Are you approaching the age of 65 and worried about your Medicare premiums? Do you know what IRMAA is and how it can affect your monthly payments? In this episode, Michael, Tommy, John, and Ben will be discussing everything you need to know about Income Related Monthly Adjustment Amount (IRMAA) and how it relates to your Medicare coverage. This episode will be especially valuable for all federal employees, but specifically to those approaching the age of 65.
Listen in to learn the difference between Medicare A, B, and D, as well as how your federal employee health benefits play a role in your coverage. You'll also hear what happens when you retire, tips on how to ensure that you're staying within your desired tax range through income planning, and what happens if you're even $1 over your IRMAA bracket.
Listen to the full episode here:
What you will learn:
- The difference between Medicare A and B. (3:36)
- What Medicare D entails. (5:50)
- How IRMAA is defined. (11:00)
- How to ensure you’re staying within your desired tax range. (12:44)
- The severity of the penalties through IRMAA. (15:50)
- When your Medicare premiums increase and for how long. (21:00)
- The importance of planning for more taxes than you think you will need. (26:20)
- How to incorporate tax planning into your financial plan. (35:30)
Ideas worth sharing:
“Tax planning is looking at the long-term future.” - Mason & Associates, LLC
“If you are only $1 over your IRMAA brackets, then you are going to pay the next premium level up.” - Mason & Associates, LLC
“It is frustrating [with taxes], however, because you try to plan with the rules you know and have today, but they may change tomorrow.” - Mason & Associates, LLC
Resources from this episode:
Did you enjoy the Federal Employee Financial Planning Podcast? Never miss an episode by subscribing on Apple Podcasts, Amazon, Spotify, Stitcher, and Google Podcasts.
Read the Transcript Below:
Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.
Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, certified financial planner; John Mason, certified financial planner; Tommy Blackburn, certified financial planner and certified public accountant.
Ben Raikes, certified financial planner, IRS enrolled agent, maybe one of the most credentialed podcasts for financial planning. Definitely, I think for financial planning and federal employees in the country.
We're happy to be with you. Today, we're going to talk about, John, Aunt IRMAA. It absolutely means nothing to the folks right now, but you'll take a moment to tell them about Aunt IRMAA after.
John Mason: So, Aunt IRMAA, we have an exciting episode for you today, Aunt IRMAA. IRMAA stands for Income Related Monthly Adjustment Amount. So, we're going to talk about what that means as it relates to your Medicare premiums.
So, this podcast episode's going to be good for all federal employees, but specifically, even those getting closer to age 65, it's really going to hit home.
Before we dive into the content, all of us, I think just want to do a big thanks to all of our returning listeners and also welcome our new listeners to the Federal Employee Financial Planning Podcast.
Who are we?
We're Mason & Associates, masonllc.net, we're financial planners first, and we're podcast hosts second. If you like what you hear and you'd like to become a client of Mason & Associates, you can kickstart that process at masonllc.net.
Get started, request an introductory phone call with one of the advisors here. And if you want more information on what that looks like to become a client, you can listen to the new client process and experience, which outlines who we work with, how we work, what the annual engagement looks like from advisor and client and team members.
Really excited to continue with this episode and this podcast as well as Mike, hopefully meet some new people across the country. I think we're gaining a lot of momentum with this podcast, and I know we're all enjoying connecting with folks who are listening.
Michael Mason: And I would say that even though this is the Federal Employee Financial Planning Podcast, if you're that mid-level, mid-career federal employee, think about your mom and dad that's 65, that's paying a Medicare premium. Think about them, ask them to tune in to get some tips on IRMAA, Income Related Monthly Annuity …
John Mason: Monthly Adjustment Amount.
Michael Mason: Thank you — Aunt IRMAA. So, what's the reason behind IRMAA?
John Mason: So, I think before we can even talk about what is IRMAA and what's the reason behind it, let's just quick go through Medicare A and B. Let's talk a little bit about defining, maybe A, B, and D, I think would be appropriate for today's conversation.
Define those variables and then talk about the premiums for standard Medicare. Then we can launch into IRMAA, maybe even then start layering in some planning opportunities as well as coordination with federal health benefits. What do you guys think?
Tommy Blackburn: Sounds good. I would also say check out one of our recent podcasts, I think it was FEHB was the title of it. And I know we hit on some of these topics at least kind of Medicare, how it can coordinate with FEHB. So, if you want to hear more detail, go to that episode, we'll certainly cover it at least at a high level right now.
John Mason: Perfect. So, let's define Medicare A and B first, Tommy, for our audience. What are those two parts? What does it cover? And then maybe Ben, you can jump in with Part D.
Tommy Blackburn: So, Part A is one that you don't pay any … it is no additional cost. Let's say no additional cost very intentionally because you've paid Medicare taxes your entire working career. So, you've already paid for that part, it's not free, you've just already paid for it, and that is for your hospital coverage. So, that one costs you nothing extra.
And Medicare, you're eligible for at age 65. You can defer it, you don't have to enroll in Medicare, and you can avoid a penalty if you are covered by a group policy that you or your spouse is still employed, working for.
So, most people, age 65 is when you can enroll. You can enroll three months prior. Part A is hospital, no additional coverage. Part B is going to be your out-patient doctors, that type of medical coverage. That one, you are going to pay a monthly premium for, it was $170 a month in 2022, I think it's 165. I think it actually went down five bucks a month in 2023.
This is where Aunt IRMAA is going to begin to become part of the story, but we won't touch on that just yet. So, if there's nothing else you wanted to say on Part A or B, we can move on to D.
John Mason: I think you hit those perfectly. So, A is your hospital, B is more of like your doctors, and then …
Ben Raikes: Medicare Part D is going to be your prescription drug coverage, if I'm correct.
John Mason: Yes, you are, and the standard premium for Part D, Ben?
Ben Raikes: Zero?
Tommy Blackburn: There is no standard premium because it's based upon …
John Mason: Trick question, Ben.
Ben Raikes: That's why I said it with the inflection.
John Mason: So, no standard premium for Part D.
Tommy Blackburn: It is not free though, let's be clear about that. There is a premium, but it's based upon where you live and the company's policy you go with.
John Mason: That's exactly right, so we've got our three main components of Medicare.
Tommy Blackburn: Well, let's just say there's usually another component if we're going to go down D as well, which is the supplement, the meta gap policy. Synonymous people call them different things, but your supplement or your meta gap.
And that one, again, I don't believe there's any standard premium. It's based upon where you live and the company you enroll with as well as what type of supplement or company you go with, and the cost on that can range.
John Mason: Exactly, so those Medicare advantage plans or supplement plans, all of this goes in to provide Mike, your portfolio of health insurance as a retiree.
So, if I'm private sector, meaning I do not work for the federal or state government, typically, my financial plan or my health insurance plan in retirement is going to consist of Medicare A and B as soon as humanly possible, with a Part D drug plan and an awesome supplement.
So, I'm probably not going on advantage, I'm probably doing a supplement plan, and I'm doing the best one, which I think is Plan …
Tommy Blackburn: G, I believe. It used to be F, they phased that one out and so now I think it's G. So, it's kind of your most comprehensive, is our understanding. And so, really when you combine all these parts of Medicare, typically, you're looking at very little out-of-pocket costs at that point.
John Mason: Medicare's a great deal, I've been joking for ever since the Affordable Care Act became not so affordable for me and my family. I was like, “I can't wait to go on Medicare,. I can't wait to have A, B, D, and supplement plans. It's going to be great because it's going to be a heck of a lot cheaper than what we're paying now.” So, that's the typical portfolio for a private sector.
What does the Medicare/health insurance portfolio look like for federal employees when they retire?
Michael Mason: So, as I look at this guys, I kind of put the private sector as you just put it, John, the ones that don't have a military or a federal retirement as the third greatest health insurance in America. And then the first greatest health insurance in America is retired military that has TRICARE for life.
So, TRICARE for life and Medicare A and B. TRICARE for life is free, Medicare A is free, Medicare Part B as in boy, that's going to come with a premium, we're going to discuss what that premium looks like because Aunt IRMAA could come into that equation.
And then the number two best insurance in America is a federal retiree that will continue their federal employee’s health benefits into retirement. And when they're 65, Medicare A and B are primary … A and B as in boy, they don't need Medicare D as in David, because they have their federal employee’s health benefits.
So, Medicare's primary, then the FEHB picks up the balance. So, the real caveat here for our federal employees, which is this Federal Employee Financial Planning Podcast, maybe you have the option because you're dual retired, military, and FEHB — you would take the first one. You'd suspend FEHB, you'd take TRICARE for life and Medicare. The wild card is what are you going to pay for your Medicare B as in boy?
John Mason: And it's so cool because both of these groups of folks, the military as well as the retired federal, they don't have to worry about a prescription drug plan, and they don't have to worry about a supplement or an advantage plan.
So, their portfolio is a lot easier to acquire because they're basically just taking that existing coverage with them into retirement. I guess one complication for federal, Mike, is that they actually have a decision whether or not they even enroll in Medicare to begin with.
And I think as we progress through the conversation on this episode, it'll become clear why some people, some federal employees opt out of Medicare and remain on their federal employee health benefits only. Again, that's not typically something that us in the private sector would ever see happening.
Michael Mason: And let's be clear, they opt out of Medicare B as in boy, because they already have A, they've already paid for that. So, they have the health or the hospital coverage, and their traditional FEHB as well.
John Mason: Very good, so real quick, while you're working, so if you are a federal employee and you're over 65 and you're enrolled in Medicare A and B and federal employee health benefits, your federal employee health benefits will be your primary coverage. Then when you retire, it switches, and Medicare becomes primary and federal employee health benefits becomes backup.
So, now let's talk about IRMAA, the Medicare Income Related Monthly Adjustment Amount. This basically is defined as an additional Medicare Part B cost and an additional Medicare Part D cost over standard. Why? Because the government has arbitrarily decided that you have too much wealth or too much income-
Tommy Blackburn: It's not wealth, it's income.
John Mason: It's income and therefore, you should pay more for identical coverage than your neighbor.
Tommy Blackburn: I'm going to call it what I always believe it to be, it's a stealth tax, it is another income tax. We're just calling it something else that's based on the income on your tax return. It is another tax, it was a way for them to pass the tax without calling it a tax.
And it's a really sneaky, it’s a really sneaky tax. Why is it sneaky? Because most tax brackets, they are what we would say like marginal. So, for each additional dollar of income, you pay 22 cents or 24 cents in taxes. Medicare, this IRMAA threshold, Ben, is not like other taxes, is it?
Ben Raikes: If you go $1 over your IRMAA brackets, then you are going to pay the next premium level up if you are over by even 1 cent. So, as John was saying, it's not that every next dollar, you earn gets taxed at the next marginal tax bracket, it’s you get the whole next level of premiums for just missing that tax bracket by a single dollar.
So, when we're all talking around this table and we're talking about tax planning, we really want to make sure that we are staying within our desired tax range. And what are some of the ways we can do that with income planning?
Tommy Blackburn: Well, one of them is, as you listen to us, a lot of times, particularly for our federal retirees as we've hit on, accelerating income can make sense. Many tax preparers out there, their default answer for everything is, “Let's kick the can as far down the road as we can: defer, defer, defer.”
We look 30 years, not just this year, and can say, “Hey, it makes sense to do a Roth conversion.” However, if we're going to do that or even realize some capital gains, anything: sell a house, whatever it be, maybe it makes sense to realize income this year, but we need to understand that something that's not apparent, this stealth tax, Aunt IRMAA, it is going to be based upon the taxable income or the income on your tax return.
So, that's why we need to at least be aware, understand what we're doing. So, Roth conversion's a common way, selling a piece of property, something like that could also easily trigger it.
John Mason: And I guess other ways, Ben, that we can prevent IRMAA from happening is prevent income from hitting my tax return. So, maybe we're doing things like qualified charitable distributions or maybe we're only realizing a certain amount of gains per year.
We have to be very thoughtful in controlling what we can control. Now, not all income can be controlled and sometimes, you just have so much of it as a federal employee who's also retired, military who's also retired from California, who's also retired from New Jersey, and you have 17 pensions and I'm being a little joking here, but we've seen some big numbers.
If you have $250,000 in pensions, you're going to trip an IRMAA bracket, and that's okay. So, we can control some income, other income is just going to keep coming.
Tommy Blackburn: At least be informed. I know that we also have cases with clients who are working where they are, that TRICARE for life retiree from the military and we are tripping many IRMAA brackets because we're doing Roth conversions because we think it makes sense for today as well as for their legacy planning.
A client I'm thinking of very much, so this wealth that they have is not for them, they're never going to touch it, they're doing this for the next generation. But at least we're informed going into it of saying, “Hey, you're going to pay a few 100 dollars extra per month each of you because of this, and we still think it makes sense, are you okay with that?”
And as long as they're informed, it's a pleasant outcome for everybody. If we didn't tell them that doing this Roth conversion was going to do that, then they got that notice in January, they might be a little upset that even though it was the right answer, so at least be aware of the actions and the ramifications.
John Mason: No doubt, and I guess maybe we should talk a little bit about how severe these penalties are to even begin with.
So, if the standard Medicare Part B is $164 and like 90 cents, I think Tommy, like you said 165, I believe the initial penalty, if you go over 194,000 of adjusted gross income, I think it's like $65 monthly penalty for both you and your spouse. So, that's like $130 more a month for Part B because you went over the number by $1.
Michael Mason: Yes, 1,500 bucks for a couple for the year. $125 a month is 1,500 but you went over by a dollar or $10. Where else is the tax code that egregious, that $10 cost you 1,500?
John Mason: It's the tax rate's infinity. I mean it's unbelievable for that $1, it cost you 1,200, $1,500.
Ben Raikes: And to save a little face for myself; if you happen to be on Medicare Part D, there's an extra premium for going up into that next bracket as well. So, that's another, I think, 12 or $15. So, you're looking at 1,500 for Medicare Part B premium increasing, and then another 3 or 400 for Medicare Part D.
Tommy Blackburn: And at least again as we talked around for this podcast for our federal employees and our retired military, they don't have to worry with the Part D. But for private sector, that is also income-tested.
So, we want to want to be aware of those and this can get pretty nasty, pretty quickly. I was actually thinking John, we don't want to go $1 over on these thresholds. We don't want to just go over 194,000 and then pay an extra $1,500 a year. If we find ourselves in that situation, it's either can we somehow get below it to avoid it or let's just move through the bracket.
Let's go ahead and let's blow this thing out until we get close to the next IRMAA threshold to try to lessen the proportional bite of that and maybe it allows us in a future year to not go into this IRMAA bracket.
So, this is where being creative and thinking long-term, looking year over more than one year can give us some guidance as to what to do.
John Mason: Well, we call it bracket topping. So, bracket topping and in one sense, is doing a Roth conversion or increasing income to get to the top of a tax bracket, whether it be 22, 24, or 32%.
Well, you also have Medicare bracket topping, which is thinking about increasing my income as it relates to my tax bracket as well as it relates to my Medicare Part B premium bracket.
You mentioned — I thought you were going to throw this number out, Tommy. I believe the highest Medicare Part B premium is like $561 a month.
Tommy Blackburn: IRMAA, my goodness, Aunt IRMAA.
John Mason: She's a sweetheart. You are correct, I got to point this out.
Michael Mason: I saw 578 but I was looking at a 2022 table. But Tommy, go ahead and make your point, then I'll make mine.
Tommy Blackburn: So, some of the income thresholds we've been throwing out so far, at least 194, that was from married filing joint. I only bring this up because occasionally, you get people that want to do married filing separate, see if it can save them some money.
Is it advantageous? Well, if you go over $97,000 as married filing separate, you go up four brackets, so your premium goes from 165 a month to four — actually, it looks like you're all the way up to 527 a month.
So, this is yet again, like let's be aware of some things we're doing when we're trying to get fancy on the tax side because married filing separate, that could be painful if we're unaware of what that might do to IRMAA.
Michael Mason: So, I have this perspective to add. Again, 35 years of experience, age 61, I think I begin to understand the way folks think and this message, this podcast is the federal employee financial planning podcast, and there are some federal employees that make quite a bit of money. Dr. Fauci, just retired with a high three of $450,000.
But I would say that the average listener, John, Tommy, Ben, is sitting there thinking, “Well you make that kind of money, by golly, you should pay those kind of premiums.”
That's how if you're not making 500, 600,000, sometimes you think. So, I want to toss it back into your court. Let's say you've saved a million in your 401(k)s, let's say you bought a house on the outer banks in North Carolina, and you sell that house because, “Oh, what a great investment I made.”
And you sell that house, you have 500,000 of capital gains for a house you held 30 years, and you wake up in 2024 and your premiums for Medicare are 600 bucks a month. And now, all of a sudden, it hit home. Now, all of a sudden, it's not just that rich guy, that CEO, now it's you, there's a different story there.
Tommy Blackburn: You're very frustrated because the thing is, you don't feel like this very wealthy person, but your tax return said at least for that one year, you were wealthy by the tax code or Aunt IRMAA’s definition. And so, you get to pay an astronomical, you went from paying 165 to, what was it John five, almost $600?
John Mason: 561. So, you guys are dancing around this, and it takes us, I think, to our next bullet is how long — so that person, Mike, they sold their house in 2023, example — big gain 500k. When do their Medicare premiums increase and for how long?
Michael Mason: So, you think you escaped it. 2023, yeah, you filed your taxes in 2024, and the first thing you say is, “I didn't know the capital gains rate was 20%. Really, I owe 100 grand? Oh, wait a second, there was a recapture tax because I'd depreciated … oh I didn't know.”
You get through 2024, filing your 2023 taxes, and then September, October of that year 2024, I say, “Hello Mr. and Mrs. Jones, your Medicare Part B premium is going to be $600 each beginning January of next year.”
Tommy Blackburn: Oh, guess what? The IRS …
John Mason: Love who? Aunt IRMAA.
Michael Mason: Aunt IRMAA.
Tommy Blackburn: Aunt IRMAA says, “Guess what? The IRS sent me your tax return and I like what I saw so, you get to pay a higher premium.”
Michael Mason: You can appeal it, right? Wait a second, let me ask you this very specifically, I'm setting you up, I'm giving it to you well in advance.
You can appeal, and you can say, “Hey, I haven't been to the doctor for anything. I haven't had one medical expense for the five years leading up to selling that house, and I promise you I won't have any in 2025.” We can appeal it because you're healthy, can't we?
Tommy Blackburn: This is a success tax, a stealth tax, this has got nothing to do with your health, this has everything to do with your income.
John Mason: So, it's a two-year look back. So, let's say that in 2023, our listeners are 63-years-old. What that means is right now, whatever you do this year is going to impact your Medicare premiums when you turn 65.
So, we need to be looking two years in advance. So, remember, 2023 impacts your 2025, and those premiums, big nasty premiums, it's still only one year.
So, if you had 2023 was huge income followed by a lower income the following year, Aunt IRMAA is not going to take you down forever. She's going to take her foot off your throat eventually.
Tommy Blackburn: Assuming you stopped, although you might have done a couple years before you even got a notice from her that you were messing up. So, it might take you a couple years of burning through it before you realize it.
And it is good that we mentioned that 63 is when she starts looking even without you knowing, because you could think when I get to 65, I'll stop doing this, but no, it's watching from 63.
John Mason: I know.
Michael Mason: So, I'm going to do a callback to the mythical tax advisor that we just recorded recently. So, the 63-year-old John, “Betty, let's sell the house, let's sell nags, it’ll make 500,000.”
So, you go to your CPA, and you say to the CPA, “Hey, we're going to sell the house.” And CPA says, “Yeah, it looks like you're going to have a $500,000 gain, it's going to cost you this much in taxes.”
And then lo and behold, nobody looked for Aunt IRMAA in that. So, they didn't give you the, “Oh, by the way, it'll cost you this in 2023 on your tax return, and it's going to cost you an extra $800 a month, $9,600 in 2025.” So, that's where you need that tax advisor that knows the whole scoop, not just …
Tommy Blackburn: You need somebody looking comprehensively and somebody who specializes in your situation. Somebody who knows that IRMAA exists and how to watch out for it. Somebody specializes in retirees, hopefully, if you're a federal retiree, specializes in federal retirees.
John, I guess we're kind of setting up. I don't know if you want to go down this path yet, but you said 63, so if you want to go down that, maybe it's 63 and you're still working.
It could be a different year as well, you could be past 65, but perhaps, we talk about some of the strategies there or if there's a different direction you wanted to go.
John Mason: Tommy, I think that does tee it up perfectly for the SSA-44. And real quick, before we go down this appeal process, and that train of thinking and the planning aspects around maybe creating income intentionally based on a future appeal activity, I just wanted to let our audience know that not only are these like stealthy nasty IRMAA brackets something that we have to worry about …
And this show is dedicated to Ken Mason. I just want to throw that out there too. This podcast episode is dedicated to Ken because he loves IRMAA more than all of us.
The fact of the matter is these brackets are unknown. So, we are operating in 2023, but we don't know until 2025, what these official Medicare brackets are going to be. So, we're using 2023 numbers and hoping that we're doing the best.
But Tommy, earlier you got my mind thinking, you said, “We wouldn't intentionally go $1 into the next bracket.” Well, two years ago I took somebody to the top of the third tier of IRMAA.
Well, lo and behold, the 2023 brackets come out and you know what happened? We exceeded one bracket by about $7, and I look like a gigantic butthead. And I'm like, “But wait a second, I'm not a butthead, I didn't take you into that bracket by $7.”
And the brackets that we know two years ago, you were firmly in bracket three and it had just been adjusted to the point where it's like the planning actually looks silly.
So, I just want to be a little frustrated for a second and hopefully, you guys will get on board that not only is the government stealthy taxing us, they're stealthy not telling us what the numbers are today.
And how are we supposed to plan accordingly if we don't even know the numbers today? It's so frustrating.
Tommy Blackburn: It is frustrating, and I guess the lesson, the takeaway I think for us there is that we just try to make sure — because you never know how extreme those brackets could move.
So, that is very frustrating, is that we try to leave a healthy cushion, I guess, between what we are shooting for and what we think that next bracket is. But it is frustrating because you try to plan with the rules you know and have today, and they may change.
John Mason: And technically, I believe I'm right on this, these Medicare premium brackets can actually go down. So, they're not necessarily always tied to inflation, they don't necessarily always just go up. So, we could be making decisions today and then two years from now, the government lowers all of those thresholds.
Tommy Blackburn: I think you're right. We keep saying these brackets and I just thought maybe make the point, there are six premium brackets. So, as we keep referencing these different brackets around we're planning, there are six different levels that you have to think about and could deal with here.
Michael Mason: I always like anytime you're doing anything extreme, like selling that house, and like Nags said converting a bunch of IRA to Roth IRA, see what bracket it might put you in, but also have a get-out-of-jail-free card.
It's always nice to have the get-out-of-jail-free card. You guys want to talk about the get-out-of-jail-free card?
John Mason: So, you're talking about the appeal now. So, let's talk about, Mike, are you able to appeal your Medicare premiums and what is the SSA-44?
Michael Mason: Well, the SSA-44 is the appeal form.
Tommy Blackburn: It's called the life-changing event.
Michael Mason: Right, and I don't know all the things on it, but I'm sure my teammates will. The one I use, we know you're going to retire. You're going to retire in, let's say, this year, 2023, and you'll be 65 next year.
If we're going to do a Roth conversion, we probably want to do it in 2023. If we're going to sell that Nags Head house, we probably want to do it in 2023 because no matter what your income is, no matter what bracket you find yourself in, if you retire August of 2023, December 31st of 2023, you have the appeal that says, “I retired, my income stopped or was reduced. This is what I anticipated it to be in 2024/2025.”
And it doesn't matter what the number was, does it?
Tommy Blackburn: It doesn't, because you had a qualifying life-changing event which says, “Ignore whatever my current year income is and I'm going to tell you what it's going to be in the future, and you'll fact check me when I file it.”
So, that is the time for us to really slam some income if that's part of our planning, whether it's selling that house or doing a Roth conversion, if we can do it in that window. And we've seen this with clients filing the form.
Now, full disclosure, it’s not the most pleasant process to go through because I believe you have to mail it to your local office and or make an appointment. So, just be aware, it is a get-out-free-jail card, and it works.
We've seen it work, it's good planning, but it's not always the most pleasant process to see it through to the end. And you can file that at any time in 2024, and they'll give it back to you to the beginning of the year.
John Mason: So, the SSA-44, I think some of the topics on there that you can pick from are work stoppage, reduction in hours, loss of an income producing property, maybe even like divorce is on there.
Tommy Blackburn: If I can tell this one story that was comical, John and I had a case recently a year or two ago, with a client who sold a business, and he was a successful guy who had … he's been paying high taxes his entire life and he just was over it.
Wanting to do an IRA to Roth conversion, get it done, do it all: “I don't want to pay IRMAA, I want to be done.” Unfortunately, he had already retired so we couldn't use this.
But we were reviewing trying to see could we use this life-changing event for him. And I remember John, you joking because of the amount of taxes that we were going to pay on this Roth conversion …
“This is a million-dollar Roth conversion.” Arguably the lost tax dollars was a loss of income producing property. Now, we didn't try that one, but that was our inside joke.
John Mason: So, several items to choose from on that form. Like Tommy, you said you can undo this anytime, so you don't have to wait until January or a certain time in the year to fill out that SSA-44.
But the takeaway here is know that your Medicare premiums are coming, fast-forward income into a year where we can later appeal it, so we do not have adverse impacts to those premiums.
Now, will you only have to appeal your Medicare premiums one time? That's a good question and sometimes, it depends on when you retire. So, I've actually had to help clients appeal two years in a row for the same reason because maybe their 2019 and their 2020 income was both high and they retired in 2021.
So, my 2021 appeal covered that singular appeal and then I get another IRMAA letter later that year for the income the following year. And it's just keep in mind that sometimes it's not just going to be one appeal if you have multiple years in a row of high income leading up until age 65.
Ben Raikes: And John, just staying on the form a little bit and hopefully, we're not going too much into the weeds.
We keep mentioning brackets and income and where there's six different tiers and we can jump up and down them. Let's be a little bit more specific on what income actually is, because it's actually your modified adjusted gross income, which according to the SSA-44 is your AGI plus your tax-free interest.
So, where do we see where we could potentially get in trouble there, is if you’re someone who is receiving a high social security benefit based on capital gains and dividends, and other things that may hit your return.
Your modified adjusted gross income may be $90,000 a year or maybe it's going to be $50,000 a year. You've really got to keep an eye on that tax-free portion of your social security to make sure we're not bumping up IRMAA brackets.
John Mason: And not only that, Ben. If you take it a step further and say, “Okay, well, now you and I were married, we were below 194,000, so we had no Medicare penalty at all. But because you did such a great job and you took survivor benefits on your military pension and your first pension and you delayed your social security until age 70, now me as a surviving spouse, I'm tripping single IRMAA brackets. And maybe now, I'm in a higher tax bracket as a single person than we were married filing jointly.”
This goes back to Roth conversions and just really looking at all aspects of a financial plan.
Michael Mason: And I would add to this, maybe I'm married (which I am Bobby and I) and we give $10,000 a year to our church. And then we wake up and we give 10,000 to church and some to other places and we're itemizing on our tax return and we write off everything we gave.
And all of a sudden, we hit an IRMAA bracket because when you give the wrong way, it shows up. Any income you pull out of an IRA shows up on the front of your tax return, which Ben, hits your modified adjusted gross.
If I had just given that 10,000 directly from my IRA to the church, I would've had the same deduction, maybe even a better one, and I wouldn't have had the excess IRMAA Medicare Part B premium.
Tommy Blackburn: And this is why we say the best income is the income that never hits your tax return, and tax-exempt interest does.
So, if you have municipal bonds and you're getting federally tax-free interest income, it's still showing up on that tax return and they're still pulling it in for this, whereas that qualified charitable distribution from the IRA to your church, your charity, never hit the tax return, so it doesn't get counted.
Also, your disabled military, that's not showing up on there. So, any income that never hits the tax return, that's 100% the best income there.
John Mason: So, as we wrap up this episode, gentlemen, the psychology behind IRMAA, like how bad is it? Should it be avoided at all cost? And I know Ben, you have some passionate feelings about this, and I do too.
I know over the 12 years that I've been financial planning with Mason and Associates, one of the biggest issues that I see with IRMAA typically is retired military folks who use the line, “I was promised free healthcare and now, it's not free because I have Medicare.”
So, they're a little burned about that, which I can understand their frustration, but then burned too for those folks is now not only are they paying for Medicare, they're actually paying a Medicare IRMAA. We can counteract that and talk about how it's still a lot cheaper than what everybody else is paying, but it's very frustrating.
So, do we avoid IRMAA at all costs? Do we deprive ourselves of vacations and trips of a lifetime, and doing things with our family as to not hit IRMAA brackets? How do we incorporate this into a financial plan?
Ben Raikes: I think what we're able to do here and what we like to do is look forward. Is not just to look at the next year or the year after that, but look at what is your income going to be each and every single year and in retirement as well as we can project that.
And when we have folks that's primary income sources, social security and their pensions, we can actually get a pretty good idea of the ranges where they're going to fall.
So, for us, I think it's really being aware of where you're going to sit within those income brackets, and then using your best judgment to say, “Hey, what we absolutely don't want to happen is to be $1 over into that next bracket.”
As you said, John, if we're going to go into that next bracket, let's go to the top of it or near to the top of it, and let's just make sure we're planning for these things. It's not that one year of extra Medicare Part B premium is going to really affect your plan negatively, it's just making sure that we're not hurting ourselves if we can avoid it.
Michael Mason: And I would add to this, because we did the qualified charitable distribution a second ago, and let's just never be surprised, let's never be surprised.
So, if I give $10,000 to church every year and I do my mock tax return, and that still puts me in the next IRMAA bracket by $500, well, let me make a decision.
Do I want to give the church 500 more? So, I give them 10,500 or do I want to give Uncle Sam 1,500 more? Let's just not be surprised.
Tommy Blackburn: I think we know where most people are going to fall in that scenario, but that is the key, I think is just being informed, understanding what's coming, not being surprised every year.
And yeah, as we do that long-term tax plan, perhaps we see particularly with federal employees that may not need their — they may not be taking annual distributions from their TSP or their IRA.
We can easily sketch out scenarios that show not only are you going to be in IRMAA, but eventually, you're going to be in the higher brackets.
So, perhaps by realizing income today, we can save you, you'll pay IRMAA today, but we can save you more in the future. So, that is tax planning is really looking at the entire long-term picture.
John Mason: And I think we can just wrap up this segment guys with, I remember specifically this client who I was working with, and we had an entire conversation around IRMAA and TRICARE.
And so, they have TRICARE for life, everything is winning, everything is happy, and then IRMAA comes up and it's like, “Wow, this is a very frustrating experience.”
And I remember asking the couple, I said, “Well, what's more important to you? Driving income and doing all the things you wanted to do in retirement? Or is it more important for you to never ever pay a single dollar extra for your Medicare?”
And they thought about it for a second and they said, “We'd rather just be able to do what we want to do all the time, but we don't want to be stupid, we don't want to be dumb, we don't want to do things that are unintentional.”
So, we treat Medicare every year like clockwork. We have IRMAA penalties every year, but we know they're coming, they're planned, they're not preventing us from doing the things that we want to do in retirement, but we're also not waking up saying, “Ooh, I wonder what's going to happen this year?”
This has been another episode of the Federal Employee Financial Planning Podcast, thank you to my co-host, really enjoyed Aunt IRMAA. Again, this episode dedicated to Kenneth Mason, one of the founders of Mason & Associates.
Ken, thank you for your passion, thank you for encouraging us to do this episode and very importantly, thank you to our audience for being on this journey with us. We would love to hear from you, please leave us some ratings, five-star ratings if you can. We'd love to hear from you at masonfp@masonllc.net.
What are your concerns? What are your fears? What keeps you up at night? What federal employee financial planning questions do you have? We'd love to hear from you, and we'll talk about it on a future episode, this is Mason & Associates.
Thank you. This has been another episode of the Federal Employee Financial Planning Podcast. Thank you for listening. Thank you for the email questions we're receiving.
Remember, your investment strategy should coordinate with your financial plan. It should be well-thought out and you should be happy in good times and bad. At no time should you be thinking “I need to make a change” if it's coordinating with your financial plan.
Remember, control the things you can control, and your largest asset is not your house, it's not your Thrift Savings Plan – it's those federal employee pensions.
The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.
We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.