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Two RMD Strategies to Avoid IRMAA

You have carefully saved for retirement and now you have accumulated a substantial amount of funds in your IRA.  At some point the funds that you have been putting away for years must come out. When you reach age 73 you must take a required minimum distribution (RMD) for that year and for every year thereafter.

Two RMD Strategies to Avoid IRMAA

You may be concerned about the tax hit that the RMD will bring. Besides the RMD itself being taxed, there is a ripple effect when an RMD is taken. An RMD is included in income for the year it is taken. A bump up in your income can negatively affect the availability of deductions and can impact the taxation of Social Security. One significant negative impact of an RMD may be increased Medicare costs. This is often not paid the attention it deserves by many IRA owners until it is too late.

Increased Medicare Costs

Without careful planning, your RMD can result in much higher healthcare costs. This is because the RMD is included in your modified adjusted gross income (MAGI) that is used to determine your Medicare Part B and Part D costs two years down the road. The income-related monthly adjustment amount (IRMAA) sliding scale is a set of tables used to adjust Medicare premiums. The higher the MAGI, the higher the IRMAA. There are no phaseout ranges. If you have MAGI that is $1 over the limits, you will have to pay the full extra amount. This can be a significant amount.

How can you avoid falling into the trap of higher Medicare costs due to RMDs? Here are two strategies to consider:

1: Convert to a Roth IRA.

One way to avoid IRMAA problems due to RMDs is to eliminate RMDs. If you are in your early sixties you may want to consider converting to a Roth IRA sooner rather than later. You will want to get the conversion done before the income from the conversion would affect your MAGI for Medicare purposes. (Income in the year you turn 63 impacts IRMAA brackets in the year you turn 65.) By doing so, you can then minimize the impact of RMDs on Medicare costs.  This is because RMDs will not be needed. RMDs are not required from Roth IRAs during the Roth IRA owner’s lifetime. In addition, any qualified Roth IRA distributions are not included in MAGI for Medicare purposes.

2: Do a QCD.

If you are already taking RMDs, a qualified charitable distribution (QCD) is another strategy you may consider to minimize the impact of RMDs from an IRA on Medicare costs. With a QCD, you can transfer up to $105,000 annually from your IRA to a charity tax-free. A QCD can satisfy your RMD for the year and it is not included in MAGI for determining Medicare costs. Keeping the RMD amount out of MAGI can result in big savings. This is not the case if you take your RMD and then donate to charity and claim a charitable deduction. With that approach, the RMD would still be included in MAGI.

By Sarah Brenner, JD
Director of Retirement Education
Ed Slott and Company, LLC

Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 04/15/24, with permission. https://irahelp.com/slottreport/two-rmd-strategies-to-avoid-irmaa/, Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. 
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment advisor. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.