004 – IRMAA is a consideration, not a roadblock

Talking about Roth is all the rage online and at industry conferences, but some people are getting the execution really wrong. One place we see Advisors get this wrong is by using certain factors as an excuse NOT to do Roth conversions. Factors like the Medicare Income Related Monthly Adjustment Amount (aka IRMAA).

Yes, rules of thumb can be helpful at times but at best they are general guidelines and not gospel. Inadvertently crossing an IRMAA threshold and having your client be surprised by the increase in two years creates an awful experience for them, but that does not mean that IRMAA is a deal breaker in pursuing the strategy.

First, some theory, and then some math.

From the highest level converting to Roth makes taxpayers concerned they could be in a similar or higher tax bracket in the future. If their tax rates go up (whether due to their income increasing, existing tax laws expiring in 2026 or Congress making another change in the future) then converting to Roth in a relatively low tax year creates tangible tax savings. If tax rates go up or remain the same then converting to Roth creates flexibility and gives taxpayers more options when unexpected cash needs arise. There is a lot more to this topic but those are the basics.

Now some math. In our experience when Advisors are scared away from Roth because of IRMAA they’ve never done the math, they just get scared of the idea. In 2023, the first premium jump happens when taxpayers who are married and filing jointly hit modified adjusted gross income (MAGI – for most taxpayers this is adjusted gross income plus tax-exempt interest) of $194,001.

Between $194,001 and $246,000 Medicare premiums are $65.90/month higher per person meaning a possible total increase for the year of $1,581.60. Which means if those taxpayers fill up that entire IRMAA bracket with a $52,000 Roth conversion the additional cost will be less than 3%. This could be enough to say “It’s not worth it this year” but we need to use real data to make decisions.

Pushing through the next IRMAA bracket ($246,001 to $306,000) the total additional cost is $2,373.60 or just under 4%. The impact is not consistent across the board but is in the single digits, not catastrophic amounts…unless the client doesn’t know to expect the change, and then it will be painful and it will be your fault (in their eyes).

IRMAA should also be in your analysis when you look at what a taxpayer will pay in taxes in the future to decide if a Roth conversion now makes sense. The conversation often centers around what income tax bracket a taxpayer will be subject to in the future, but for those who will be indefinitely in a higher IRMAA bracket in the future without advance planning, it could make sense to be more aggressive before additional income streams like social security and required minimum distributions kick in.

This is a topic we will continue to cover in more depth but this gives you a starting point to think differently about how IRMAA may or may not impact the Roth conversion decision.

What can you do about it?

Your approach to Roth conversions has to be intentional and specific. Make sure you are getting tax returns from everyone of your clients so you have the real data. Before you recommend a Roth conversion, understand your client’s long-term goals and most likely long-term tax situation and then work out the plan. There are times when converting into a higher IRMAA bracket can absolutely make sense, but you need a system to identify and execute those opportunities.

Happy Tax Planning!

About The Newsletter

The tax code is 80,000+ pages and Google has 875,000,000 results when you search “Tax Planning”, so each week we are going to help you wade through all of that noise and get to the Relevant Tax Stuff.