That 28,000,000% Tax

IF YOU’RE IN YOUR 60s or older and making sizable Roth conversions, it isn’t just income taxes that you need to worry about. You may also trigger much higher Medicare Part B and Part D premiums.

We’re talking here about those Medicare surcharges known as IRMAA, short for income-related monthly adjustment amount. These surcharges are over and above 2023’s standard $1,979 per person Medicare premium, and they’re based on income from two years earlier.

IRMAA’s cost impact is usually discussed in terms of monthly per-person dollar amounts. But to give readers a better handle on the true cost, I’ve converted IRMAA’s 2023 surcharges into something more akin to marginal income-tax rates.

IRMAA surcharges might amount to around 1% or 2% of total income. But that’s the average rate. What I’m focused on here is the marginal rate. As you’ll see in the tables below, I’ve calculated “tax-percentage equivalent” IRMAA costs for both single and married taxpayers. These show that the marginal IRMAA surcharges are a minimum 3% to 5% of the additional income involved—but that assumes you’re near the top of each IRMAA income bracket.

Suppose you’re single and your 2021 modified adjusted gross income (MAGI) placed you at the top of the first 2023 IRMAA bracket, which is $97,000 to $123,000. You’d pay a surcharge of $937 in 2023. That surcharge is equal to 3.6% of the total dollar bracket amount above $97,000. Put another way, this 3.6% rate assumes your income was just shy of $123,000.

What if your income was below the bracket maximums? The marginal surcharge “tax” rate will be even higher than 3% to 5%—and it could be vastly higher. How come? IRMAA is a so-called cliff penalty, meaning the full surcharge for any bracket is levied as soon as your income crosses that bracket’s threshold income. In other words, IRMAA surcharges for each income bracket behave totally unlike regular income taxes, where the same marginal tax rate applies to each dollar within that income-tax bracket.

The tables also highlight two federal income-tax thresholds, which are shaded in grey. For instance, the 2021 income-tax brackets included a sharp jump in marginal tax rate from 24% to 32% for single filers with taxable income of $164,926 and above, and for joint filers at $329,851 and above. In the tables, these income thresholds are adjusted for the standard deduction, so they’re comparable to the IRMAA thresholds. Keeping an eye on such federal income-tax thresholds can be as important as managing your IRMAA brackets.

Considering Roth conversions and worried about IRMAA? Here are seven insights that my wife and I have gleaned:

• The tables show a strong incentive to undertake Roth conversions before age 63. Once you reach 63, any Roth conversions could potentially affect the Medicare premiums levied two years later, when you turn age 65. With the benefit of hindsight, my wife and I should probably have done bigger conversions prior to age 63.
• We manage our income, including planned Roth conversions, to put us toward the top of our IRMAA income bracket, so the marginal surcharges are in the 3% to 5% range.
• Whether you’re converting to a Roth or not, there’s a huge incentive to keep your income from breaching the next IRMAA income threshold. In fact, IRMAA surcharges at the beginning of brackets may be the country’s most punitive incremental tax, which—for a married couple—I calculate to be some 28,000,000% on that first penny.
• IRMAA brackets two years from now aren’t known precisely because the thresholds are inflation-adjusted. Still, early projections are available. We manage our income to get within $4,000 to $5,000 of the projected bracket ceiling, thus leaving some margin for error.
• When required minimum distributions kick in, we’ll potentially find we’re still in IRMAA surcharge territory. Still, today’s conversions should help, because subsequent investment growth from today’s Roth conversions will never trigger IRMAA.
• Federal income-tax brackets are also worth watching, especially those at 2023 taxable incomes of $182,100 for single filers and $364,200 for married filers. These trigger the eight-percentage-point jump to the 32% income-tax rate. In recent years, the income levels where tax rates jump have often been close to one of the IRMAA bracket ceilings.
• IRMAA surcharges are a single-year cost. But the Roth conversions that trigger that cost will result in decades of tax-free growth for us and our heirs, and that growth should help us recoup today’s IRMAA costs.

John Yeigh is an author, speaker, coach, youth sports advocate and businessman with more than 30 years of publishing experience in the sports, finance and scientific fields. His book “Win the Youth Sports Game” was published in 2021. John retired in 2017 from the oil industry, where he negotiated financial details for multi-billion-dollar international projects. Check out his earlier articles.

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