GRD Season 4 Episode 4_How Big of a Deal are IRMA Charges_mixdown
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[00:00:00] Hi, I'm Ed Slott. And I'm Jeff Levine. And we're two guys who just love to talk about retirement and taxes. Look, our mission is simple to educate you the saver, so that you can make better decisions because better decisions on the whole lead to better outcomes. And here's how we're going to do that. Each week, Jeff and I will debate the pros and the cons of a particular retirement strategy or topic with the goal of helping you keep more of your hard-earned money.

At the end of each debate, there's going to be one clear winner you. A more informed saver who can hopefully apply the merits of each side of the debate to your own personal situation. Decide what's best for you and your family. So here we go. Welcome to the Great Retirement Debate. Hello everyone, and welcome back to the latest episode of The Great Retirement Debate.

I'm Jeff Levine. With me, as always, is my partner in crime Ed Slott. What's going on today? Great to be here. Today we're talking about IRMAA. Now, there may be somebody watching [00:01:00] the podcast named Irma. I have a, there's a lot of people watching, so we're talking specifically to you today. It's only to you. I don't think I've heard that name since my grandmother.

I mean, I think a lot of her friends were Irma or Sadie or somebody like that. But it's, uh, we're talking about Medicare income related monthly adjustment, um, uh, amount, income related, that's it. Uh, monthly adjustment amount that determines how much your Medicare premiums can go up for parts B and D. And this affects obviously, uh, virtually everybody on Medicare, depending on your income, and it's not just your income.

Other portions of the tax code where you hit a certain income and it phases in or phases out the, in this case you go $1 over the limit, it's what we call a cliff, and all of a sudden your monthly premiums can go up, costing you, uh, hundreds of dollars [00:02:00] more a month or, or even in the thousands in some cases for the year.

Yeah. So, so I guess our topic really today then is how big of a deal are these IRMAA charges? Are these, what are called IRMAA surcharges? Yeah, so the question is there are a big deal and there are, but they're tough to plan for and that's the context we're talking about adding income specifically for a Roth conversion.

That's the number one question I get when I do consumer programs and I talk all about the Roths. I'll give you an example. There was, uh, one case where. Had a big crowd and this I talked all about the Roth and they all love the idea. And a woman gets up in front of the whole group and says, wait a minute.

I like the idea of these, uh, Roth conversions, but, if I convert to a Roth, won't that increase my income? And I said, yes, absolutely. Well, if it increases my income, could it push me and increase my Medicare IRMAA [00:03:00] charges? And I said, it really could. And if you go even a dollar over the limit, it could really, uh, increase them.

That's for sure. She says, well, if that happened, that, that would make me very angry. And I said to her, uh, in front of everybody, well, if that would make you an, uh, very angry, then convert anyway. 'cause I'd rather have you be angry one year than be angry for the rest of your life. So here's what I meant by that.

The money that's coming out of your IRA is going to be forced out at some point in your life right now, age 73 for most people, unless you're in a plan. But for your IRA age 73, you have required minimum distributions, and those are forced distributions, whether you like it. Or not. We're talking about say, Roth conversions here.

So if you do nothing, if you say, well, I don't wanna convert because I don't want to increase my Medicare charges, so you do nothing. Your IRA [00:04:00] doesn't go away. It continues to grow and grow and build. And then once you hit RMDs at age 73, well then your RMDs may be so high that the very thing that made you angry in the first place will happen to you for the rest of your life triggering those Medicare IRMAA charges.

You have to look long term personally to me. Depending on what you add, income form, we're talking about a Roth conversion, which is, I think at low rates is a good thing to add income is a good thing to do when your tax rates are low, and I don't think that IRMAA charges, for the most part, should deter you from converting to me at the end of the game, if you are building up in a Roth, it's more like a. A rounding era. You have to look at the, in the grand scheme of things, where you want to end up. And if you want to end up, again, my opinion with more money in the Roth IRA and it costs you a few more dollars, uh, in IRMAA charges, you'll, you'll [00:05:00] still be better off in the long run because let's take the extreme, Jeff. Let's say you converted everything. Well now in retirement, you won't have any RMDs and then you'll That's right. Just when you need the money, the most in retirement. You won't have to worry, uh, generally depending on your other income about these IRMAA charges. So I don't think it's a big deal in the making the decision on whether to convert to a Roth or not.

Alright, so let, let's rewind a little bit and let's talk a little bit more about these IRMAA surcharges. As you already mentioned, these are the income related monthly adjustment amounts, and effectively you can think of them as an extra charge for individuals with higher income. The higher your income up to certain points, the more you're going to pay in surcharges in a similar way to the way that tax brackets rise as you have higher income.

But. For, whereas with income, right, you start at the, the 10% tax bracket and you go up from there. We started a zero IRMAA, right? There's for [00:06:00] if your income is low enough, you don't have any IRMAA, your IRMAA is zero. That doesn't mean your premium for Medicare is zero. You just have the, like, the regular or what they call the base premium amount for that year. If your income rises and, and for 2025 as an example here, you have to have more than about a $106,000 of income as a single filer before you are impacted, and twice that $212,000 of income as a married couple, filing a joint return before you're affected. So it, it doesn't impact the majority of individuals out there because the majority of people. Who are on Medicare, so generally talking about people who are 65 or older, the majority of those individuals have income below those amounts.

Those are still relatively high income amounts, so most people don't have to worry about IRMAA. So if our, you know, if, if the, the, the topic of this discussion today is our IRMAA surcharges a big deal or not? For the [00:07:00] overwhelming majority of people, the answer is they're not because they just don't have income high enough.

That they even need to think about these things in the first place. Now, for those who have done, uh, a really great job saving over the years, or who are fortunate enough to have higher income, then they can be pretty significant. So just as again, uh, you know, never know when someone might listen to this, but in the year 2025, right, if you think about what these can actually equate to, you know, there's a song like that in the year 25, 25, but this is 2025.

Yeah. Okay. Yes. 2025. Yeah. All right. Well, I out the future. Yeah, a couple years. Yeah, so, I mean, but for, for, for 20, for, for 2025, I'm just gonna go with that, right? For 2025, if you are, if your income is higher and at the highest tier, you could end up paying about $443. Well, actually a little bit more than that.

Almost $444 a [00:08:00] month, more each month for your Medicare Part B premiums. Now the same IRMAA. Like concept also applies to Medicare Part D, part A, there's no surcharges, you don't have to worry about that, right? And part C is Medicare advantage. So we're just gonna to think about that. Uh, we can leave that to the side for now.

But for Medicare part B and Part D, the prescription drug plan part D, there's also an A premium surcharge there. And that's another up to another about $86 a month. And what's important is how much this impacts you. Depends upon your specific circumstance. If your income is lower, your surcharge may be lower, but.

If you are married, well, there's two of you, which means that each of you may have Medicare, part B and part D, which means that each of you may be subject to a higher surcharge. And you know, just to give people a, a, an idea of how significant at a, at a maximum this can be. [00:09:00] In 2025, we're talking about a potential increase, not total premium, but an increase from the baseline of more than $10,500 for part B and of more than $2,000 for Part D for a married couple. So a married couple could end up paying in addition to the regular baseline part B and Part D premiums that everyone pays, they could end up paying more than $12,500 more in just surcharges. A way to think of it is as penalties for having higher income.

Yeah, that's right. And it, it's a cliff kind of thing. It's not like the, the, uh, progressive tax rates, like you said, like if you're in a 37% bracket, you get part of the 10 and all of that stuff. Once you go over the cliff by a dollar, you, you jump to the next bracket. So that could be a big problem. So you're right.

I agree that so, so effectively, ed, I wanna pause you there, just, just to, to. As the, as the [00:10:00] youths say. Double click on that for a moment. Oh, uh, $212,000 I mentioned for 2025 is the, the, the limit. Right before you go into the IRMAA, so what you're saying is the cliff is if someone had $212,000 of, of income and they filed a joint tax return, they would have no surcharges for the year.

Right. But if they had 212,000. $1, then they have to pay the higher surcharge amount, right? Which in this case for 2025 is $74 for the entire year. So having $1 more of income. Just to give people a sense of what this cliff looks like, that means having one extra dollar of income in the example I gave, going from 212,000 to 212,001 means $74 a month.

More times the potentially two people, if you're married, right? That's $148 per month. And then you've gotta pay that monthly, which means it's 1,776. [00:11:00] Very American number there for you, ed $1,776 more, plus the part having $1 more, plus the Part D. That's right. Plus the Part D, which in this case would be $13.70 cents more a month on top of that, which, you know, again, we're talking about almost $2,000 more in what you'd have to pay by having $1, that's like a 2000000000% tax rate or something like that, Ed.

Right, right. What we are talking about here, does it pay in the context, at least what I'm talking about is of the Roth conversion, where you, you were right? Most people will be under, these are pretty good limits for the average income of somebody on Medicare, but you have a spike in income. Let's say you convert, I don't know, $300,000.

Alright, so you are going to get hit probably with the maximum. But only for that year. Look long term. That's $300,000 you took out of your IRA that won't produce higher RMDs in the [00:12:00] future. If you don't start bringing this IRA balance down, you will have this problem every year when you start, or part of it, depending on how much you have in your IRA.

Beginning at age 73, so you have to look out and it's also a very tough thing. We do tax planning, we talk about it all the time. It's one of the toughest things to plan for, for two reasons. Yep. Uh, one of them, I think you said, uh, the Medicare charges appear nowhere on tax return. So if you're looking at a tax return, how do you plan for it?

But it's also a two year look back. So you have to plan two years ahead. So if you are doing Roth conversions, for example, a lot of times we tell people if you're that worried about the Medicare surcharges, do all of your conversions before reaching age 63. Some people say, well, I'll wait till I'm 64 because Medicare charges kick in at 65.

No. Uh, if you convert in the year, you, you turn [00:13:00] 63, that's going to show up. Two years later. So you'd have to convert at 62 or earlier. That's one, uh, one way to avoid them. Start doing your conversions earlier if you can. Yeah. And I find a lot of people are confused by that, and they say, why, why do they have to go back two years?

So basically what you're saying is now, uh, you know, as we sit here today, we're in 2025. See, I gotta, at that time you're saying that today someone's surcharges in 2025 are generally based on. What their income was in 2023, two years before Kade. Correct. Right. It's already locked in. That's it. Can't do anything about it.

Now people say like, why is that it, it's very simple. It's the year that the, the, the Social Security Administration knows what your income is for the most part. Right. Like when you think about starting 2025, what is, you know, what are, what are your surcharges gonna be in January? Well. That if you base it on the previous year, no one [00:14:00] knows what your income was in 2024 until you file your 2024 return, but you generally don't do that until part of the way into 2025.

So at the start of 2025, the most recent tax return that the Social Security Administration has for the most part is 2023. That's why they look back two years. It's a matter of being practical about what they can actually have access to from a data perspective. And it's also worth mentioning. One other thing, ed, we, you know, you said, well, what if you're 63 and you somebody said, I want to convert it.

64. There are. Exceptions to this rule, and that's why, you know, ed and I are here to, to provide information and, and general education for folks, but we are also big believers in working with a knowledgeable professional whenever you have big decisions to make because. There's always exceptions. For instance, if you retired when you are 64, then there's a form that you can fill out.

The SSA, the Social Security Administration [00:15:00] 44 form, where you can report a life changing event to basically say, I had high income two years ago, but I don't really have high income now, and it has to be for some approved reason. Like I retired or a a, I got married, or I got divorced, or something like that, or someone died.

And you can actually tell the Social Security Administration, don't use this old income number. Use this new income number because it's more reflective of my current status. But again, you've gotta know that that form exists. You've gotta know to fill it out. It's gotta be done in a timely matter. It's gotta be done correctly and, and so everything we say.

It, it's just as a general rule of thumb, like it's always best to make sure that you're getting the best information for your specific circumstances, especially for big decisions like Roth conversions and things like you're talking about ED retirement and how do I deal with these IRMAA surcharges, et cetera.

Uh, go back to the form. Let's say you did all the things you said. Yep. One excuse that's not of acceptable is for a Roth [00:16:00] conversion. That's right. Yep. So you did all of that. So if you have a spike in income for a Roth conversion, that's not going to help you in that recalculation. So at the end of the day, ed, what do you say?

You say IRMAA, surcharges are a big deal or not? Uh, I I don't think they're generally a big deal for the reasons you said up front that it doesn't affect most people. The surcharges we're talking about where you go up, but. Even for those who convert 300,000, 400,000, 500,000, they get hit that one year. If you look at the tax-free buildup in that Roth IRA for the rest of your life and 10 years beyond to your beneficiaries, that that's nothing those IRMAA charges are, are going to be, like I said before, rounding era.

That's really all, all they're going to be in the grand scheme of things, you, you and your family will be way ahead, I believe with the Roth IRA, even if it caused that spike in income that triggered these [00:17:00] Medicare surcharges. Yeah. Ultimately, if we think about what this could be for higher earners, it can equate to, in some cases, and I'm, I'm just giving a round number here, assume it's almost like a 3% increase in tax rate, right?

Right. When you think about you're paying IRMAA surcharges generally with after tax money, so if, as in my example, you have to pay $12,500 of surtax for the year, it probably means you had to earn about another. You know, if it's ordinary income, $25,000 maybe between state and federal taxes in order to get the $12,500 to pay the IRS.

And if you figure $12,000, you know, $25,000 out of your income. If you're making in, you know, in this case $750,000, which is where that top one kicks in, it's 3%. So is 3% a big deal or not? It's, it's a personal opinion. It's certainly not trivial, but it's also probably not breaking the bank for someone who's making $750,000 a year in retirement.

And I wanna point out what Jeff just said there. [00:18:00] That's where the top bracket kicks in for married couples, 750,000 when you hit that. So that's a pretty healthy number. And for singles is 500,000. So that, that's a pretty good number. So in the long run, yes, you should be concerned about it and you should know about it.

For things that increase your income that you know, don't have a long-term benefit. Uh uh, for example, uh, I can't even think of an example, but just to add income. Uh, but for something that has a huge long-term benefit like a Roth IRA, to have that money building tax free, no RMDs grows and compounds income tax free for the rest of your life at 10 years beyond.

That's a small price to pay. I agree with all of that, and I would add just one more thing. You know, nothing makes people more upset than I know being like $1 over the surcharge, right? Because again, it's a cliff. So this goes back to having good planning, right? If your income is going to be just a little bit over, do something [00:19:00] right.

Either add more income so you're getting more out of it, or go back a little bit. But because of the cliff nature of this, it's even more important in some ways to plan for your IRMAA than it is even for your regular tax brackets if you're over by a dollar in a regular tax bracket. Only that last dollar gets taxed at the higher rate.

But with an IRMAA, you go over by $1 and you and potentially even your spouse, if you're married, are going to pay those higher surcharges for the entire following year. And Ed, that's, that doesn't sound like fun. Yeah. And you, you are absolutely right. When I do seminars, everybody hates these IRMAA charges.

It's all they talk about. But we're, we're, that's why we're addressing it, but we're addressing a. A bigger picture, a bigger benefit long term that it's not as big as a, as big of a deal. Uh, nobody likes to pay more. They all complain about it. You're absolutely right about that. But you gotta look at it long term.

You may end up, uh, way better off, especially in terms of, uh, a Roth conversion, I believe. Anyway. Yeah, I'm with you a hundred percent. [00:20:00] Alright, well Ed, that's all the time we have for this episode of The Great Retirement Debate. Remember, the goal of this show is to help make you the consumer the winner of every one of our debates in that you are more informed and can make better decisions about your future and better decisions on the who lead to better outcomes.

And that's what Ed and I hope for you. So thanks so much for joining us for this episode of The Great Retirement Debate and we'll see you real soon. Jeffrey Levine is Chief Planning Officer at Focus Partners. This podcast is for informational and educational purposes only, and should not be construed as specific investment accounting, legal or tax advice.

Certain information mentioned may be based on third party information, which may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. The topic discussed and corresponding arguments are those of the speakers and may not accurately reflect those of focus partners.