncle sam likes to say they "give' us that. I call BS!

Breath, Breath.....................that's not what Blue is talking about............Breath.

[Nevinator]

It is not 37% on all your income, though, only the portion of your income over $693,750 for couples or over $578,125 for singles. And if your income is coming from qualified dividends, the top rate is 15%.

CORRECT! We have a progressive tax system, and taxes are calculated by tiers. Most people are unaware of that. Good comment.

[Nevinator]

…the starting point is we are both 65 at the end of this year, start taking Social security on Jan 2025, when I qualify for full retirement benefits for both. )

From your post, my guess is that you were born in 1958. Assuming that is true, your full retirement age is 66 years and eight months which would put your FRA for the purpose of SS at about Aug, 2025.

Separately, I do quite a bit of development on various spreadsheets to track, stocks, options (calls, puts, IC, spreads…) and numerous calculations for various options trades. I would be very interested in seeing what you’ve created at such point that you decide to share your work product.

[LoisR]

Start taking SS at 62. Waiting until full retirement age to start SS means youl will have to live to approx 80 years old to make up for the years you didn't take SS. How many people do you know who passed before reaching 80?

[MandoMan]

Top Federal rate is now 37% + 3.8% NIIT = 41.8%. That ain't chicken feed. Moreover a substantial percentage of people pay no income tax whatsoever.

" In total, about 59.9 percent of U.S. households paid income tax in 2022. The remaining 40.1 percent of households paid no individual income tax. In that same year, about 47.1 percent of U.S. households with an income between 40,000 and 50,000 U.S. dollars paid no individual income taxes."

From: Households paying no income tax by income level U.S. 2022 | Statista (https://www.statista.com/statistics/242138/percentages-of-us-households-that-pay-no-income-tax-by-income-level/)

That is astonishing. Add to that the large number of people who pay NO IRS taxes who vote for candidates who want to cut taxes. A tax cut doesn’t help you if you don’t pay that kind of tax. Some people don’t think clearly, yet they are still allowed to vote. And drive.

[huge-pigeons]

I’m tired of hearing if you have money, you need to share it. Most people who have money when they retire worked hard and long hours during their working years. And these same people did the right thing and invested a lot of their money during those years for the future instead of partying and overspending. Now, the have nots want to condemn the people that did the right thing.

Socialism/robbing Peter to pay Paul does not work and will never work. ACA is the worst thing that was ever created, ask around.

As for taxes, your goal every year for your whole life is to pay the least amount of taxes legally. If you want to pay more, there is a line that lets you add more taxes to your return. Same for social security, we all paid SS taxes during our working years and now we are double taxed on these distributions which is unfair. Hopefully that will change.

Everyone got a tax reduction 5 or 6 years ago. Somebody mentioned the rich only pay 20% tax, that is huge. If you make $1M a year, they will be paying $200,000 in taxes, this is a huge amount of money.

We should implement a flat tax of 10% for everybody, no deductions, no loopholes, and we would have much more money coming in for the government to spend foolishly.

[Robbb]

This thread deviated quickly from the OP’s financial modeling post.

Yea that's disappointing, the op had some very interesting things to say.

[retiredguy123]

I’m tired of hearing if you have money, you need to share it. Most people who have money when they retire worked hard and long hours during their working years. And these same people did the right thing and invested a lot of their money during those years for the future instead of partying and overspending. Now, the have nots want to condemn the people that did the right thing.

Socialism/robbing Peter to pay Paul does not work and will never work. ACA is the worst thing that was ever created, ask around.

As for taxes, your goal every year for your whole life is to pay the least amount of taxes legally. If you want to pay more, there is a line that lets you add more taxes to your return. Same for social security, we all paid SS taxes during our working years and now we are double taxed on these distributions which is unfair. Hopefully that will change.

Everyone got a tax reduction 5 or 6 years ago. Somebody mentioned the rich only pay 20% tax, that is huge. If you make $1M a year, they will be paying $200,000 in taxes, this is a huge amount of money.

We should implement a flat tax of 10% for everybody, no deductions, no loopholes, and we would have much more money coming in for the government to spend foolishly.
I don't see a line on the tax return to pay additional taxes. What tax form and line are you referring to? In my experience, if you overpay your taxes, the IRS will usually correct your return and send you a refund.

[Ski Bum]

My financial expertise is in building models for future decision making about whatever the topic is, doesn't matter, there are thousands of financial decision topics.

So, since I (Sportsguy) am now retired and my wife (CoachK) is still working but will retire next year, I have built out the retirement model even further to include medical insurance premiums and Roth Conversions to understand when to take Social Security and what is the status of our IRA savings and investment savings to weather the future expenses in TV, for taxes and a cash flow statement to see when additional withdrawals may be required. (I have not factored in the latest increase in AUTO insurance premiums :eek:)

After researching IRMAA, a hot topic du jour for some, I modeled out a married couple, with both at current max social security, again maybe us :shrug:, with IRAS with RMDs, as everyone has. With the model being dynamic, the starting point is we are both 65 at the end of this year, start taking Social security on Jan 2025, when I qualify for full retirement benefits for both. At that time, i am assuming 5 k in additional taxable income above SS from any other sources, investments, part time work, etc.

Using inflation and other annual increasing assumptions (IRMAA threshold increased at nearly 6 % and Social security increased at 4%+ for CY24) and market returns for investments are 6% out for 20 years, the effect of RMDS can be seen in AGI and in taxes and tax brackets.

By entering an CY22 ending IRA balance as a total for a married couple, here is the age and year we would have to pay IRMAA penalties based upon current RMD percentages, based on max SS, RMD and taxable income year by year

Conclusion: Its not worth ROTH conversions and paying taxes now to save future IRMAA penalties in the future for married couples with IRAs less than $3,000,000

certainly its a non issue for us, and i suspect many others.

I am more than willing to share the workbook after I detail out the IRMAA penalties by taxable income bracket, I just used the max penalty in the example, and since its per person for a couple, it gets a bit detailed to calculate out which person in a couple, so i just doubled the per person penalty. . (may need to research the married couple scenario a bit as well), however, i am still looking for a CFP willing to review it for reasonableness. There are a few financial types here who can PM me to discuss validation of formulas, but not assumptions)

Thank you! I realize there are a bunch of variables, but I really appreciate this analysis (and I know it was a ton of work). This describes my wife and I fairly well and I have been wondering where the cut off point would be. This analysis places that point at $3M. Even if that is off by $1M, the info is useful. I always suspected it wasn't worth doing a conversion. I just wish I would have started a Roth younger. My kids know from my error though!

[Boilerman]

My financial expertise is in building models for future decision making about whatever the topic is, doesn't matter, there are thousands of financial decision topics.

So, since I (Sportsguy) am now retired and my wife (CoachK) is still working but will retire next year, I have built out the retirement model even further to include medical insurance premiums and Roth Conversions to understand when to take Social Security and what is the status of our IRA savings and investment savings to weather the future expenses in TV, for taxes and a cash flow statement to see when additional withdrawals may be required. (I have not factored in the latest increase in AUTO insurance premiums :eek:)

After researching IRMAA, a hot topic du jour for some, I modeled out a married couple, with both at current max social security, again maybe us :shrug:, with IRAS with RMDs, as everyone has. With the model being dynamic, the starting point is we are both 65 at the end of this year, start taking Social security on Jan 2025, when I qualify for full retirement benefits for both. At that time, i am assuming 5 k in additional taxable income above SS from any other sources, investments, part time work, etc.

Using inflation and other annual increasing assumptions (IRMAA threshold increased at nearly 6 % and Social security increased at 4%+ for CY24) and market returns for investments are 6% out for 20 years, the effect of RMDS can be seen in AGI and in taxes and tax brackets.

By entering an CY22 ending IRA balance as a total for a married couple, here is the age and year we would have to pay IRMAA penalties based upon current RMD percentages, based on max SS, RMD and taxable income year by year

Conclusion: Its not worth ROTH conversions and paying taxes now to save future IRMAA penalties in the future for married couples with IRAs less than $3,000,000

certainly its a non issue for us, and i suspect many others.

I am more than willing to share the workbook after I detail out the IRMAA penalties by taxable income bracket, I just used the max penalty in the example, and since its per person for a couple, it gets a bit detailed to calculate out which person in a couple, so i just doubled the per person penalty. . (may need to research the married couple scenario a bit as well), however, i am still looking for a CFP willing to review it for reasonableness. There are a few financial types here who can PM me to discuss validation of formulas, but not assumptions)

But there are several reasons for doing Roth conversions besides avoiding IRMAA. Like being pushed into higher tax brackets. Or being subject to NIT. Or the risk that tax rates will be higher in the future than today’s rates. Or the risk that Social Security benefits might be means tested in the future. Or the psychological benefit of having tax free money to spend from a Roth (my parents refuse to spend their IRA money because of the taxes they would pay.) I’ll say that all these reasons mostly apply to large IRAs, but I don’t agree that $3M is the threshold.

[GoRedSox!]

I’m tired of hearing if you have money, you need to share it. Most people who have money when they retire worked hard and long hours during their working years. And these same people did the right thing and invested a lot of their money during those years for the future instead of partying and overspending. Now, the have nots want to condemn the people that did the right thing.

Socialism/robbing Peter to pay Paul does not work and will never work. ACA is the worst thing that was ever created, ask around.

As for taxes, your goal every year for your whole life is to pay the least amount of taxes legally. If you want to pay more, there is a line that lets you add more taxes to your return. Same for social security, we all paid SS taxes during our working years and now we are double taxed on these distributions which is unfair. Hopefully that will change.

Everyone got a tax reduction 5 or 6 years ago. Somebody mentioned the rich only pay 20% tax, that is huge. If you make $1M a year, they will be paying $200,000 in taxes, this is a huge amount of money.

We should implement a flat tax of 10% for everybody, no deductions, no loopholes, and we would have much more money coming in for the government to spend foolishly.Many of those tax cuts, if not all them, are set to expire in 2025-26 because they were passed in Budget Reconciliation to avoid the Senate filibuster rule. The amount these tax cuts increased the national debt was so large that they had to make them temporary in order to stay within Reconciliation rules. Extending them or making them permanent will add trillions more to the national debt. It will be interesting to see what happens as this will be one of the first things Congress has to tackle after the 2024 Presidential election. The Reps from both parties from many states which have high income or property taxes will not vote to extend the State and Local Tax (SALT) deduction limit of $10,000 no matter what.

As for the ACA, it is most certainly not the worst thing ever, in fact it now has public approval polling over 50%. The worst thing ever might be tying health insurance to your job. Without the ACA, tens of millions of people would have no health insurance at all. There are a lot of folks who decided to retire before age 65 who relied on the ACA to get them to Medicare-eligibility.

[mntlblok]

I’m tired of hearing if you have money, you need to share it. Most people who have money when they retire worked hard and long hours during their working years. And these same people did the right thing and invested a lot of their money during those years for the future instead of partying and overspending. Now, the have nots want to condemn the people that did the right thing.

Socialism/robbing Peter to pay Paul does not work and will never work. ACA is the worst thing that was ever created, ask around.

As for taxes, your goal every year for your whole life is to pay the least amount of taxes legally. If you want to pay more, there is a line that lets you add more taxes to your return. Same for social security, we all paid SS taxes during our working years and now we are double taxed on these distributions which is unfair. Hopefully that will change.

Everyone got a tax reduction 5 or 6 years ago. Somebody mentioned the rich only pay 20% tax, that is huge. If you make $1M a year, they will be paying $200,000 in taxes, this is a huge amount of money.

We should implement a flat tax of 10% for everybody, no deductions, no loopholes, and we would have much more money coming in for the government to spend foolishly.

"We should implement a flat tax of 10% for everybody, no deductions, no loopholes"

Ahh, but that's still progressive taxation, no? A flat tax would be everybody writes the same size check. Sorta like the way everybody gets the same number of votes - the old "one man, one vote" thing. Except they now let *wimmin* vote!

On a more serious note, what I keep wondering is what happens where a threshold is crossed when the combination of national debt size and high enough interest rates leads to a % of the budget being paid out as interest on said debt becomes unsustainable.

Have read a fair bit of speculation about the subject of late. The most plausible (to me) is that it happens gradually - and then all of a sudden. Reading more and predictions that have it occurring during my (likely) lifetime. Hard to anticipate much likelihood of a sudden turn towards fiscal responsibility by our "leaders" on the national level in time to avoid that cliff. Could get interesting. . .

So, I'm wondering if your spreadsheets include any "assumptions" that factor that scenario in. That is, SS payments get massively and suddenly reduced.

[Caymus]

"We should implement a flat tax of 10% for everybody, no deductions, no loopholes"

Ahh, but that's still progressive taxation, no? A flat tax would be everybody writes the same size check. Sorta like the way everybody gets the same number of votes - the old "one man, one vote" thing. Except they now let *wimmin* vote!

On a more serious note, what I keep wondering is what happens where a threshold is crossed when the combination of national debt size and high enough interest rates leads to a % of the budget being paid out as interest on said debt becomes unsustainable.

Have read a fair bit of speculation about the subject of late. The most plausible (to me) is that it happens gradually - and then all of a sudden. Reading more and predictions that have it occurring during my (likely) lifetime. Hard to anticipate much likelihood of a sudden turn towards fiscal responsibility by our "leaders" on the national level in time to avoid that cliff. Could get interesting. . .

So, I'm wondering if your spreadsheets include any "assumptions" that factor that scenario in. That is, SS payments get massively and suddenly reduced.

Isn't that a cause for hyperinflation? The government repays loans with "cheaper" dollars.

[Altavia]

Be careful the tail isn't wagging the dog if trying to minimize IMRAA.

I know someone who decided to delay a cruise to avoid taxes a year who didn't make it to the next year.

[Bridget Staunton]

Manabouttien: totally agree paying high premiums for Medicare because if IRMAA and single person. Hubby with the lord so I am paying way too much being single

[Bridget Staunton]

It’s not like we inherited it we worked for it

[Carla B]

Thank you! I realize there are a bunch of variables, but I really appreciate this analysis (and I know it was a ton of work). This describes my wife and I fairly well and I have been wondering where the cut off point would be. This analysis places that point at $3M. Even if that is off by $1M, the info is useful. I always suspected it wasn't worth doing a conversion. I just wish I would have started a Roth younger. My kids know from my error though!

Depending on your age, maybe you shouldn't feel bad for not starting a Roth earlier. Remember, there was no Roth IRA until 1997.

[tophcfa]

Start taking SS at 62. Waiting until full retirement age to start SS means youl will have to live to approx 80 years old to make up for the years you didn't take SS. How many people do you know who passed before reaching 80?

Be careful! If you are getting Obamacare tax credits to help pay for health insurance between the age of 62 and 65, taking early SS could put you over 400% of the FPL and wipe out your tax credits, costing you thousands of dollars. Every situation is different.

[lawgolfer]

I’m tired of hearing if you have money, you need to share it. Most people who have money when they retire worked hard and long hours during their working years. And these same people did the right thing and invested a lot of their money during those years for the future instead of partying and overspending. Now, the have nots want to condemn the people that did the right thing.

Socialism/robbing Peter to pay Paul does not work and will never work. ACA is the worst thing that was ever created, ask around.

As for taxes, your goal every year for your whole life is to pay the least amount of taxes legally. If you want to pay more, there is a line that lets you add more taxes to your return. Same for social security, we all paid SS taxes during our working years and now we are double taxed on these distributions which is unfair. Hopefully that will change.

Everyone got a tax reduction 5 or 6 years ago. Somebody mentioned the rich only pay 20% tax, that is huge. If you make $1M a year, they will be paying $200,000 in taxes, this is a huge amount of money.

We should implement a flat tax of 10% for everybody, no deductions, no loopholes, and we would have much more money coming in for the government to spend foolishly.

A flat income tax rate has advantages and disadvantages that are too numerous to discuss in this forum.

What is easier to discuss is the proposition that everyone should pay some income tax, i.e. everyone should have "some skin in the game". We have created a system where 40% of the people pay nothing and, therefore, think nothing about what the government spends with the exception that they want the government to spend more on them.

This reduces, if not eliminates, the involvement of a large part of the citizenry in the manner in which our country is run. However, it is particularly offensive to those who are taxed when the non-taxed are involved and vote on how to spend other people's tax money.

In the 1950's nearly all small, rural, school districts were eliminated and children were bused to large "consolidated" schools. Up to that time, the rural one, two, and three room schools were governed by residents of the area served by the school and the property owners in that area were taxed to pay for the schools. You better believe that, while pennies were pinched, a high percentage of the residents were knowledgeable about what went on at "their" school and were concerned that their children received a good education. These schools were the classic example of taxpayer involvement.

I'm not saying that these small, local, schools were the best way to educate children (although my wife came out pretty well from a two-room school in rural Illinois). What I am saying is that these schools demonstrate the social benefit of citizens having "some skin in the game".

[Stu from NYC]

A flat income tax rate has advantages and disadvantages that are too numerous to discuss in this forum.

What is easier to discuss is the proposition that everyone should pay some income tax, i.e. everyone should have "some skin in the game". We have created a system where 40% of the people pay nothing and, therefore, think nothing about what the government spends with the exception that they want the government to spend more on them.

This reduces, if not eliminates, the involvement of a large part of the citizenry in the manner in which our country is run. However, it is particularly offensive to those who are taxed when the non-taxed are involved and vote on how to spend other people's tax money.

In the 1950's nearly all small, rural, school districts were eliminated and children were bused to large "consolidated" schools. Up to that time, the rural one, two, and three room schools were governed by residents of the area served by the school and the property owners in that area were taxed to pay for the schools. You better believe that, while pennies were pinched, a high percentage of the residents were knowledgeable about what went on at "their" school and were concerned that their children received a good education. These schools were the classic example of taxpayer involvement.

I'm not saying that these small, local, schools were the best way to educate children (although my wife came out pretty well from a two-room school in rural Illinois). What I am saying is that these schools demonstrate the social benefit of citizens having "some skin in the game".

You are right on/!

[GoRedSox!]

A flat income tax rate has advantages and disadvantages that are too numerous to discuss in this forum.

What is easier to discuss is the proposition that everyone should pay some income tax, i.e. everyone should have "some skin in the game". We have created a system where 40% of the people pay nothing and, therefore, think nothing about what the government spends with the exception that they want the government to spend more on them.

This reduces, if not eliminates, the involvement of a large part of the citizenry in the manner in which our country is run. However, it is particularly offensive to those who are taxed when the non-taxed are involved and vote on how to spend other people's tax money.

In the 1950's nearly all small, rural, school districts were eliminated and children were bused to large "consolidated" schools. Up to that time, the rural one, two, and three room schools were governed by residents of the area served by the school and the property owners in that area were taxed to pay for the schools. You better believe that, while pennies were pinched, a high percentage of the residents were knowledgeable about what went on at "their" school and were concerned that their children received a good education. These schools were the classic example of taxpayer involvement.

I'm not saying that these small, local, schools were the best way to educate children (although my wife came out pretty well from a two-room school in rural Illinois). What I am saying is that these schools demonstrate the social benefit of citizens having "some skin in the game".But they don't pay nothing. Their income is low enough and they have enough children that with the earned income tax credit and child care credits and the standard deduction, they end up owing no federal income tax. But they still pay state income tax in most states. They still pay Medicare and Social Security taxes. They still pay sales taxes. They still pay federal excise tax on every gallon of gas and other miscellaneous taxes. To question their right to vote is really something.

[lawgolfer]

I am not questioning the right of non-taxpayers to vote. I am questioning the wisdom of having 40% of the citizenry pay nothing in income tax. Many of this 40%, as well as many of the 60% paying income taxes, will not vote in any event. My point is that citizens who pay income taxes are more likely to vote and to consider the issues on which they vote and the platforms of the candidates they have to choose among.

As I recall, only property owners could vote in the school board elections in the rural districts in Illinois. However, many of the owners had tenants who farmed their land and many of the tenants as well as owners farming their own land had one or more "hired men'. The tenants and the hired men lived on the farms and had families. Providing decent schools for the children was a serious obligation. The men and women who were elected to the school boards took this obligation seriously and were proud of their school. I admit I view those times through rose-colored lens; however, I know from personal experience that those schools were a prime example of the benefits of an involved citizenry.

With the increased mechanization of farming and the consolidation of small farms into large ones, the rural population rapidly diminished in the 1950's. This, together with the increase in supervision of all schools by the state resulted in the consolidation of the schools into area-wide districts.

[Jack58033]

Baum and Parady will pay for you to go away.

[Jack58033]

So you want Universal health care?

[Haggar]

I have the greatest respect for your projections. I have many clients who are asking me not because of IRMMA but what's the best thing for them in the long run? And the problem with any of these projections is: What will be the rate of investment growth? What will be the tax rates in the future?
And what the effect of a reduced amount to invest because of the taxes required to be paid in the year of conversion. If you're
in a higher bracket the investment amount could be reduced by 20-30% which will affect the yield and growth.

Someone mentions that the sale of a house (particularly a non-residence) could cause an increase in IRMMA (which will calculated for 2024 based on your 2022 return). Yes it could but there a form you can file which requests medicare to reduce the premium based upon non-recurring events or life changing situations. Their response to filing this form is very quick.

[Pugchief]

You're not buying Medicare or don't you know that? If you were paying the cost your premium would be huge, not a few hundred a month. The people paying for your health insurance right now are the workers of the US. And they are paying your premiums for you because, well Socialism. See how you benefit when the government takes money from somebody and gives it to you?

Didn't everyone pay 3.9% (2.45% employee + 2.45% employer) of their income to cover Medicare? You paid for this "insurance" yourself. And higher earners already paid more in premiums than lower earners. If I had kept that 3.9% and invested it, I could use that money to more than cover whatever current healthcare premiums would be.

And now you want to base health insurance premiums on the health and age of the insured. Thank your lucky stars that ACA and Medicare did away with such things.

Health insurance premiums are absolutely based on age. Yes, ACA did away with basing premiums on health, but it is debatable whether that was a good thing or not. Pre-existing conditions needed to be eliminated for sure, but why should a non-smoker pay the same as a smoker? Or someone who eats healthy and exercises pay the same as an overweight couch potato? Controllable diseases should be risked out into the premiums IMO, but not things beyond the patient's control.

[manaboutown]

I have the greatest respect for your projections. I have many clients who are asking me not because of IRMMA but what's the best thing for them in the long run? And the problem with any of these projects is: What will be the rate of investment growth? What will be the tax rates in the future?
And what the effect of a reduced amount to invest because of the taxes required to be paid in the year of conversion. If you're
in a higher bracket the investment amount could be reduced by 20-30% which will affect the yield and growth.

Someone mentions that the sale of a house (particularly a non-residence) could cause an increase in IRMMA (which will calculated for 2024 based on your 2022 return). Yes it could but there a form you can file which requests medicare to reduce the premium based upon non-recurring events or life changing situations. Their response to filing this form is very quick.

A friend of mine sold her long time home in Miami at a price that threw her into IRMAA even though she has little retirement income other than Social Security. She appealed and lost even though it was a once in a lifetime gain. Her SS income for 2023 was substantially reduced. In her case IRMAA was confiscatory. For couples selling a primary residence held the requisite number of years the first $500K LTCG is excluded from counting as income toward IRMAA but for a single person the exclusion is only $250K. IRMAA is vicious and merciless, particularly to folks receiving a once in a lifetime LTCG such as from selling their long term primary residence, the family farm or a mom and pop business.

[zuidemab]

Thank you for the facts.

[Rainger99]

You're not buying Medicare or don't you know that? If you were paying the cost your premium would be huge, not a few hundred a month. The people paying for your health insurance right now are the workers of the US. And they are paying your premiums for you because, well Socialism. See how you benefit when the government takes money from somebody and gives it to you?


Sorry, Seniors, You Didn't Pay for (All of) That (https://www.forbes.com/sites/chrisconover/2012/12/03/aarp-lobbies-for-100000-plus-medicare-subsidy-for-seniors/)

[manaboutown]

Sorry, Seniors, You Didn't Pay for (All of) That (https://www.forbes.com/sites/chrisconover/2012/12/03/aarp-lobbies-for-100000-plus-medicare-subsidy-for-seniors/)

Total nonsense as this ignores the time value of money, an old time whole life insurance salesman's trick. A dollar 20-50 years ago invested is not the same as a dollar received today.

[mntlblok]

Baum and Parady will pay for you to go away.

Googling your cryptic comment yielded this near the top of the list. https://www.youtube.com/watch?v=4a7Ge_sy7Zw

[GoRedSox!]

So you want Universal health care?I would certainly like to see universal health care. Every other industrialized democracy in the world has done it, and we should, too. The system of tying your health insurance to your job is antiquated and works less efficiently in the modern economy. The biggest criticism of the Canadian system has always been there are some delays getting appointments, but there are plenty of delays in our system, too. We already have a very popular universal system in this country for those 65+, and we rarely hear anyone scream “socialism!” That system can be extended to everyone, and funded with the same money employers are currently spending to provide it and they would be happy to unload that responsibility and the administrative costs that go with it.

[Caymus]

I have the greatest respect for your projections. I have many clients who are asking me not because of IRMMA but what's the best thing for them in the long run? And the problem with any of these projections is: What will be the rate of investment growth? What will be the tax rates in the future?
And what the effect of a reduced amount to invest because of the taxes required to be paid in the year of conversion. If you're
in a higher bracket the investment amount could be reduced by 20-30% which will affect the yield and growth.

Someone mentions that the sale of a house (particularly a non-residence) could cause an increase in IRMMA (which will calculated for 2024 based on your 2022 return). Yes it could but there a form you can file which requests medicare to reduce the premium based upon non-recurring events or life changing situations. Their response to filing this form is very quick.

Suppose the 65-year-old has $3 million in non Roth IRA/401K accounts. Can the maximum annual Roth conversions be determined based on the "best" current tax/ IRMMA rates. This would also assume that side issues like inheritance concerns are not important.

Would this just be a total guess since items like future tax rates, investment returns and life expectancy are unknowns to certain degrees?

[huge-pigeons]

What is considered a large ira? IMO, $20M in an ira is a large ira. $3M is just an ok size

[retiredguy123]

I found this to be an interesting math calculation. Assume that you make 10 percent per year on your investments and you have an income tax rate of 30 percent. You convert $100 of your traditional IRA to a Roth, leaving $70 to invest tax free. A year later, you will have $77 in tax free money. But, suppose you do not convert to a Roth and keep the $100 in the traditional IRA. A year later, you have $110 in taxable money. At that time, you convert the $110 to a Roth and pay taxes of $33, leaving $77 in tax free money. So, in both cases, you have the same amount of tax free money. So, what is the point of converting to a Roth?

[BlueStarAirlines]

But there are several reasons for doing Roth conversions besides avoiding IRMAA. Like being pushed into higher tax brackets. Or being subject to NIT. Or the risk that tax rates will be higher in the future than today’s rates. Or the risk that Social Security benefits might be means tested in the future. Or the psychological benefit of having tax free money to spend from a Roth (my parents refuse to spend their IRA money because of the taxes they would pay.) I’ll say that all these reasons mostly apply to large IRAs, but I don’t agree that $3M is the threshold.

This is exactly correct. I don't have a major issue with the OPs original analysis, but it was narrowly defined for one scenario while there are other factors and scenarios where Roth conversions make perfect sense. One common error I see often is analysis is done for a couple but the ramifications when one passes is never considered.

To @Boilerman comment about tax rates being higher, we know this is a certainty if the TCJA isn't extended at the end of 2025. In my case, my top tax rate will rise by 9% in 2026. Not taking that into consideration in considering Roth conversions is crazy.

[BlueStarAirlines]

I found this to be an interesting math calculation. Assume that you make 10 percent per year on your investments and you have an income tax rate of 30 percent. You convert $100 of your traditional IRA to a Roth, leaving $70 to invest tax free. A year later, you will have $77 in tax free money. But, suppose you do not convert to a Roth and keep the $100 in the traditional IRA. A year later, you have $110 in taxable money. At that time, you convert the $110 to a Roth and pay taxes of $33, leaving $77 in tax free money. So, in both cases, you have the same amount of tax free money. So, what is the point of converting to a Roth?

Now do the math for the 2nd year after the conversion....5 years after...10 years after.

Another factor is many folks do not pay for the taxes associated with the conversion from the converted amount, so that $100 converted to a Roth is still $100.I totally understand that tax payment for the conversion has to come from elsewhere, but paying it from another source allows the Roth to grow without that initial detriment.

Calculate the tax paid on the conversion as a married couple and then when spent from the IRA as a single widow(er).

[retiredguy123]

One advantage to keeping your money in a traditional IRA is that, if you move into an assisted living facility or a nursing home, you can spend the IRA money and take advantage of huge medical tax deductions. In the case of a nursing home, 100 percent of the cost is tax deductible. With an assisted living facility, the tax deductible percentage can be as much as about 60 percent.

[CoachKandSportsguy]

Yes, there are many good reasons to convert to a ROTH, but fear of IRMAA should not be one of them, especially if you are paying lots more in taxes to avoid the penalty than you have to pay in IRMAA, unless you have an IRA say $4M or more when the penalty starts early and continues for the rest of your life. And yes, being single in this case transitioning from a married couple, is a valid point to consider moving some money out of an IRA, but that is the same model with a different scenario, which I haven't finished as the workbook is almost perfected.

Paying $50,000 in additional taxes prior to paying IRMAA at $14,000 per year for two years in the future makes no financial sense whatsoever. One can't grow wealth with a tax / penalty avoidance approach. Taxes are a by-product of success, not the same as tax minimization strategy, which a ROTH conversion is a potential option.

However as on my other post, there is a little advantage to a ROTH versus a TAXABLE account, other than tax free for annual gains which some people might expect are guaranteed, especially in FL with no state tax , but gains are in fact not guaranteed. And if you convert to a ROTH and don't have gains or lose money, unfortunately poor timing, there is not offset, its permanently gone.

The difficulty is that there are a lot of unknowns for sure, the future is always uncertain. The calculations are with the current knowns and relationships, which is the best one can do. . as well as be genetically lucky and live a healthy and long life, same with your spouse. Remember, you might not live long enough but you might. . .

[CoachKandSportsguy]

after typing out the prior post, i realized that the best strategy for minimizing IRMAA for a married couple is to view the penalty from a single point of view, and plan as if one spouse is going to pass tomorrow and inherit the IRA. I didn't look at size from a single point of view, but its lower, and that is the proper planning strategy for penalty avoidance. . . which i wouldn't have come to unless actually seeing the modeled data.

I will update with that view. .

again, the purpose is to evaluate planning strategy within the current known constraints to maximize wealth, which includes the effect of taxes, but is not tax avoidance.

[CoachKandSportsguy]

I did have a response from a very nice poster who volunteered to review the model, though I won't blow his cover. .

He is a CPA, a CFA and a PhD in Finance, and that man has overdosed on finance!

:BigApplause:

:bigbow:

:boom:

[Stu from NYC]

I found this to be an interesting math calculation. Assume that you make 10 percent per year on your investments and you have an income tax rate of 30 percent. You convert $100 of your traditional IRA to a Roth, leaving $70 to invest tax free. A year later, you will have $77 in tax free money. But, suppose you do not convert to a Roth and keep the $100 in the traditional IRA. A year later, you have $110 in taxable money. At that time, you convert the $110 to a Roth and pay taxes of $33, leaving $77 in tax free money. So, in both cases, you have the same amount of tax free money. So, what is the point of converting to a Roth?

I agree with you in general but one other consideration.

Down the road either your or your heirs will have to liquidate your portfolio. What will take rates look like than? If taxes go up the roth makes some sense otherwise I would stay and invest all money into IRA.

[CoachKandSportsguy]

I agree with you in general but one other consideration.

Down the road either your or your heirs will have to liquidate your portfolio. What will take rates look like than? If taxes go up the roth makes some sense otherwise I would stay and invest all money into IRA.

liquidation for your heirs, its all unplanned money, or it should be, therefore its all gravy to them, with out without taxes.

With an IRA, its taxed at income rates,
with a Roth its tax free,
with a taxable account, its very low tax or no tax at all,

but remember, all of the accounts are subject to the federal and some states' estate taxes, prior to distribution. . if there isn't enough taxable assets to pay for the estate tax, then the IRA will have to be liquidated to a certain degree. . so a balance between illiquid assets, ie houses, IRAs and taxable accounts is also a planning consideration for the wealthy, especially with a state estate tax

fortunately, not a headache i have to worry about.

[Boilerman]

One advantage to keeping your money in a traditional IRA is that, if you move into an assisted living facility or a nursing home, you can spend the IRA money and take advantage of huge medical tax deductions. In the case of a nursing home, 100 percent of the cost is tax deductible. With an assisted living facility, the tax deductible percentage can be as much as about 60 percent.

True. And the other benefit of having money in a traditional IRA is to take advantage of QCDs (qualified charitable deductions). Everyone’s situation is different, but for us, the advantages of a Roth far outweigh these 2 advantages of a traditional IRA. We are doing Roth conversions.

[Boilerman]

Yes, there are many good reasons to convert to a ROTH, but fear of IRMAA should not be one of them, especially if you are paying lots more in taxes to avoid the penalty than you have to pay in IRMAA, unless you have an IRA say $4M or more when the penalty starts early and continues for the rest of your life. And yes, being single in this case transitioning from a married couple, is a valid point to consider moving some money out of an IRA, but that is the same model with a different scenario, which I haven't finished as the workbook is almost perfected.

Paying $50,000 in additional taxes prior to paying IRMAA at $14,000 per year for two years in the future makes no financial sense whatsoever. One can't grow wealth with a tax / penalty avoidance approach. Taxes are a by-product of success, not the same as tax minimization strategy, which a ROTH conversion is a potential option.

However as on my other post, there is a little advantage to a ROTH versus a TAXABLE account, other than tax free for annual gains which some people might expect are guaranteed, especially in FL with no state tax , but gains are in fact not guaranteed. And if you convert to a ROTH and don't have gains or lose money, unfortunately poor timing, there is not offset, its permanently gone.

The difficulty is that there are a lot of unknowns for sure, the future is always uncertain. The calculations are with the current knowns and relationships, which is the best one can do. . as well as be genetically lucky and live a healthy and long life, same with your spouse. Remember, you might not live long enough but you might. . .

There are many factors in play that makes everyone’s situation different. Trying to give generic advice like this doesn’t work. Unless your Roth conversions push you into a higher tax bracket, you’re not “paying lots more in taxes”, you’re just pre-paying them. If you think tax rates are likely to be lower in the coming years then keep your money in the traditional IRA. Or maybe you’re certain that both you and your spouse sill die in the same tax year.

For me, the worst case scenario is that my Roth conversions will be a wash. The best case scenario is that we save thousands of dollars. But as I said, that wont apply to everyone.

[rsmurano]

I decided decades ago that it will never buy me 1 penny in benefits to go the Roth way compared to the regular 401k way for a few reasons, but 1 main reason:
When I was working, I was in a high tax bracket and I knew for a fact when I stopped working, it didn’t matter at what age, my tax bracket would drop greatly and it has. For example, if I was in a 30% tax bracket when working, I would have to pay 30% taxes on my income before putting any money into a Roth whereas in a 401k, I didn’t pay any income tax and contributed the full amount. So hypothetically, if I wanted to put away $20,000 a year in a Roth using after tax money, I would need $26,000 of income before taking taxes out. But while I was in a high tax bracket, I got to put $20,000 into my 401k and now, I’m in a much much lower tax bracket so my taxes withdrawals are taxed much less than the tax I would have to pay years earlier. This has been true thus far in retirement, with even better benefits.

My work would not do a company match on a Roth whereas I got a lot of company matching that is free money.

The other benefit is that I got a much better return on my money using tax free money than what I would have got taking taxes out earlier. For example: say I had $10,000 to invest in either a Roth or 401k. The full $10,000 would be invested in a 401k because it would be before tax $$$. Now if I wanted to put the same $10,000 into a Roth, I would have had to pay taxes on that money, say I’m in a 20% tax bracket in my working years, I would only have $8,000 to put in the Roth. Over decades, my 401k would make more money because I would have more to compound interest on. This is a fact. Most of the scare tactic financial planners try to scare you by using the same tax bracket in retirement as you were in will you worked. Even if you used the same tax bracket in retirement 20%, you would pay the same taxes on your 401k withdrawals as you would have paid when paying taxes before putting the money in a Roth. Do the math.
But the reality is, you will be in a lower if not a much lower tax bracket in retirement so you will be paying much less taxes on 401k/ira withdrawals than if you paid after tax money in a high tax bracket. Do the math.
We don’t know what things will be like next year or 5 or 10 years down the road. The scare tactic people will say your taxes will be much higher down the road but on the other side of the coin, we just rmd’s pushed down the road by a few years which means less taxes to be paid before larger distributions are warranted, so that gives you more time to cash in on your 401k/ira at a low tax bracket (if not paying 0 tax dollars) so your rmd’s are at a smaller amount in the future.

[BrianL99]

This thread deviated quickly from the OP’s financial modeling post.

The model was nonsensical.

[BrianL99]

in a higher bracket the investment amount could be reduced by 20-30% which will affect the yield and growth.

Someone mentions that the sale of a house (particularly a non-residence) could cause an increase in IRMMA (which will calculated for 2024 based on your 2022 return). Yes it could but there a form you can file which requests medicare to reduce the premium based upon non-recurring events or life changing situations. Their response to filing this form is very quick.



A decision not to sell any property, in contrast to what you did a year or 2 ago, is not a "life changing event" per Medicare Regulations and it won't change an IRMAA determination.

[Stu from NYC]

The model was nonsensical.

Guess you disagreed but decided not to do so politely

[Boilerman]

I decided decades ago that it will never buy me 1 penny in benefits to go the Roth way compared to the regular 401k way for a few reasons, but 1 main reason:
When I was working, I was in a high tax bracket and I knew for a fact when I stopped working, it didn’t matter at what age, my tax bracket would drop greatly and it has. For example, if I was in a 30% tax bracket when working, I would have to pay 30% taxes on my income before putting any money into a Roth whereas in a 401k, I didn’t pay any income tax and contributed the full amount. So hypothetically, if I wanted to put away $20,000 a year in a Roth using after tax money, I would need $26,000 of income before taking taxes out. But while I was in a high tax bracket, I got to put $20,000 into my 401k and now, I’m in a much much lower tax bracket so my taxes withdrawals are taxed much less than the tax I would have to pay years earlier. This has been true thus far in retirement, with even better benefits.

My work would not do a company match on a Roth whereas I got a lot of company matching that is free money.

The other benefit is that I got a much better return on my money using tax free money than what I would have got taking taxes out earlier. For example: say I had $10,000 to invest in either a Roth or 401k. The full $10,000 would be invested in a 401k because it would be before tax $$$. Now if I wanted to put the same $10,000 into a Roth, I would have had to pay taxes on that money, say I’m in a 20% tax bracket in my working years, I would only have $8,000 to put in the Roth. Over decades, my 401k would make more money because I would have more to compound interest on. This is a fact. Most of the scare tactic financial planners try to scare you by using the same tax bracket in retirement as you were in will you worked. Even if you used the same tax bracket in retirement 20%, you would pay the same taxes on your 401k withdrawals as you would have paid when paying taxes before putting the money in a Roth. Do the math.
But the reality is, you will be in a lower if not a much lower tax bracket in retirement so you will be paying much less taxes on 401k/ira withdrawals than if you paid after tax money in a high tax bracket. Do the math.
We don’t know what things will be like next year or 5 or 10 years down the road. The scare tactic people will say your taxes will be much higher down the road but on the other side of the coin, we just rmd’s pushed down the road by a few years which means less taxes to be paid before larger distributions are warranted, so that gives you more time to cash in on your 401k/ira at a low tax bracket (if not paying 0 tax dollars) so your rmd’s are at a smaller amount in the future.

Which is why Roth conversions after retirement makes sense. Paying lower taxes than you would have while working.

[rsmurano]

Why do you think it’s a good time to make the conversion when you retire? Just for grins, say you have $5M in 401k/ira and you are 65 years old. Plus, say right now you are in the $0 tax bracket. Now, you want to say you want to convert $1M a year to a Roth for the next 5 years, do you know what tax bracket you will be in each year? You would be in the max tax bracket, your Medicare payments will jump by 5x or more every year you do this plus 1 year, your social security will be taxed at 85%, on and on. So you sell $1M of your 401k/ira and you get to take a little over $550,000 and invest it. Do this for 5 years, you will end up with $2.5M-$3M.

Now I keep what I have and it compounds by 8-10% each year on average, my $5M will grow to $7.5M-$8M in 5 years (3x more than what you would have with the conversion), let them tax the hell out of me in 5 years each year, but I guarantee you, I will not be anywhere near the top tax bracket and the more money I have in my 401k/ira accounts, the more it will grow, and my growth per year will pay any taxes that will be levied to me.

[dewilson58]

"IRMAA not worth getting excited over "

Crap, I woke up this morning and was looking forward to getting excited over.

:evil6:

[Boilerman]

Why do you think it’s a good time to make the conversion when you retire? Just for grins, say you have $5M in 401k/ira and you are 65 years old. Plus, say right now you are in the $0 tax bracket. Now, you want to say you want to convert $1M a year to a Roth for the next 5 years, do you know what tax bracket you will be in each year? You would be in the max tax bracket, your Medicare payments will jump by 5x or more every year you do this plus 1 year, your social security will be taxed at 85%, on and on. So you sell $1M of your 401k/ira and you get to take a little over $550,000 and invest it. Do this for 5 years, you will end up with $2.5M-$3M.

Now I keep what I have and it compounds by 8-10% each year on average, my $5M will grow to $7.5M-$8M in 5 years (3x more than what you would have with the conversion), let them tax the hell out of me in 5 years each year, but I guarantee you, I will not be anywhere near the top tax bracket and the more money I have in my 401k/ira accounts, the more it will grow, and my growth per year will pay any taxes that will be levied to me.

You wouldn’t make that large a conversion in any one year for the reasons you stated. But a $8M IRA balance at age 70 would result in an RMD at age 73 of over $300K. Depending of your other income you could permanently be in at least the 32% tax bracket and paying around $500 a month for Medicare forever (times 2 if you’re married). Ideally, you be starting conversions at an earlier age with smaller amounts each year. $8M might be hard to convert. Good problem to have.

[Haggar]

A decision not to sell any property, in contrast to what you did a year or 2 ago, is not a "life changing event" per Medicare Regulations and it won't change an IRMAA determination.
I agree that the voluntary sales of real estate by itself does not qualify but the sale of real estate along with a change in a zip code or a sale of income producing real estate have been successful reasons for reducing the increase in medicare premiums by my clients.

[Boomer]

There is a well-organized, clearly written article on investopedia.com titled “Capital Gains Tax on Home Sales” dated March 2023, update.

Google or DuckDuckGo, using the article title and the source, will find it, if you want to learn more.

Btw, it was the Taxpayer Relief Act of 1997 that changed the law that used to say profits on a home sale got hit with a capital gains tax unless being reinvested in a more expensive home.

I don’t know about you, but that 1997 Taxpayer Relief Act helped regular people (Mr. Boomer and me) far more than any tax law change since. If you don’t remember who was President then, look it up and you might be surprised that was the actual Taxpayer Relief for helping regular people, not just the tiny percent at the very top.

We have bought 3 primary residences since 1997 and each time we have thanked that 1997 tax law change.

Seems like an awful lot of my fellow-boomers, and beyond, are forgetting which side their bread was buttered on by a tax relief act and remain off by 20 years or are choosing to be amnesiacs. 2017 did very little, if anything, for most of us…..

But the Taxpayer Relief Act of 1997 sure helped a lot of us by letting us keep a chunk of change when selling our primary residence for a good profit.

Boomer (the regular boomer, not a bizillionare)

[manaboutown]

Then IRMAA came into existence in 2003, expanded in 2011 under the ACA and MIDs and SALT deductions were capped in 2017, affecting only "the rich". How about them apples!

"IRMAA was first enacted in 2003 as part of the Medicare Modernization Act.

This new rule applied only to high-income enrollees of Medicare Part B.
In 2011, IRMAA was expanded under the Affordable Care Act. The new rules include high-income enrollees in Medicare Part D."

How Much Does Health Insurance Cost Per Month? - Healthmarkets Agents/Content/Plans (https://www.healthmarkets.com/resources/medicare/what-is-irmaa/#:~:text=IRMAA%20was%20first%20enacted%20in,enroll ees%20in%20Medicare%20Part%20D).

Mortgage Interest Deduction: Reviewing How TCJA Impacted Deductions (https://taxfoundation.org/blog/mortgage-interest-deduction-tcja/)

[CoachKandSportsguy]

You wouldn’t make that large a conversion in any one year for the reasons you stated. But a $8M IRA balance at age 70 would result in an RMD at age 73 of over $300K. Depending of your other income you could permanently be in at least the 32% tax bracket and paying around $500 a month for Medicare forever (times 2 if you’re married). Ideally, you be starting conversions at an earlier age with smaller amounts each year. $8M might be hard to convert. Good problem to have.

There is a certain wealth point above which these issues are non issues, as a different point of view from those which are significantly below the wealth point. Its behavioral economics, and most people assume a sufficing life style, and they hope to maintain it. Especially if you live a relatively frugal life, and even after all the taxes, you still have plenty of money to live your lifestyle, many issues become non issues.

In reality, the older you are, the less active you are, and the less likely you will be living an expensive lifestyle, other than healthcare related expenses.

But remember that many times, you can control events, and at other times, you can't control events, and this is a time where you can't control events. the IRMAA tax is transitionary for those with windfalls or other wealth point issues, but beyond your control due to events, foreseen or unforeseen. So yes, you are being taxed differently, but you are probably viewing the added tax through the lack of control issue view, which you live the rest of your life. At this point, the tax is what it is, and I admire those who have this issue that they did better than I, and those who saved and worked well enough to have these issues.

But I do love this bbs and the responses here, gives me great insights into different views of behavioral finance for sure.

[Boilerman]

But remember that many times, you can control events, and at other times, you can't control events, and this is a time where you can't control events. the IRMAA tax is transitionary for those with windfalls or other wealth point issues.

I don’t think people with lots of money have any less aversion to paying taxes as those who don’t. IRMAA can be permanent, not just transitory in some situations. But Roth conversions can, done properly, give you control over future RMDs and taxable income so one can avoid IRMAA and other consequences of having higher taxable income.

[Boomer]

I don’t think people with lots of money have any less aversion to paying taxes as those who don’t. IRMAA can be permanent, not just transitory in some situations. But Roth conversions can, done properly, give you control over future RMDs and taxable income so one can avoid IRMAA and other consequences of having higher taxable income.


The guy who wrote the post I am quoting here gets my vote.

Btw, I have said it before and I will say it again……

I don’t care how many commas you have in your total IRA amount, it could be well worth taking the time to look into converting to Roth…….

especially when you are in what can be a very sweet spot after retiring, when your earned income goes down, but before RMD age.

Generic financial advice cannot apply in this one.

And — another thing — speaking of generic advice — that thing about waiting to take SS until full SS age is also generic advice. There are many different scenarios where that tedious mantra should not apply because taking the money and running at 62 could make a lot more sense in a variety of circumstances — including being able to stay out of tax-deferred accounts longer.

Why in the heck do people think financial advice should be one-size-fits-all.

Boomer

[Stu from NYC]

The guy who wrote the post I am quoting here gets my vote.

Btw, I have said it before and I will say it again……

I don’t care how many commas you have in your total IRA amount, it could be well worth taking the time to look into converting to Roth…….

especially when you are in what can be a very sweet spot after retiring, when your earned income goes down, but before RMD age.

Generic financial advice cannot apply in this one.

And — another thing — speaking of generic advice — that thing about waiting to take SS until full SS age is also generic advice. There are many different scenarios where that tedious mantra should not apply because taking the money and running at 62 could make a lot more sense in a variety of circumstances — including being able to stay out of tax-deferred accounts longer.

Why in the heck do people think financial advice should be one-size-fits-all.

Boomer

Even worse are so called financial advisors who really have no idea what they are doing other than lets sell annuities so we can make some money

[manaboutown]

Even worse are so called financial advisors who really have no idea what they are doing other than lets sell annuities so we can make some money

As an admonition to others to examine your conversion documentation carefully, I had an inept stock bookie foul up the paperwork on my IRA to Roth conversion back in 2002 which was the only year possible and thankfully a sensible year for me to do the conversion. The docs did not look right to me so I took them to a very smart advisor at another branch office of the same outfit who redid them during the last couple of days of December. If the conversion had failed I had no second chance as my income was always too high to qualify. Additionally, IMHO it makes no sense to do a conversion in a high tax bracket year or a high market year. 2002 was the perfect year for the conversion both income-wise and stock market-wise for me. I was able to strike when the iron was hot and got in under the wire. Whew!!!

[CoachKandSportsguy]

The model ONLY looked at the effect of IRA size with max social security benefits taken at by couple at FRA, minimal other taxable account income and the current RMD schedule to find where the size of the IRA at age 65 this year would cause the IRMAA tax to happen as a result of the RMD schedule, and only a married couple's limit, not a single limit. That is all, what people read into post and interpret is beyond the control of the post, as well as conflating this specific model output with other benefits of a ROTH, which was not the model output. The model makes no judgement on the value of a ROTH

I don’t think people with lots of money have any less aversion to paying taxes as those who don’t.

That's an assumption to justify your position. They may have an aversion, but may leave the decision to someone else as the issue is a result of success, and they focus on success, and let someone else worry about execution after the results. From what i have seen from these people, success is the key focus, not the avoidance of taxes as their focus.

IRMAA can be permanent, not just transitory in some situations.
Known issue, model calculates same. With a cap so as income increases it becomes a smaller percentage, and against other tax percentages, it is not the biggest to pay so it becomes less important. again, the model only looked at if IRMAA will effect a couple from an IRA RMD after a certain size. It does appear to be permanent or payable over many years with an IRA over $4 under the constraints of the model, which would currently start at the first RMD. That is all the model says, nothing else.

But Roth conversions can, done properly, give you control over future RMDs and taxable income so one can avoid IRMAA and other consequences of having higher taxable income.

Nothing suggested that is not the case, especially when near the level of having to pay penalties and taxes. The model has many inputs and currently known income tax by income level, deductions or standard, different incomes sources, social security at what age, etc.. but my post only focused on the effect of ONE variable under ONE scenario, which may be a common scenario,

The model makes no other judgements about the benefits to a Roth, the conversion to a ROTH, or even that a ROTH is the best option, and a ROTH does have drawbacks as compared to putting the conversion into a taxable account. The model also does not know of future tax law changes, which means that the model is not clairvoyant, and is only good as fy2024 anticipated taxes and levels, and very conservative IRA annual increases, given interest rates, geopolitical instability, and deterioration of the US standard of living by capitalism.

So if a reader here, who has not had much tax experience, reads that everyone doing ROTH conversions because of the threat of IRMAA tax, feels that they should follow because of what they read, maybe the information they are reading is incomplete as far as how much money they have relative to others posting on the board. under the current tax laws, IRMAA will not apply to everyone, so maybe they should visit with their financial advisor and tax person and see if they should be concerned about IRMAA or not. . and then while they are at it, they should also ask if a ROTH conversion is good for them, and how much.

IRMAA will not apply to everyone reading here under the fixed scenario presented. Other scenarios have not been presented.

[kkingston57]

Are the "super rich" actually on Medicare? Don' t they use some sort of Concierge System?

Probably have both. Medicare for the hospital part and concierge for the doctors

[Boilerman]

The model ONLY looked at the effect of IRA size with max social security benefits taken at by couple at FRA, minimal other taxable account income and the current RMD schedule to find where the size of the IRA at age 65 this year would cause the IRMAA tax to happen as a result of the RMD schedule, and only a married couple's limit, not a single limit. That is all, what people read into post and interpret is beyond the control of the post, as well as conflating this specific model output with other benefits of a ROTH, which was not the model output. The model makes no judgement on the value of a ROTH



That's an assumption to justify your position. They may have an aversion, but may leave the decision to someone else as the issue is a result of success, and they focus on success, and let someone else worry about execution after the results. From what i have seen from these people, success is the key focus, not the avoidance of taxes as their focus.


Known issue, model calculates same. With a cap so as income increases it becomes a smaller percentage, and against other tax percentages, it is not the biggest to pay so it becomes less important. again, the model only looked at if IRMAA will effect a couple from an IRA RMD after a certain size. It does appear to be permanent or payable over many years with an IRA over $4 under the constraints of the model, which would currently start at the first RMD. That is all the model says, nothing else.



Nothing suggested that is not the case, especially when near the level of having to pay penalties and taxes. The model has many inputs and currently known income tax by income level, deductions or standard, different incomes sources, social security at what age, etc.. but my post only focused on the effect of ONE variable under ONE scenario, which may be a common scenario,

The model makes no other judgements about the benefits to a Roth, the conversion to a ROTH, or even that a ROTH is the best option, and a ROTH does have drawbacks as compared to putting the conversion into a taxable account. The model also does not know of future tax law changes, which means that the model is not clairvoyant, and is only good as fy2024 anticipated taxes and levels, and very conservative IRA annual increases, given interest rates, geopolitical instability, and deterioration of the US standard of living by capitalism.

So if a reader here, who has not had much tax experience, reads that everyone doing ROTH conversions because of the threat of IRMAA tax, feels that they should follow because of what they read, maybe the information they are reading is incomplete as far as how much money they have relative to others posting on the board. under the current tax laws, IRMAA will not apply to everyone, so maybe they should visit with their financial advisor and tax person and see if they should be concerned about IRMAA or not. . and then while they are at it, they should also ask if a ROTH conversion is good for them, and how much.

IRMAA will not apply to everyone reading here under the fixed scenario presented. Other scenarios have not been presented.

Looks you’ve modeled a scenario for your own situation. That’s great, I’ve done the same. The issue is when you try to generalize your advice for others. These situations are complex and generalized advice does more harm than good.

[Stu from NYC]

Looks you’ve modeled a scenario for your own situation. That’s great, I’ve done the same. The issue is when you try to generalize your advice for others. These situations are complex and generalized advice does more harm than good.

But it does give one something to consider and think about.

[Boomer]

Re. RMD amount based on brokered CDs, at year’s end

Two Questions:

2023 is the first time I have ever bought brokered CDs. I have been buying short term, 3-6 months. All but one of those have already come due and paid the interest during this calendar year.

But now I have one (possibly soon to be more) that will not pay the interest until 2024. I know that the interest on brokered CDs does not compound. I also know that the amount originally invested in the CD fluctuates along the way — which makes no difference if held to term.

But what I do not know is — how is the year-end value of a brokered CD figured into an IRA for the calculation of the RMD? Original invested amount? Or amount on 12/31?

That range in value will be relatively moot. I am just curious about that part, but the bigger question is about the interest???………

Somewhere along the line, I picked up that the interest on a brokered CD (even if not yet paid in a calendar year due to no compounding) is somehow included in the amount on 12/31, whether it be for the RMD or as interest income from a taxable account. Am I understanding that correctly? Is interest projected somehow even though it has not yet been received, but cannot be thrown over into then next tax year? How does that work?

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.

[retiredguy123]

Re. RMD amount based on brokered CDs, at year’s end

Two Questions:

2023 is the first time I have ever bought brokered CDs. I have been buying short term, 3-6 months. All but one of those have already come due and paid the interest during this calendar year.

But now I have one (possibly soon to be more) that will not pay the interest until 2024. I know that the interest on brokered CDs does not compound. I also know that the amount originally invested in the CD fluctuates along the way — which makes no difference if held to term.

But what I do not know is — how is the year-end value of a brokered CD figured into an IRA for the calculation of the RMD? Original invested amount? Or amount on 12/31?

That range in value will be relatively moot. I am just curious about that part, but the bigger question is about the interest???………

Somewhere along the line, I picked up that the interest on a brokered CD (even if not yet paid in a calendar year due to no compounding) is somehow included in the amount on 12/31, whether it be for the RMD or as interest income from a taxable account. Am I understanding that correctly? Is interest projected somehow even though it has not yet been received, but cannot be thrown over into then next tax year? How does that work?

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.
Your IRA custodian will determine the value of your IRA, including brokered CDs, on December 31. As I understand it, this will include the market value of the CDs (not what you invested) and any accrued interest that would be taxable income if it were not in an IRA.

[Stu from NYC]

Re. RMD amount based on brokered CDs, at year’s end

Two Questions:

2023 is the first time I have ever bought brokered CDs. I have been buying short term, 3-6 months. All but one of those have already come due and paid the interest during this calendar year.

But now I have one (possibly soon to be more) that will not pay the interest until 2024. I know that the interest on brokered CDs does not compound. I also know that the amount originally invested in the CD fluctuates along the way — which makes no difference if held to term.

But what I do not know is — how is the year-end value of a brokered CD figured into an IRA for the calculation of the RMD? Original invested amount? Or amount on 12/31?

That range in value will be relatively moot. I am just curious about that part, but the bigger question is about the interest???………

Somewhere along the line, I picked up that the interest on a brokered CD (even if not yet paid in a calendar year due to no compounding) is somehow included in the amount on 12/31, whether it be for the RMD or as interest income from a taxable account. Am I understanding that correctly? Is interest projected somehow even though it has not yet been received, but cannot be thrown over into then next tax year? How does that work?

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.

These can be interesting and educational discussions and I like having them here

[Boomer]

These can be interesting and educational discussions and I like having them here

Me, too, Stu. :)

Boomer

[mntlblok]

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.

Same. Where is the list of these types compiled? :-)

[Boomer]

Your IRA custodian will determine the value of your IRA, including brokered CDs, on December 31. As I understand it, this will include the market value of the CDs (not what you invested) and any accrued interest that would be taxable income if it were not in an IRA.


Thank you. . .that brings me to another question, or two:

So, am I understanding correctly that the operative words there are “accrued” and “would be”……..

Does that then mean that the brokered CD’s interest is projected and taxable (or figured into next year’s RMD amount) though not paid out in the current tax year? (Kind of phantom-like?)

Actually, the CD I have is in an IRA. It will not reach its term until 2024 when it will pay the interest to me — no compounding along the way, I know. BUT……..

It sounds like “accrued” interest will apply inside an IRA, too; therefore, having an effect on next year’s RMD. Is that how it works?

If so, how is the accrued interest figured? Does an interest amount just show up on 12/31, even though it is not accessible to the CD holder yet?

I am brand new to brokered CDs. I obviously need a little fine-tuning on the subject.

Boomer

[retiredguy123]

Thank you. . .that brings me to another question, or two:

So, am I understanding correctly that the operative words there are “accrued” and “would be”……..

Does that then mean that the brokered CD’s interest is projected and taxable (or figured into next year’s RMD amount) though not paid out in the current tax year? (Kind of phantom-like?)

Actually, the CD I have is in an IRA. It will not reach its term until 2024 when it will pay the interest to me — no compounding along the way, I know. BUT……..

It sounds like “accrued” interest will apply inside an IRA, too; therefore, having an effect on next year’s RMD. Is that how it works?

If so, how is the accrued interest figured? Does an interest amount just show up on 12/31, even though it is not accessible to the CD holder yet?

I am brand new to brokered CDs. I obviously need a little fine-tuning on the subject.

Boomer
I am only about 99 percent certain, but CDs generate taxable income every tax year regardless of whether or not the interest is actually paid to the owner. The earned, but not paid, interest is included in the December 31 valuation of your total IRA, and that is the amount used to calculate your RMD for the following year. Note that, with a brokered CD, you can sell it at any time at the current value, and you will not lose any accrued interest up to the date of the sale. Some people have stocks, gold, and even real estate in their IRAs, but the RMD is still calculated on the market value of the IRA assets as of the end of the year. The RMD is always calculated on the market value of the IRA assets on December 31. And, unless you have a self-directed IRA, you have an IRA custodian, who is responsible for determining the market value of your IRA assets, and reporting it to the IRS.

[Stu from NYC]

Me, too, Stu. :)

Boomer

Having said this think there are times you get very conflicting opinions and best to consult a tax professional.

In the meantime keep them coming.

[Altavia]

Same. Where is the list of these types compiled? :-)

In my ignore list...

[Haggar]

Re. RMD amount based on brokered CDs, at year’s end

Two Questions:

2023 is the first time I have ever bought brokered CDs. I have been buying short term, 3-6 months. All but one of those have already come due and paid the interest during this calendar year.

But now I have one (possibly soon to be more) that will not pay the interest until 2024. I know that the interest on brokered CDs does not compound. I also know that the amount originally invested in the CD fluctuates along the way — which makes no difference if held to term.

But what I do not know is — how is the year-end value of a brokered CD figured into an IRA for the calculation of the RMD? Original invested amount? Or amount on 12/31?

That range in value will be relatively moot. I am just curious about that part, but the bigger question is about the interest???………

Somewhere along the line, I picked up that the interest on a brokered CD (even if not yet paid in a calendar year due to no compounding) is somehow included in the amount on 12/31, whether it be for the RMD or as interest income from a taxable account. Am I understanding that correctly? Is interest projected somehow even though it has not yet been received, but cannot be thrown over into then next tax year? How does that work?

Boomer

PS: Before the snarky unhelpful types pile on and imply that I am stupid for asking a question like this on TOTV and should ask an accountant — save it. Go read a different thread if you do not like this kind of discussion. I do.

I'm a CPA and here's my answers:

First one easy question - on CD's outside of retirement accounts interest is taxable when paid (not as it is accrued). The taxpayer has to have constructive receipt (be able to get their hands on the money to be taxable).

As to whether accrued interest on a CD is added to market value in a retirement plan used as a basis for calculating. The answer would be appear to be yes after doing research though I cannot find any specific reference to it in the code or regs.

As indicates before a minor problem as this increase in market value due to accrued interest would be divided by the holder over their life expectancy.

A reminder - start doing the work for your 2023 Qualified Charitable Donations now - if you qualify. A wonderful way to reduce income for both income taxes and IRMMA.

[retiredguy123]

I'm a CPA and here's my answers:

First one easy question - on CD's outside of retirement accounts interest is taxable when paid (not as it is accrued). The taxpayer has to have constructive receipt (be able to get their hands on the money to be taxable).

As to whether accrued interest on a CD is added to market value in a retirement plan used as a basis for calculating. The answer would be appear to be yes after doing research though I cannot find any specific reference to it in the code or regs.

As indicates before a minor problem as this increase in market value due to accrued interest would be divided by the holder over their life expectancy.

A reminder - start doing the work for your 2023 Qualified Charitable Donations now - if you qualify. A wonderful way to reduce income for both income taxes and IRMMA.
With regards to your first paragraph regarding CDs outside of an IRA, as I understand it, you can always withdraw accrued interest without penalty. And, you are taxed on accrued interest on an annual basis regardless of the term of the CD, or whether or not you actually withdrew the interest. I have owned a lot of CDs, and have always received a 1099-INT every year from the bank and paid income taxes on the accrued interest even when I didn't actually withdraw any interest.

[Sabella]

Looking for advice regarding RMD‘s on IRAs, and approaching that age where you have to start taking money out And possible tax consequences

[Viperguy]

Flat tax. Everyone pays

[Boomer]

With regards to your first paragraph regarding CDs outside of an IRA, as I understand it, you can always withdraw accrued interest without penalty. And, you are taxed on accrued interest on an annual basis regardless of the term of the CD, or whether or not you actually withdrew the interest. I have owned a lot of CDs, and have always received a 1099-INT every year from the bank and paid income taxes on the accrued interest even when I didn't actually withdraw any interest.


rg123,

I have owned CDs over the years, too, but they were always regular bank CDs that compounded, making the interest available to take when it posted throughout the term, and that interest was taxable, outside of IRAs. I understand all that.

But — this is the first time I have ever owned brokered CDs, and somewhere I picked up the idea (I think on TOTV) that interest on a brokered CD, inside an IRA, would become a factor in the RMD calculation even though it was not compounding and had not yet been posted. And outside an IRA, the brokered CD interest that had not yet been posted could somehow be taxed……..

Two differences in a brokered CD and a regular CD are the fluctuating value of the brokered CD before term and a lump sum paid at the end of the brokered CD’s term instead of compounding. Those two things — I understand…….

BUT now…..I am starting to wonder if the concern I have about possible consequences of brokered CD interest BEFORE being posted was a complete misunderstanding on my part……Or was it? (It never made sense to me or seemed fair that way, but I have never had any reason to expect tax law to make sense or to be fair.)

Looks like maybe my question was much ado about nothing — maybe.

Boomer

[Haggar]

With regards to your first paragraph regarding CDs outside of an IRA, as I understand it, you can always withdraw accrued interest without penalty. And, you are taxed on accrued interest on an annual basis regardless of the term of the CD, or whether or not you actually withdrew the interest. I have owned a lot of CDs, and have always received a 1099-INT every year from the bank and paid income taxes on the accrued interest even when I didn't actually withdraw any interest.

It's taxable when the interest is actually credited to you account even if there are restrictions on the CD - not on an accrued basis.

[retiredguy123]

It's taxable when the interest is actually credited to you account even if there are restrictions on the CD - not on an accrued basis.
Thanks. Years ago, I had a zero coupon bond that never credited any interest. But, I still had to pay income tax on the "imputed" or "phantom" interest every tax year. Isn't that the same way a long term bank CD works? I thought that, even if the bank doesn't actually credit interest to your account, the IRS still wants to tax you on interest every year.

[Boomer]

I'm a CPA and here's my answers:

First one easy question - on CD's outside of retirement accounts interest is taxable when paid (not as it is accrued). The taxpayer has to have constructive receipt (be able to get their hands on the money to be taxable).

As to whether accrued interest on a CD is added to market value in a retirement plan used as a basis for calculating. The answer would be appear to be yes after doing research though I cannot find any specific reference to it in the code or regs.

As indicates before a minor problem as this increase in market value due to accrued interest would be divided by the holder over their life expectancy.

A reminder - start doing the work for your 2023 Qualified Charitable Donations now - if you qualify. A wonderful way to reduce income for both income taxes and IRMMA.



Hey, Haggar, thanks,

I am into QCDs. In fact, I tell friends about them, before their eyes begin to glaze over, as they start to look furtively for an exit.

I think it was 2015, not sure, when QCDs were made permanent in the tax law instead of having to wait until late in the year to find out if QCDs would be a thing in each given year. But I was not old enough yet then to worry about RMDs.

When the 2017 tax law changes came into play, the old charitable deduction could not help much anymore for a lot of taxpayers but if RMD age, the QCD could work even better — and it fortunately was already in the tax law and somehow escaped being taken out in 2017.

It is good that the QCD can also avoid IRMAA for those who are charitably inclined and/or would rather give money to charity than to the government for higher Medicare costs. But numbers, of course, will vary by returns and inclinations.

Btw, the reason I have been sounding a bit obsessed with tax questions is because November is when I try to project numbers to see if anything needs to be or can be adjusted. (Yes. I am a boring woman. :) )

Boomer

[retiredguy123]

rg123,

I have owned CDs over the years, too, but they were always regular bank CDs that compounded, making the interest available to take when it posted throughout the term, and that interest was taxable, outside of IRAs. I understand all that.

But — this is the first time I have ever owned brokered CDs, and somewhere I picked up the idea (I think on TOTV) that interest on a brokered CD, inside an IRA, would become a factor in the RMD calculation even though it was not compounding and had not yet been posted. And outside an IRA, the brokered CD interest that had not yet been posted could somehow be taxed……..

Two differences in a brokered CD and a regular CD are the fluctuating value of the brokered CD before term and a lump sum paid at the end of the brokered CD’s term instead of compounding. Those two things — I understand…….

BUT now…..I am starting to wonder if the concern I have about possible consequences of brokered CD interest BEFORE being posted was a complete misunderstanding on my part……Or was it? (It never made sense to me or seemed fair that way, but I have never had any reason to expect tax law to make sense or to be fair.)

Looks like maybe my question was much ado about nothing — maybe.

Boomer
Note that another difference with brokered CDs is that there is no penalty for early withdrawal of principal.

[Boomer]

Note that another difference with brokered CDs is that there is no penalty for early withdrawal of principal.

But I think that means that because the interest is paid at the end of the term, in total, there is no interest upon early withdrawal, even though there is no penalty.

I have yet to do anything over 3 or 6 months. Lately, I saw that it’s hitting more above 5% in available new CDs and I am getting ready to buy again.

Still though……..weird and scary times we are in……..

I realize Fidelity’s money market is grazing 5 sometimes, but I think they collect basis points. Is that right?

Boomer

[retiredguy123]

But I think that means that because the interest is paid at the end of the term, in total, there is no interest upon early withdrawal, even though there is no penalty.

I have yet to do anything over 3 or 6 months. Lately, I saw that it’s hitting more above 5% in available new CDs and I am getting ready to buy again.

Still though……..weird and scary times we are in……..

I realize Fidelity’s money market is grazing 5 sometimes, but I think they collect basis points. Is that right?

Boomer
I don't know how the interest is paid on a brokered CD, but I assume that the market price, if you sell it before maturity, would reflect the value of any future interest payments that will be due. With a bank CD, you never pay a penalty on the interest you withdraw. The penalty only applies to the early withdrawal of principal. You can ask the bank to allow you to withdraw interest only to avoid paying a penalty.

Note that the Vanguard Federal money market fund current yield is 5.31 percent. The Fidelity Federal money market fund has a current yield of 5.02 percent. I think that advertised yields are calculated after any fees have been applied. I always buy the "Federal" money market funds because they pay a slightly higher interest rate than the regular MM fund.

[Boomer]

Looks like the official IRMAA brackets for 2024 have now appeared online.

Yes. I know that those are based on the 2022 MAGI, but, at least, those numbers can act as a gauge to get an idea about 2025 brackets that will be based on NOW!

If you find yourself teetering on the threshold of crossing over into IRMAA and you have reached RMD age but have not yet completed the RMD for 2023, it might be worth running some numbers to see if a QCD could rescue you. . . if giving to charity is more appealing than paying taxes and you do the math to see what works best for you.

I think the IRMAA brackets seem unfair to single filers because probably more of them hit that threshold. I also know that IRMAA can sneak up on those who never thought about what could happen if income has been unusually high in a certain year.

Anyway, if IRMAA could be an issue for you, well. . . time’s a wastin’.

Boomer