Roth Conversions and IRMAA - Jill on Money with Jill Schlesinger

Summary

Podcast Summary: Roth Conversions and IRMAA Jill on Money with Jill Schlesinger Release Date: December 6, 2024

Introduction

In this episode of Jill on Money with Jill Schlesinger, host Jill Schlesinger, CFP®, delves into the intricate topics of Roth conversions and Income-Related Monthly Adjustment Amounts (IRMAA). With the holiday season upon us, Jill addresses listener questions, providing clear and actionable financial advice without the usual jargon. Co-host Mark Talaricio joins her to offer additional insights, making complex financial strategies accessible to all listeners.

Understanding Roth Conversions and IRMAA

Roth Conversions: A Roth conversion involves transferring funds from a traditional retirement account (like a 401(k) or IRA) to a Roth IRA. While this move can lead to tax-free withdrawals in retirement, it also triggers taxable income in the year of conversion.

IRMAA: IRMAA affects Medicare beneficiaries with higher incomes by increasing their Medicare Part B and Part D premiums. It's crucial to manage income levels to avoid these additional costs.

Listener Questions and Discussions

1. Patty's Pension and Roth IRA Eligibility

Timestamp: [05:10]

Patty's Situation:

Husband's pension from law enforcement: $80,000 (taxed)
Patty's income: $200,000 (W-2)
Inquiry: Does their combined income exceed the Roth IRA contribution limits?

Jill's Response:

"The range for 2024 is $230,000 to $240,000 for married filing jointly to be eligible for a contributory Roth IRA." ([06:25])
Given their combined income of $280,000, they exceed the Roth IRA eligibility threshold.
Alternatives: Utilize employer Roth options or invest in taxable accounts due to their substantial income.

2. Mary's Roth Conversion and IRMAA Concerns

Timestamp: [10:45]

Mary's Situation:

Single, doing annual Roth conversions from her 457 account.
Maintains income within the second tier of IRMAA ($103,000 to $129,000).
Faces an extra $83/month in Medicare premiums.
Question: Should she convert more funds and accept higher IRMAA charges?

Mark's Insight:

"You may be forced to take money out of these accounts at uncertain tax rates and IRMAA costs in the future." ([12:15])
Recommends converting more despite increased IRMAA to lock in current tax liabilities.
Emphasizes the importance of managing required minimum distributions (RMDs) proactively.

3. Dave's Retirement Planning and Commercial Real Estate

Timestamp: [14:30]

Dave's Situation:

Gross income: $185,000 - $205,000
Wife's income: $8,000/month
Assets: $1.7M in stocks, 3 bitcoins, $200,000 in money market
Mortgage: $200,000 remaining on a 3% rate
Plans to retire once stocks hit $2.5M or in three years
Owns commercial real estate valued at $5M, producing $14,000/month
Concerns about financial security and retirement readiness

Jill and Mark's Discussion:

Jill questions the sufficiency of current assets without considering the commercial real estate's stability.
"If the commercial real estate has a long-term lease, that adds significant security." ([15:50])
Mark advises caution, highlighting the heavy reliance on stock market performance.
Suggests delaying retirement to bolster savings and gain more certainty about income streams.

4. Eric's Strategy to Avoid Future Tax Burdens

Timestamp: [18:20]

Eric's Situation:

Ages: 53 and 52, married
Income: < $100,000/year from various sources
Assets: $1.2M pre-tax retirement, $1.4M Roth, $60,000 HSA, $175K brokerage (including $50K cash), home worth $375,000 with $14K mortgage left, commercial real estate valued at $250,000
Concerns: Looming tax liabilities in 20 years, receiving premium tax credits

Jill's Advice:

"Do not proceed with Roth conversions now as it may jeopardize your premium tax credits." ([19:45])
Emphasizes the importance of maintaining liquidity and safeguarding access to brokerage accounts.
Recommends postponing Roth conversions until retirement phase to minimize impact on tax credits and Medicare premiums.

Key Insights and Takeaways

Balancing Roth Conversions with IRMAA: While converting to a Roth IRA can provide tax-free income in retirement, it's essential to consider the impact on IRMAA and future Medicare costs. Strategic planning is necessary to optimize both benefits and minimize additional expenses.
Evaluating Income Thresholds: Understanding the income thresholds for Roth IRA contributions and IRMAA is crucial. Couples with high combined incomes may need to explore alternative investment strategies to maximize retirement savings without triggering higher Medicare premiums.
Retirement Readiness and Asset Diversification: Relying heavily on stock market investments can be risky. Diversifying assets, including secure commercial real estate with stable income streams, can enhance financial security and provide more predictable retirement income.
Tax Credits and Future Planning: For those receiving premium tax credits, maintaining lower taxable income levels is vital to retain these benefits. This may influence decisions on Roth conversions and the timing of taking distributions from retirement accounts.
Proactive Financial Management: Addressing financial concerns proactively, such as managing RMDs and strategizing Roth conversions, can lead to more stable and secure retirement outcomes.

Conclusion

In this episode, Jill Schlesinger and co-host Mark Talaricio provide comprehensive guidance on navigating Roth conversions amidst the complexities of IRMAA. By addressing real-life listener questions, they offer practical strategies to optimize retirement savings while managing potential tax implications. Listeners are encouraged to assess their unique financial situations, consider professional advice, and make informed decisions to secure their financial futures.

Notable Quotes:

"Everyone who joins right now is going to get Grandfathered in at $35 for next year." – Mark Talaricio [02:30]
"You have to decide which is the less invasive event in my life over time." – Jill Schlesinger [15:05]
"I really think people are so apoplectic about some of the small dollars and we are really focusing on the wrong thing sometimes." – Jill Schlesinger [13:40]

Resources Mentioned:

Jill on Money Live: Subscribers can access quarterly webinars and the episode back catalog.
Contact Information: Listeners can email questions to jillonmoney@gmail.com via the website jillonmoney.com.

For more insightful discussions on personal finance and investment strategies, subscribe to Jill on Money with Jill Schlesinger on your preferred podcast platform.

Transcript

Jill Schlesinger (0:00)

Here at Jill on Money, we're all about helping you get more for less. So here's a life hack that can automatically put some extra cash in your pocket. Discover will automatically double all the cash back you've earned on your credit card at the end of your first year with Cash Back Match. So you could get some money for this holiday season and get more next holiday season. It pays to Discover see terms@discover.com credit card. Well, here it is. It is the holiday season. I know it snuck up on you and I know that there are a lot of competing forces for your dollars during the holidays. Which is why you may want to check out Klarna. Klarna is your smarter everyday spending partner for the holiday season. You can use Klarna's pay in for product to split your purchase into four interest free payments. They've also got a new cash back feature that makes it easier for you to spend smarter and other products like the Klarna card, the Klarna app and new Klarna Balance. Choose Klarna at your favorite retailers or shop now@klarna.com CA resident loans made or arranged pursuant to a California Finance Law License NMLS number 1353190 Klarna balance account required. Klarna may get a commission. Limitations, terms and conditions apply. Welcome to the Jill on Money show. It's Friday, December 6th and we are here trying to help you make more considered financial decisions. I know it's the holiday season, I know you're all freaked out. But if you are thinking about anything personal finance or maybe just about your life, your real life and it at all impacts your money, we would love to help you out. All you need to do is go to our website jillonmoney.com and and in the upper right hand corner there is a contact us button. Click that button, that is the email that we receive and end. If you'd like to come on the air live, just check the box. Mark will do everything else while you're on the website. It is time ladies and gentlemen to get busy and subscribe to Jill on Money Live. The price is going up next year. Mark figured it all out. It is going from this bargain basement of 35 bucks this year. It's going up to 45 next year. Yeah. And if you're actually doing this in this very smart way you say wait a minute, if I join now, does that mean I just going to have to join and the price goes up next year? No. Everyone who joins right now is going to get Grandfathered in at 35 bucks for next year. All the newbies who come in next year, they got to pay $45. So you might as well do it right now. Jill, on Money Live, four quarterly webinars for the 2025 year and the back catalog. So 35 bucks, that'll kind of get you in for the next 12 months. Pretty good deal. I think so. Anyway, let's get to you guys. Let's do some emails today. Here is from Patty, who writes, hi, Jill, I have a question about my husband's pension as it relates to income. He was in law enforcement and he's got a pension that's good and his pension is taxed. Does this pension count as income as it relates to me investing In a Roth IRA, meaning using round numbers, if he makes $80,000 in pension income, I make $200,000 in W2 income. Does that amount exceed the allowance for combined income for a Roth contribution? And the answer is I think yes. The range for 2024 is 230 to $240,000 for married filing jointly in order to be eligible for a contributory Roth ira. However, Patty, do you have a Roth option at work? Maybe you could do it that way. Or maybe it doesn't matter. Maybe you've got so much money with all this income and this pension income that you'll be able to save in a taxable account. Okay, next up, Mary writes, for the last few years, I have done a Roth conversion from my 457 account. Just to note, I am single. Okay, in completing the Roth conversion. Oh boy, here we go. Mark. I've stayed within the IRMAA limits up to the second tier where Medicare charges 1.4%. Okay, before we get into these numbers, just as a reminder, gang, here's the deal. Medicare taxes income in a way or considers income in a way that might shift your cost of paying for Medicare. So there are different tiers. As I count them right now on my beautiful Ed Slotter chart, if you are single and you're in that second tier, there is a surcharge that is placed on your Medicare Part B and your Part D. So let me give you an example. In a case, I think what she is saying is the second tier is that if she's single, it means that earning 103,000 to 129,000, so she's converting enough so she stays in that range, which then subjects her to extra charges for Medicare Parts B and D of just under $83 a month. Okay, my question is, should I be Converting more money and pay the extra amount of IRMAA or not? And I think this is a really important question because so many of you consistently freak out about these IRMAA payments. And you know, it may be that you're so concerned about IRMAA and looking past the opportunity to convert your retirement accounts from traditional into Roth. And so let's just pretend that we want to convert more money. How much more will it, will it cost to go to that next tier, which would allow a conversion up to 100, you'd have to have income up to $161,000, but you know, it's $208 a month. Okay, that means $2,500 for the year. So should you pay an increase of $2,500 to lock in your tax liability and pay the amount of money of tax today? Look, gang, you have to take the money out of these accounts. I don't know how to say it more gently. Required minimum distributions. You're going to have to take the money out. Now. You may have to be, you may be forced to take that money out at a time when you don't know what your tax rate's going to be and you don't know what the IRMAA cost is going to be. So my feeling is I'd rather pay the IRMAA than worry about where tax brackets and rates are going to be in the future. So, Mary, I would convert more and pay the irmaa, and I hope that helps. But I really think people are so apoplectic about some of the small dollars and we are really focusing on the wrong thing sometimes when we do that. Okay. Okay. This next question is from Dave. He was watching us on the compound YouTube channel and you should too check that out. Okay. Dave earns 185 to $205,000 a year gross. And his wife earns about $8,000 a month. Take homes. He's 56, she's 46. They spend about nine grand a month. They've got $1.7 million in stock plus three bitcoins long has been held for a long time and $200,000 in money market. So now market's so easy. When I say bitcoin, I just say, oh, it's 100,300. Great. Okay, no debt except $200,000 remaining on a 3% mortgage. The house is worth $720,000. There are no dependents or basement creatures. I think that means pets. Once stocks hit two and a half million or three years, whichever is first I'm going to retire and all my holdings will be left to grow. We'll have an additional $300,000 in a current 401. It is a completely separate basket resulting from a company sale in 2020. I'm going to tap that 300,000 under the rule of 55 to the tune of $5,000 a month or so to supplement my wife continuing to work. She'll retire later around 55 to 57. Okay. With regard to Social Security, he thinks he's going to take it early, she's going to take it later. He also has a small pension coming at age 65. Fifteen hundred dollars a month just on his life. Now she has a trust that is building up. It is commercial real estate with a value of $5 million. Wow. It's producing $14,000 a month. Oh, my gosh. But we don't know what the equity portion she will end up with, so we kind of write it off as just a bonus. We would be ecstatic to hear your behind. Close, brutally honest opinion, pull no punches. I quite understand monetary debasement, inflation. Are we cutting things too close? Yeah, I just, I. I'm not sure. First of all, I don't know, like, what the nature of what's going on for you. You spend nine grand, okay? That's what, you know, you are. I think the issue is that you are, you're 56 and you are producing the bulk of this money. So what do we have to do to look at this, like, just for fun, one thing to consider would be like, well, what would happen if you drop dead right now? Do you have life insurance? I don't know if you do or not, but I don't think your wife would actually make it on this valuation. I guess if we knew that you had $14,000 a month in revenue or something, even less than that, if we knew you were getting something very consistent for her. That kind of helps me feel a little bit sure of your situation. But if we don't include that, it does look like you're kind of close. But do you hate your job? Are you, are you really just freaking out? I don't know. I really want to know a lot more. I mean, remember that. Let's just say you got 2 million right now, okay? Including the bitcoin, because, you know you can sell the bitcoin, so you have $2 million. So just think that of that $2 million, if that were going, if you're going to start pulling money out of that, you know, could safely. You could spend 70 or 80 grand a year out of that. So that would be pretty good. And if your wife were to keep working, that would be pretty good. But I'm not sure if it is. I don't know if it's like this. You must retire because you are fried and something's horrible is happening. I just don't know. I feel like you could, you could work a few more years, build this up and have a lot more security and maybe between now and then we could learn more about this commercial real estate. Mark, you don't think they can do this, do you? Yeah, well, I'm not counting on the commercial real estate. If it happens, great, then we can talk. But until it happens, I'm not even thinking about it. Yeah, it's very close. It's really close. And by the way, 56 years old and he's 100% in stocks. I know, and bitcoin. So I'd rather you work a little bit longer. I certainly would rather you let everything build up a little bit. And it doesn't, shouldn't be three years or this. It should be. You run the numbers, you feel confident. But again, if you come back to us and say, oh no, we are clear that money and that commercial real estate, that is a done deal. Like there's a long term lease, maybe there's like a triple, a triple net lease that is really in place. I could feel okay with the plan if I knew more about that commercial real estate. Can we talk to somebody about it? Is that too weird? I mean, I wonder if they're not telling them because they don't want this kind of thing. They don't want them to be calling it quits and moving on. So anyway, I would be interested to hear more from you and I hope that that helps. I, I'm really, I wish I could just give you the. Yeah, thumbs up and maybe it will be a thumbs up. I don't know, I just, I'm not sure. I am not sure. And until I'm sure, I don't want to give you the complete thumbs up. That's, that's my two cents. Here is Eric who writes, we are a self employed married couple, 53 and 52. We've got low taxable income and growing assets after more than 10 years of fine, you know, financial independence. Next endeavor question, should we make and can we afford to do Roth conversions? They bring in less than $100,000 a year from various taxable and non taxable sources. After maxing out the Roth NHSA contributions, they spend all of their income. Cash flows tight. Here's what they got. Pre tax retirement 1.2 million Roth 1.4 HSA 60,000. Brokerage 175 including $50,000 of cash savings $10,000. The home is worth $375,000. Little mortgage left 14,000. They've got commercial real estate which, which they're using for their business. It's worth $250,000. No debt, no dependents, no debt, no big plans. Cash flow may improve next year. Mortgage payments are going to end in October. Wow. We're also expecting an increase in rental income of $25,000 a year. Can you offer a strategy for us to avoid the looming tax bomb in 20 years? An additional wrinkle, we receive the premium tax credit which was $8,500 last year based on our low income. Well, first of all, I know that you don't want to lose that tax credit for your healthcare. So that's, I understand that. However, the bigger question is should you use this money that you have in the brokerage to do conversions? No, don't do it. You don't have enough money right now. I don't want you to like lose access to that 8 to that brokerage account. When you end up looking at your future retirement, one thing to consider would be, you know, maybe in 10 years when you know you're going to have that pre tax retirement but you have time between say you know, you're, let's say you turn 63 and you 75 years old is when you have to take your retirement distributions. Take the money out then but don't use your available cash right now. I think that would be a little bit dangerous. We like liquidity and so I think to have that liquidity is important to you and it should continue to be important to you. And I think I'd rather keep things as is. But the same thing goes with like the Medicare IRMAA as the healthcare.gov premium tax credit. Be careful gang. When you are trying to qualify for these low income benefits, whether it's a credit or making sure you don't get any extra charge on Medicare, you're going to potentially lose the ability to use your pre tax money and convert it or take it out before those required minimum distributions. You have to decide which is the less invasive event in my life over time. Not this minute, but over time. So I hope that helps. Okay, this is it. It's a Friday show. I'm so excited. You can subscribe to us on the Odyssey app or wherever you find your favorite podcasts, please leave us a rating and review wherever you listen. As always, I just want everyone to know our music is composed by the newly married Joel Goodman. Mark Talaricio is the best executive producer overall in the universe. He's also the king of our web. We are distributed by Odyssey. Try to lift someone up. Change your work, change your wealth, change your life. Thank you for listening and we'll talk to you tomorrow.