Q. I have a question regarding RMDs and IRMAA — Income Related Monthly Adjustment Amount — which is the increase in Medicare Part B premiums. I started taking RMDs that put me into a higher income — not just for tax purposes — but surprisingly also for Medicare Part B premiums. Could I take all my RMDs and pay the tax at one time? Then I’d pay the higher Part B premiums for that year, but not forever. If I did that, my future income would be under the $85,000 level and I’d then pay the lowest Part B premium.
A. Let’s talk this whole thing through because you’re suggesting a very substantial change in your finances for some Part B savings.
Let’s start from scratch.
Medicare Part B covers medically necessary services and supplies needed for the diagnosis or treatment of a health condition, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. It includes outpatient services received at a hospital, doctor’s office, clinic, or other health facility. Medicare Part B also covers many preventive services to prevent illness or detect them at an early stage.
Part B premiums are based on your Modified Adjusted Gross Income (MAGI), Kiely said.
MAGI equals your total adjusted gross income plus your tax-exempt interest income.
“Most people pay $104.90 per month for Part B premiums,” Kiely said. “However, if your MAGI is higher than $85,000 per year for a single person or $170,000 for married filing a joint income tax return, you will pay more.”
Take a look at the chart below for premium and income details.
We’re assuming you’re single because you mentioned the $85,000 income level.
Kiely said if your income was $85,000, your federal income tax will be $14,188 (single, over 65 and with the standard deduction) and your annual Medicare B premiums would be $1,258.80 ($104.90 X 12 = $1,258.80).
If your income was $107,000, your federal tax would be $19,867 and your Part B premiums would be $1,762.80, Kiely said.
Now let’s turn to your IRA and your idea to take all your Required Minimum Distributions in one year.
Every traditional IRA holder is required to take Required Minimum Distributions (RMDs) beginning at their age 70 1/2, and every year thereafter, said Debra Morrison, a certified financial planner with Empowered Retirement in Lincoln Park.
“It is impossible to stack up all of your annual RMDs to otherwise satisfy the IRS by taking them in one year,” Morrison said. “You would virtually nearly exhaust your IRA, since the RMD schedule has been established to better ensure that your Traditional IRA will ‘last’ your expected lifetime.”
But there are other strategies to consider.
Kiely said you could consider converting your IRA to a Roth IRA. The tax results would be the same in the conversion year, but the money in the Roth would then grow tax-free and you wouldn’t have to take any RMDs. Ever.
Kiely offered this example: Let’s say you have $250,000 in your IRA. If you convert it all at once, your income would jump from $85,000 to $335,000. Your federal tax would be $91,408, a $77,220 increase. Additionally, your Medicare Part B premiums in 2017 would jump to $2,769.90 ($230.80 X 12 = $2,769.60).
“Medicare used your MAGI from two years ago to calculate your premiums,” he said. “So an increase in 2015’s income wouldn’t be reflected in your premiums until 2017. In 2018, your premiums would drop back to $1,258.80.”
But here’s the big question: do you have $77,220 sitting in the bank to pay the tax?
“Also, don’t forget the Great State of New Jersey. The governor’s share of your Roth conversion would be $17,382, bringing the total tax to $94,602,” Kiely said.
So if you have $95,000 in the bank that you can use to pay the tax, great, Kiely said. But if you don’t have $95,000, then you have to pay the tax out of the $250,000 you converted into a Roth. That means you will lose the income potential on the $95,000.
“If you were my client I probably would advise against the conversion,” Kiely said. “The tax and loss of future earning is more than the potential savings from $1,500 lower Medicare Part B premiums.”
Morrison said you not have to convert all of your traditional IRA to a Roth. You could consider partial conversions if in fact your income could be kept underneath either the $85,000 or the $170,000 MAGI limit, she said.
If you do try to convert all, or part, of your IRA to a Roth, substantially increasing your income for the one year, you can appeal to Social Security in the second year to lower your Medicare part B premium, Morrison said.
If that worked, she said, you’d have the best of best of both worlds: a Roth IRA with no annual RMDs and no extra future Part B or D Medicare premiums.
See below for more details from Social Security on how such appeals work.
Of course, a successful appeal can’t be guaranteed, so know that a conversion isn’t your only alternative.
Morrison said if you need the IRA money to live on, you could choose to withdraw additional sums from your IRA — which would otherwise be deemed taxable income — thus grouping those every other year, or every third year, for example. The hope would be that in the years in between the additional income draws, you could qualify for a lower Part B premiums — unless your regular annual RMD causes you to be over the standard limit of MAGI, she said.
“Remember that excess withdrawals from your IRA will help ratchet down subsequent years’ RMDs, presuming neutral market performance,” Morrison said.
Or, if you do not need taxable dividend or interest income from your non-IRA investments, you can make some other changes that could help.
“Reallocate your portfolio more towards stocks to generate capital gains instead of taxable interest and dividends, which will lower your annual declarable income figure, on which MAGI is based,” Morrison said.
Also, if you otherwise contribute annual amounts to charities and don’t need all of the principal money in your traditional IRA, you could choose to gift part of your traditional IRA to charities and thus not have to take such a large RMD, potentially reducing the Part B and D Medicare excess premiums, Morrison said.
Here’s that closer look on how to appeal higher premiums with Social Security, courtesy of SSA.gov:
What if my income has gone down?
If your income has gone down due to any of the following situations, and the change makes a difference in the income level we consider, contact us to explain that you have new information and may need a new decision about your income-related monthly adjustment amount:
•You married, divorced, or became widowed;
•You or your spouse stopped working or reduced your work hours;
•You or your spouse lost income-producing property because of a disaster or other event beyond your control;
•You or your spouse experienced a scheduled cessation, termination, or reorganization of an employer’s pension plan; or
•You or your spouse received a settlement from an employer or former employer because of the employer’s closure, bankruptcy, or reorganization.
If any of the above applies to you, we need to see documentation verifying the event and the reduction in your income. The documentation you provide should relate to the event and may include a death certificate, a letter from your employer about your retirement, or something similar. If you filed a federal income tax return for the year in question, you need to show us your signed copy of the return.
Remembering that the Income Tax year that the SS administration is relying upon is most likely that of 2 years ago, hence your need to provide them with your most recent Form 1040.
Keep in mind that the Medicare premium notices are sent each fall, so time is of the essence now for you to appeal to SS if you happened to convert to a Roth IRA, for example, or have been widowed, etc., such that future years’ MAGI will not replicate past years’ MAGI, hopefully resulting in a reduction in, or elimination of, your IRMAA. Call the SSA @ 800-772-1213, 7 AM – 7 PM, Monday–Friday and make an appointment with your local SSA office to appeal your IRMAA.
Email your questions to moc.p1545142651leHye1545142651noMJN1545142651@ksA1545142651.