Can you win the fight to avoid the nearby IRMAA tripwire?
Posted on August 2, 2024

Nope, not in the long run. If are on Medicare and have a relatively large traditional IRA, you are going to get closer and closer to income that results in your crossing a tripwire for a Medicare premium surcharge. IRMAA surcharges cost single filers ~$1,000 to ~$2,000 depending on the tripwire crossed. (The surcharge is twice that for married, joint filers on Medicare). The culprit is RMDs. At expected returns for stocks and bonds, RMDs increase in real terms about 6% per year. Unless you take action to chop down the size of your traditional IRA, it’s almost certain you will cross the tripwire that’s ahead of you. That’s a fact of life that we just have to accept. I describe two actions you can take to slow down the progress toward the next IRMAA tripwire.

 

== MAGI and IRMAA ==

 

I complete my draft tax plan this time of year. I want to know my MAGI (Modified Adjusted Gross Income = AGI for most all). I’m in the ~10% of all taxpayers on Medicare who worry about crossing an IRMAA tripwire. If you are slightly above a tripwire, you can jiggle where you sell securities that you want for your spending. (I’ll discuss how I jiggle next week.) But there are limits to your ability to jiggle, and, eventually, you just have to accept that you will always cross the tripwire that you’ve wanted to avoid. Then the march is on toward the next tripwire. Given expected returns for stocks and bonds and enough years, you’ll cross that tripwire, too.

 

 

== Real growth in your RMD ==

 

The IRMAA tripwires adjust for inflation; they remain constant in real terms. Social Security benefits remain constant in real terms. But, at expected returns for stocks and bonds, RMDs from our traditional IRAs increase in real terms. On average, RMDs increase in real terms about 6% per year from the combination of two factors. We’ll have big swings from the average: RMDs fell sharply for 2023 and jumped for 2024. We may be on track for a 10% real increase for 2025; see here.

 

• The real value of your traditional IRA grows because the RMD percentage is less than the expected real return for your portfolio until you are in your mid-80s. The expected return for my traditional IRA is 6.4%. The RMD percentage is less than this until age 86. (6.4% is the expected real return for our portfolio; I assume 7.1% real return for stocks and 2.4% real return for bonds and our mix of 85% stocks and 15% bonds.)

 

• RMD withdrawal rates increase. Rates increase from less than 4% at age 73 to ~ 7% by age 87. The rate increases about 4% to 5% per year.

 

 

The combination of the two effects is about an average 6% annual real increase in your RMD. You can expect your RMD to be ~33% greater in real terms in five years. Your RMD will double in real terms in about 12 years.

 

 

== Roth Conversions and QCD ==

 

You can only slow this march by lowering the amount of your traditional IRA subject to RMD. You have two options.

 

1. You can convert some traditional to Roth each year. You never lose when you convert traditional to Roth: you wind up with the same or greater after-tax return. But you incur taxable income when you convert. You’ll only be able to convert an amount in a year that keeps you below the next IRMAA tripwire. You’re not able to convert that much since IRMAA tripwires are spaced about $30,000 apart for a single filer (Twice that for married, joint filers.) It NEVER hurts to do this, but I assert that this is a small percentage of your traditional IRA: it’s not putting much of a dent into the growth of future RMDs.

 

2. You can decide to chop your traditional IRA by giving large amounts to charity by using QCD. QCD does not count as taxable income. You can contribute $105,000 each year per taxpayer from your IRA to charities after age 70½. This is a much bigger bite out of your traditional IRA.

 

You’d have to be confident that you have “more than enough.” (See Chapter 5, Nest Egg Care.) I would not consider this until returns are such that we’ve recovered from the steep market decline in 2022: I want to calculate to a greater real SSA. (See Chapters 2 and 9, Next Egg Care.) We last did that at the end of 2021 . We are getting close to that point, but we aren’t quite there.

 

(I rule out QLAC [Qualified Longevity Annuity Contract] as a tactic to avoid IRMAA. You can buy a deferred annuity for $200,000 from your IRA and the $200,000 is excluded from your RMD calculation. You defer income payment so you have no taxable income. You will then have taxable income when you start annuity payments. I’ll discuss QLACs in another post.)

 

== Delay. Delay. Delay. Cross it. ==

 

Assume you find your MAGI on your 2024 return is $5,000 above an IRMAA tripwire from your 2024 return. You may be able to jigger your income to the amount of after-tax dollars you want for your spending and get below the tripwire, but at some point – perhaps 2027 or 2028 – you have to throw in the towel and accept that you will cross that tripwire every year in the future.

 

Then the next tripwire will look to be far away. You’ll have more room to convert traditional to Roth that slows down the growth. But you’ll creep towards that tripwire. Eventually, you’ll be $5,000 above that tripwire, and you will jiggle to stay under it. But at expected returns and enough years, you’ll lose that fight.

 

 

Conclusion. I spend time in early August to plan my tax return for the year. One concern is IRMAA tripwires. Too high of MAGI will cross a tripwire that triggers a Medicare premium surcharge – effectively an added tax of $1,000 to $1,500 for single filers. (Twice that for married, joint filers.) If I have just crossed a tripwire, I may be able to tweak the securities that I sell – my mix of RMD less QCD, taxable securities and Roth – to get the same net amount for our spending but at lower MAGI.

 

But I can’t permanently win this game: it’s a fundamental fact that RMDs from traditional IRAs push taxable income toward IRMAA tripwires. At expected returns for stocks and bonds, RMDs increase by about 6% per year in real terms, getting you closer and closer to an IRMAA tripwire.

 

In five years, your RMD will be about one-third greater than now; in 12 years, you should expect your RMD to double in real terms. You may be able to slow that growth by converting some traditional to Roth each year. But if you are close to an IRMAA tripwire now, you really won’t be able to avoid it in a few years. It’s a fact of life that we have to accept.