The Silent Surcharge Retirees Forget About
by SGL Financial
Our 2 Cents – Episode #228
The Silent Surcharge Retirees Forget About
A fresh episode of Our 2 Cents is here! On today’s show, the Lewits kick things off with quick hits before unpacking everything you need to know about Income-Related Monthly Adjustment Amount (IRMAA). Don’t miss it! Listen in now!
- Gabriel’s Quick Hits:
- Fed rate cut = big market moves ahead?
- Can you guess the happiest state in America?
- Major move for the Bears—get ready for their brand-new stadium in this suburb!
- The Hidden Medicare Penalty:
- Get the inside scoop on IRMAA and discover strategies to reduce this often-overlooked surcharge.
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Podcast Transcript
Announcer: You are listening to Our 2 Cents, with the team from SGL Financial. Building Wealth for Life. Steve Lewit is the President of SGL Financial and Gabriel Lewit is the CEO. They’re here to discuss all the latest in financial news, trends, strategies, and more.
Gabriel Lewit: Well, hello everybody. Welcome to Our 2 Cents. You’ve got Gabriel here back with you and Steve’s back with you, and we are revved up for another great show today.
Steve Lewit: We are. You have your mellow voice on this morning.
Gabriel Lewit: My mellow voice?
Steve Lewit: Yeah, you usually have a little tinge,-
Gabriel Lewit: Hello.
Steve Lewit: … but this is more mellow.
Gabriel Lewit: Mellow. Okay.
Steve Lewit: Yeah.
Gabriel Lewit: Well, I’ll take it.
Steve Lewit: I think you’ve matured.
Gabriel Lewit: I don’t know about that overnight or over the last week, but maybe, who knows?
Steve Lewit: Who knows?
Gabriel Lewit: It’s sometimes when I look at my kids on a given week, I’ll just, I’ll come home on a given day and look at them and be like, “You look older.”
Steve Lewit: Where did they come from?
Gabriel Lewit: They look a little bit older, and you don’t see it day-to-day, but sometimes it’s just a little bit of time. So maybe I’ve matured over the last week.
Steve Lewit: Yeah, don’t look in the mirror too often.
Gabriel Lewit: Yeah.
Steve Lewit: I look in the mirror, guess what?
Gabriel Lewit: Same thing happens here too.
Steve Lewit: I look a little older.
Gabriel Lewit: Yeah. Well, we hope you’re doing great and as we talked about last time on the show, we predicted correctly that there would likely be a rate cut.
Steve Lewit: And there was.
Gabriel Lewit: And there was, and so we’re going to talk a little bit about that today. We’ve got some other news and tidbits and fun items to chat with you, so we’ll get to those in a moment. And then we’re going to talk a little bit about IRMAA, okay, which is a Medicare surcharge, which I don’t believe we’ve talked about much on the show before. And we are going to just get going. More importantly,-
Steve Lewit: More importantly…
Gabriel Lewit: … Bears won.
Steve Lewit: Oh my gosh. And guess who was at the game?
Gabriel Lewit: Steve and I were at the game.
Steve Lewit: With Nathan.
Gabriel Lewit: With my little boy Nate.
Steve Lewit: My oldest grandson.
Gabriel Lewit: Yes, and we had a very good time because it was a great game and, of course, that they won. And it was also Nate’s very first football game ever. I think he was a little bored actually.
Steve Lewit: I don’t know. But whenever there was a score or touchdown, he was up chair.
Gabriel Lewit: He was excited, yeah.
Steve Lewit: He was up chair.
Gabriel Lewit: I think it was just longer than he thought.
Steve Lewit: He did great. He did great.
Gabriel Lewit: And you don’t typically, I don’t know, you don’t get up and go too often, right? When there’s commercials at home, you get up and you go to X, Y or Z, but-
Steve Lewit: Didn’t you love the traffic driving home?
Gabriel Lewit: Oh my gosh, yeah. It was brutal.
Steve Lewit: What a brutal mess.
Gabriel Lewit: Highway, two lanes shot and yeah, it was no fun. Anyways, yeah, great news. Bears won and hopefully they’re starting their way towards victory, more victory in their future.
Steve Lewit: Bear down.
Gabriel Lewit: And if you’re not a Bears fan, you may not care, but I’m excited because I’ve been waiting for this for a long time. It’s been a long time without a win.
Steve Lewit: Yes, yes,-
Gabriel Lewit: All right.
Steve Lewit: … yes it has.
Gabriel Lewit: Oh yeah. And also Steve bought a Bears jacket that I’m expecting him to wear when it gets colder.
Steve Lewit: I am going to wear it every day.
Gabriel Lewit: Even though you’re more of a Giants fan, I was very excited to see that.
Steve Lewit: Well, I’m going to get a Giants jacket too and alternate on, well, depends. The Giants are owning three and they’ve got their new quarterback starting, Jackson Dart, who is really talented. So that’s the most exciting part of their game is a new quarterback and they will lose again.
Gabriel Lewit: There you go.
Steve Lewit: There you go. Yeah.
Gabriel Lewit: Okay, so back to the rate cuts here.
Steve Lewit: Yep.
Gabriel Lewit: So yeah, Fed lowered the rates-
Steve Lewit: Quarter of a point.
Gabriel Lewit: … quarter point, right. It’s benchmark rate by a quarter point to stay within what they call the four to four and a quarter percent range and is projecting potentially two more cuts by the end of this year.
Steve Lewit: And I do think they will happen because there’s a lot of data and the underlying data in the economy that it is softening a little bit. Unemployment is up a little bit. We still haven’t seen the effect of all the tariffs. And so lowering the rates, think good idea.
Gabriel Lewit: Well, I think in general the Fed does have a dual mandate trying to stimulate the economy, also trying to reduce inflation. It’ll be interesting to see if the inflation rate continues to stay a little higher than where the Fed wants it to be and or ticks higher potentially as well increasing inflation.
That would not be good because if inflation is sticky, what happens? You generally try to raise rates, but if the economy is softening what happens? You try to lower rates.
Steve Lewit: Exactly.
Gabriel Lewit: Those two create an environment that no economist I know you would say wants to be in, which is a stagflation potential environment.
Steve Lewit: Yeah, it’s the perfect storm. What do we do? You’ve got inflation, we’ve got to raise the rates. As soon as we raise the rates, there’s more unemployment, less investment. What do you do? And that is the question, what do you do?
Gabriel Lewit: So, there’s been a little bit of hint of that, right? In some of the Feds comments. A little bit of hint of that in articles that you’re seeing out there. Whether or not that’s something to be worried about, stay tuned. We don’t know just yet.
Steve Lewit: And folks keep in mind that this doesn’t necessarily translate into the performance of the stock market. Everyone thinks well rates are going down, the market’s going to go up. Well, a lot of that has been discounted. In other words, predigested in the market right now. So the effect of lowering rates is not going to all of a sudden see a boom in the market.
Gabriel Lewit: Yeah, correct. And it should bit by bit, however, start to result in a little bit lower rates elsewhere. Although mortgage rates have come down a little already, you’re not going to see a huge change because of this.
Steve Lewit: They’re almost, they’re.
Just above 6%.
Gabriel Lewit: And then you might see some bit-by-bit lower interest rates on your cars. And of course, what are you going to see lower as well? Your money market, savings and CD accounts, those are going to pay a little bit less.
Steve Lewit: They’ve already come down.
Gabriel Lewit: They already have.
Steve Lewit: And folks, if you have debt on credit cards, this is not helping you. Instead of paying 21%, you might be paying 20% and that’s the highest rates ever. So if you have any debt on any credit card, your number one financial goal right now is to pay it off.
Gabriel Lewit: Indeed. Okay.
Steve Lewit: Okay.
Gabriel Lewit: Well, I don’t know, did you have more you wanted to say on the rate cut environment, Steve?
Steve Lewit: I feel like we’ve said it so many times.
Gabriel Lewit: It’s been a theme this year, so we don’t want to talk too much.
Steve Lewit: I got nothing new.
Gabriel Lewit: Okay. Yeah, me either on this one. I do have something new though about the happiest state in America and where you would want to move to if you wanted to live in the happiest state in America or even the top 10 states.
Steve Lewit: I wish I knew that yesterday. Yesterday I had a tough day. So, maybe it’s because I wasn’t in the happiest state in America.
Gabriel Lewit: Well, our state here of Illinois isn’t even in the top 10.
Steve Lewit: Why am I not surprised at that?
Gabriel Lewit: But it’s also not in the bottom either. So, let’s talk a little bit about this. Now, where would you guess… I know you’ve probably already seen it, but where would you have guessed the happiest state in America would’ve been if you hadn’t already seen the results?
Steve Lewit: Well, I just looked. I really just looked and I wouldn’t have guessed that, although when I see it, I can understand that. I think I would’ve said Maine.
Gabriel Lewit: Maine.
Steve Lewit: No, no. Maybe Wyoming. Some place laid back with a lot of skiing and outdoor activities.
Gabriel Lewit: Yeah.
Steve Lewit: Utah.
Gabriel Lewit: Yeah.
Steve Lewit: Utah. Is Utah on the list?
Gabriel Lewit: It is on the top 10 list, yes.
Steve Lewit: It is? I got one. Okay, I got one.
Gabriel Lewit: Yep. Well, in case you were wondering, we won’t keep you in suspense any longer. The top happiest state currently in the United States, according to a WalletHub survey is Hawaii.
Steve Lewit: Oh, I love Hawaii.
Gabriel Lewit: All right. And here was the criteria that was being looked at, right? It had a very low, a second lowest depression rate and the highest self-reported life satisfaction. And nearly 85% of adults in Hawaii reported being in good or better physical health. And the state currently boasts the longest life expectancy in the US.
Steve Lewit: I’m moving there. I need life expectancy.
Gabriel Lewit: So, now what you may not have… You might’ve guessed that, right? Because it is kind of a seemingly happy state, right? Everyone goes there generally because it’s beautiful and it’s warm and the beaches.
Steve Lewit: And the people of Hawaii, the natural people of Hawaii are very happy people.
Gabriel Lewit: Generally, yeah.
Steve Lewit: Generally.
Gabriel Lewit: Yeah. Now, let’s see here. Maryland came in second.
Steve Lewit: Maryland?
Gabriel Lewit: Maryland. I would not have guessed that.
Steve Lewit: What’s in Maryland? What have they got there?
Gabriel Lewit: Baltimore’s in Maryland, I think, right? You got the Ravens. They’re a half-decent football team.
Steve Lewit: Baltimore’s good, Orioles.
Gabriel Lewit: You’ve got a 3.2% lowest unemployment rate currently of the states and the highest percentage of households earning above 75,000, and the third highest rate of people who feel motivated and like what they do.
Steve Lewit: Would you ever think of moving to Maryland?
Gabriel Lewit: Yeah, I don’t know. I don’t think so.
Steve Lewit: No, I don’t think so.
Gabriel Lewit: Yeah.
Steve Lewit: Let’s retire to Maryland.
Gabriel Lewit: Where is Washington D.C.? That’s near Maryland, right?
Steve Lewit: Yeah.
Gabriel Lewit: So, there might be-
Steve Lewit: They’re right next door.
Gabriel Lewit: … government workers and stuff like that there.
Steve Lewit: They’re not happy people though.
Gabriel Lewit: Yeah, so also the state had the third highest share of people who reported having supportive relationships and love in their lives.
Steve Lewit: Oh, that sounds good.
Gabriel Lewit: Yeah.
Steve Lewit: That sounds like-
Gabriel Lewit: You need supportive relationships and love in your life; you moved to Maryland.
Steve Lewit: Yeah. Yeah, okay.
Gabriel Lewit: Who would’ve guessed that, right?
Steve Lewit: No, not me.
Gabriel Lewit: Okay. All right, so here’s the rest of the top 10 states, okay? We’re going to just go through the list. We’ve got Hawaii. We’ve got Maryland. Nebraska, bringing up number three, right? Silver, no bronze medal, right, for Nebraska.
Steve Lewit: I could see that, yeah.
Gabriel Lewit: Nebraska, why? It has one of the lowest unemployment rates combined with the second highest level of economic security.
Steve Lewit: A lot of golf courses.
Gabriel Lewit: Mental health indicators have improved and one of the lowest depression rates and the highest level of leisure time. Maybe all the farmers, because they don’t get to work in the winter or who knows what.
Steve Lewit: I’m surprised because they drink a lot in the winter.
Gabriel Lewit: Yeah. I don’t know.
Steve Lewit: Well, maybe that’s why they’re not depressed.
Gabriel Lewit: They also have tornadoes, I think, in Nebraska, and I don’t like any state that has tornadoes.
Steve Lewit: It’s windy, yeah.
Gabriel Lewit: So, I would not to live there.
Steve Lewit: It could be windy. The next one really surprises me.
Gabriel Lewit: New Jersey.
Steve Lewit: New Jersey.
Gabriel Lewit: New Jersey, Connect-
Steve Lewit: New Jersey.
Gabriel Lewit: … Connecticut.
Steve Lewit: Connecticut’s beautiful.
Gabriel Lewit: It’s number five. You’ve got Utah, you were spot on, number six. Sunny California, number seven. New Hampshire-
Steve Lewit: I almost said New Hampshire.
Gabriel Lewit: Okay. And I’m purposely mispronouncing these, yes?
Steve Lewit: Yes, Hampshire.
Gabriel Lewit: Massachusetts, number nine and little Idaho, right, is 10, are rounding out your top 10.
Steve Lewit: They don’t give you where Illinois, all the others are?
Gabriel Lewit: No. There’s a map here that shows colors where blue is, blue is happy and no. Yeah. And red is unhappy. Yes, correct. And Illinois is gray, so I think we’re-
Steve Lewit: Perfect.
Gabriel Lewit: … right in the middle.
Steve Lewit: We’re headed into the gray. It’s perfect timing.
Gabriel Lewit: I’m looking at other reds here in case you were interested.
Steve Lewit: What’s an unhappy state?
Gabriel Lewit: Alaska.
Steve Lewit: Yeah, I can see that. Nothing going on there.
Gabriel Lewit: Interestingly, Oregon is fairly unhappy. Nevada’s unhappy.
Steve Lewit: Really?
Gabriel Lewit: I don’t know all these states because I don’t actually have the names on the states, so I’m just guessing.
Steve Lewit: You don’t know the states?
Gabriel Lewit: By their shape? I know most of them. Texas is fairly red.
Steve Lewit: Did you go to school?
Gabriel Lewit: Louisiana is dark red, and you’ve got Alabama, Arkansas are pretty red.
Steve Lewit: A lot of the South, Southeast is very-
Gabriel Lewit: No, blue you’ve got-
Steve Lewit: … sad.
Gabriel Lewit: … Florida, Georgia both on the blue side. Pennsylvania, New York, blue. California, blue. Utah, blue. I think that’s… I don’t know what that is. Nebraska I said blue.
Steve Lewit: It’s really interesting that most of the unhappy states are in the South.
Gabriel Lewit: Maybe it’s the hot weather and the June bugs. I’m not sure.
Steve Lewit: I don’t know, but it really is interesting.
Gabriel Lewit: Yeah.
Steve Lewit: Very interesting. Good pick, Gabriel.
Gabriel Lewit: Well, yeah, we wanted to give you a little bit of a take here.
Steve Lewit: I wonder if there’s a correlation between happiness and the amount of taxes in the state.
Gabriel Lewit: Well, California has high taxes and they’re blue.
Steve Lewit: And they’re blue, right.
Gabriel Lewit: It says that blue means happy.
Steve Lewit: Well, they’re oblivious.
Gabriel Lewit: Yeah.
Steve Lewit: Californians are like that. They live in their own dream world.
Gabriel Lewit: Well, they definitely on their 12 lane highways and who knows what else they got out there, but a lot of taxes in California, so I don’t think that’s purely a low tax, high happiness level there.
Steve Lewit: Yeah, I got all excited about doing a research project. I’m not going to do it now.
Gabriel Lewit: Yes, yes, yes. Okay. Well, in other news… And then we’re going to talk more about something else financial related, but this is very important. The Bears apparently are officially going to move their stadium to Arlington Heights.
Steve Lewit: Yes.
Gabriel Lewit: And now the shovels aren’t in the ground yet, so take that with a grain of salt.
Steve Lewit: But it’s pretty a done deal. It looks like.
Gabriel Lewit: Per the president, Kevin Warren, “Arlington Heights is the only site for a new Bears Stadium team planning bid to host Super Bowl.”
Steve Lewit: Yes.
Gabriel Lewit: Okay. So Stadium decision, Chicago, sorry. CEO and President Kevin Warren announced the team plans to build a new stadium in Arlington Heights and apparently requires no state funding for construction. And they’d like to have the-
Steve Lewit: What is that, a $9 billion? I think I saw a $9 billion or something silly like that. Does it say?
Gabriel Lewit: No, I don’t see the exact amount of the stadium costs here. Maybe I just missed it, right?
Steve Lewit: Maybe you could Google that guys.
Gabriel Lewit: Yeah, apparently over half the season ticket holders live near Arlington Heights, okay, so that was partially part of their reasoning.
Steve Lewit: That will transform that whole area and all the entire area around it.
Gabriel Lewit: So, the stadium might be around $4.7 billion. Okay, that’s a few bucks.
Steve Lewit: Yep.
Gabriel Lewit: They had bought Arlington Park the site of the new stadium for 197 million, and they do have to get out of Soldier Field because they have a lease there, but they can break the lease for a piddly little 84 million. Which is chump change when you’re building-
Steve Lewit: Well, actually, it is.
Gabriel Lewit: … when you’re building a $5 billion stadium-
Steve Lewit: Exactly.
Gabriel Lewit: … it is, yeah. So, it might hold other things like concerts, NCAA Final Four Tournaments, Super Bowl is what they want to do. And of course, we are on a march now towards the playoffs with our first win on the year, so are looking good.
Steve Lewit: And we might play at home. And how long will it take to build nine years?
Gabriel Lewit: Well, if they won a 2031 Super Bowl, I don’t think that’s going to work.
Steve Lewit: 2031 is seven, 86-
Gabriel Lewit: I think, three to four, I think these things take two to three to four years.
Steve Lewit: Yeah. Well, I’m pretty pumped about that.
Gabriel Lewit: I’m very, I mean, we were just talking about how we went to the Bears game and it took us a very long time to get there, and then a very long time to walk to the stadium, and a very long time to walk back. And so this would be, I mean, for me, superbly easy to get to.
Steve Lewit: And I think the… They hopefully, they will wisely build the traffic patterns to do a little better. But yeah, it’s right next door. But what I’m excited about is it brings a whole happiness to this area because I think they’re going to have shopping malls in there. It’s going to be more than just a football stadium.
Gabriel Lewit: Yes. No, I believe it meant to be an entire concourse of Bears fandom, so who wouldn’t want that?
Steve Lewit: Right, and I can wear my jacket.
Gabriel Lewit: You could.
Steve Lewit: Right there.
Gabriel Lewit: All right, all right. Okay, let’s talk about our main financial topic for today. We’ve got IRMAA.
Steve Lewit: Oh, I thought we were going to talk about the other topic, main financial topic.
Gabriel Lewit: No, no, not for today.
Steve Lewit: Not for today?
Gabriel Lewit: No, we’ve already talked about a few other-
Steve Lewit: Oh, this is so much fun.
Gabriel Lewit: Well, yeah, we got to get to some financial topics, Steve.
Steve Lewit: Okay. This is a financial show, right?
Gabriel Lewit: It is.
Steve Lewit: Not a news report.
Gabriel Lewit: Correct, yes.
Steve Lewit: Well, we did a little bit.
Gabriel Lewit: We did do a little bit, yes.
Steve Lewit: All right. Let’s talk about IRMAA.
Gabriel Lewit: Okay. IRMAA is, well, what does it stand for, okay? It’s not a person, it’s a thing. It’s income related monthly adjustment amount, also known as IRMAA, okay? I-R-M-A-A. And what it is it’s a potential hidden penalty that you might be paying and you may not even know exists.
It’s essentially an additional tax or what’s known as a Medicare surcharge for anybody that’s paying Medicare premiums or Part D premiums. If your income is above a certain level, and we’re going to get into more details on this, you may have to pay a Medicare surcharge-
Steve Lewit: Yeah, actually-
Gabriel Lewit: … known as IRMAA.
Steve Lewit: … Part B and D.
Gabriel Lewit: Part B and D.
Steve Lewit: Yes.
Gabriel Lewit: Yes, okay.
Steve Lewit: Yes.
Gabriel Lewit: Okay. Now, it was introduced in 2003 to ask higher income retirees to pay, quote unquote, “More of their fair share.”
Steve Lewit: Yes.
Gabriel Lewit: Okay? It’s based on your M-A-G-I, MAGI, modified adjusted gross income from two years prior.
Steve Lewit: Two. Now, remember that folks, it’s not last year, it’s two years ago that they’re going to look at your income and then determine your IRMAA bracket.
Gabriel Lewit: Yeah. It applies, as you said, Steve, to your Medicare Part B and Part D premiums, okay? It’s not considered a penalty. It’s not considered a tax, but it basically is both.
Steve Lewit: What else would you call it? Oh, it’s a surcharge.
Gabriel Lewit: It’s a surcharge.
Steve Lewit: Gee, that’s not a penalty or a tax.
Gabriel Lewit: Yeah, it’s a surcharge.
Steve Lewit: I feel better about it.
Gabriel Lewit: You’re just paying a fair share surcharge.
Steve Lewit: Yeah, I’m in the top bracket. I really love paying a surcharge and not a tax or-
Gabriel Lewit: A fair share surcharge, not a penalty.
Steve Lewit: Of an extra $1,000 a month.
Gabriel Lewit: But yes, it’s both essentially a penalty and essentially a tax is how it feels like to most people. And a lot of people don’t know about it, so they just inadvertently bust through these brackets here. It’s a separate bracket. We’ll get into that in a second.
And then they all of a sudden get a statement or a notice from Medicare from, “Hey, your income from two years ago was blah, and now you got to pay X amount more this month for the rest of the year.” And people are very unhappy when they receive that notice.
Steve Lewit: Well, and they get their social security check, and there’s, guess what? There’s less money in it.
Gabriel Lewit: Right, because it’s correct, being deducted from-
Steve Lewit: It comes right out of your social security payment. Now, if you’re not on Medicare now, you can plan ahead to make sure that you don’t get hit with IRMAA when you do go on Medicare, and that’s all part of tax planning and a good financial plan.
Gabriel Lewit: Yeah. Well, so let’s talk about some numbers first, okay, then we can get into how to do the tax planning piece. Is that okay with you?
Steve Lewit: I love it when you don’t want to follow my lead, you just say, “Yeah.”
Gabriel Lewit: Yeah, good point, Steve.
Steve Lewit: That’s okay. I know my son. Yeah.
Gabriel Lewit: Yeah.
Steve Lewit: Yeah.
Gabriel Lewit: Yeah. Okay. Well, how much does this cost you? Well, you’ve got your regular Medicare Part B premium, which can you pull that up here, Gabby? I think it’s $181. Hold on. Let’s see if I know this right. Medicare Part B premium. Hold on one second. We’re pulling this up here. $185 per month. And yes, that is the baseline you’ll pay no matter what.
And your Part D premium will generally depend on the specific Part D prescription drug plan that you have chosen. Okay. So that might range from $0 a month if you don’t have many prescriptions. It could be even $75 per month depending on your specific Part D plan.
Steve Lewit: It’s not nearly as onerous as the Part B.
Gabriel Lewit: Yes. Now, the IRMAA, right? The income related monthly adjustment amount could add anywhere between $74 to $444 per month to your Part B premium.
Steve Lewit: Wait. Per person, per month.
Gabriel Lewit: Per person, per month. Yep. So that’s somewhere between $528 to $5,326 per year multiplied by two, if you’re married, it could be anywhere between 1,000 to $10,000 more per year, depending on your total income level. And on the part D, right, between $13 a month to $85 a month. So, there’s a lot that this could cost you. Anywhere up to almost 13,000 per year for a husband and wife at the high end.
Steve Lewit: So, if you’re retired and you have a high income, high expenses, you are contributing your fair share, which is not a tax or a penalty. You’re just making this contribution because you love to support America.
Gabriel Lewit: Indeed. And now to be fair, the high tiers there are pretty hard to get into. You’d have to have a very substantial-
Steve Lewit: What is the highest? Do you have it there?
Gabriel Lewit: I don’t have the full bracket right in front of me here, but that’s a little beyond the scope of what I wanted to get into for today. But you’d have to be hundreds and hundreds of thousands of dollars before you would get into the highest tier. I think $750,000. We just pulled it up really quick before you get to the highest.
Steve Lewit: So highest tier.
Gabriel Lewit: So that’s the good news, right? But the bad news is if you are over any of these tiers by even $1 in your planning, okay, so you go over by one buck, it does trigger the tier.
So, it’s not like your taxes where a typical tax bracket, right, if you’re in the 10% and you go over a little bit into the 12, then just the amount that falls into the 12% bracket gets taxed at 12%. This is a $1 over the bracket level, then triggers that tax.
Steve Lewit: Yeah. Now, so Gabriel, let’s say I retire, I get a big payout from my company, and all of a sudden, instead of making my hundred grand a year, that year, I make $250,000, and that pushes me into a higher IRMAA bracket. What can I do?
Gabriel Lewit: Well, sometimes you can’t do anything, right? For example, all of a sudden this year you realize that last year you took out a huge withdrawal and it bumped you into a bracket. Well, that’s going to count towards your IRMAA for two years from last year or next year.
Steve Lewit: So, if I use my IRA to buy my house, and I take $300,000 out, guess what? My MAGI just went up 300,000 bucks.
Gabriel Lewit: MAGI?
Steve Lewit: MAGI.
Gabriel Lewit: MAGI?
Steve Lewit: MAGI. MAGI.
Gabriel Lewit: Yeah. Yeah. Correct, it did, right? And it would then potentially by the time you know that, right, maybe there’s nothing you can change for prior years. So most of the time you’re looking at this year, right? What can you do this year to avoid bumping yourself into a bracket two years from now into a higher Medicare surcharge bracket?
So, one thing would be just knowing where you are currently, how close to the edge of a bracket are you based on your standard month-to-month income sources?
Steve Lewit: Yes.
Gabriel Lewit: Yes. Okay.
Steve Lewit: I’m agreeing with you.
Gabriel Lewit: Yeah, I know when you’re tuning out, because I’m waiting for your prompt and then-
Steve Lewit: I wasn’t tuning-
Gabriel Lewit: … there’s no prompt back.
Steve Lewit: … I really wasn’t tuning you out. I was thinking-
Gabriel Lewit: Just giving you a hard time because you gave me a-
Steve Lewit: Yes, I know, I know,-
Gabriel Lewit: … hard time earlier.
Steve Lewit: … I know, it’s fine. It’s fine. I’m a happy person today.
Gabriel Lewit: So, let’s say you’re on social security this year and you’re on Medicare obviously. This doesn’t apply to you if you’re not on Medicare. So if you’re under 65, you don’t have to worry about this just yet. Unless you’re 64 and you might be on Medicare next year or the year after.
Steve Lewit: Which brings us back when we get there to tax planning about that.
Gabriel Lewit: Right. So we’re talking about tax planning right now.
Steve Lewit: Sort of.
Gabriel Lewit: I’m setting this up because you need to know where you are in these brackets right now before you make any changes.
So, before you take big withdrawals, before you start your income plans, before you decide if you’re pulling from cash or a Roth or an IRA, these are all tax planning questions, you have to know where you are in the current tax brackets.
What if you’re right on the edge of one of these Medicare brackets that could substantially change your strategy?
Steve Lewit: Exactly. Absolutely. If you’re going to take a lot of capital gains this year, and you’re on the edge of an IRMAA strategy, maybe wait until January so you don’t push yourself into the higher bracket.
Gabriel Lewit: Yeah. And you may next year be in the same position, right? If this is regular month-to-month income from social security or pensions or whatever else might be withdrawing from just because you need the money, maybe there’s nothing you can do. But you might also realize, yes, we don’t want to go over that bracket.
Now, especially if you’re taking one-time withdrawals or if you’re doing Roth conversions or really anything to do with, you could do QCDs, which if you’re RMD age is a qualified charitable distribution because RMDs, to back up a little, require minimum distributions, you have to take for many as 73 or 75. Those can bump you into a higher tax bracket, whether or not you need the money and you have no control at that point.
Steve Lewit: Well, if most of your savings are in the IRA tax bucket, the tax deferred bucket, and you have to take it out, absolutely, it’s going to increase most likely, or it could, I don’t want to say most likely, but often increase not only your income bracket, but your IRMAA bracket as well.
Gabriel Lewit: Yeah. Yeah, so all these things, number one, once you know about them, once you know where you are in your tax brackets, now you can start looking at the right strategies to use. And for the next few minutes, we wanted to talk about what some of those are.
Steve Lewit: Yeah, I just wanted-
Gabriel Lewit: Which I think is what you wanted us to talk about 10 minutes ago, but now we’re there.
Steve Lewit: I forgot. I don’t remember. It was so long ago. But I just wanted to take a segue back to the appeals. Now, folks, if you have a one-time expense, or one-time… You retired, what should I call it? One-time event that all of a sudden drives your income up.
Roth conversions are not included in that, but you can appeal that. And those appeals are actually… There’s a list of qualifications for appeals, and those appeals actually are worth trying to get.
Gabriel Lewit: Yeah. They’re not guaranteed, but you can submit that appeal and perhaps get your IRMAA surcharge waived or reduced, right, for a given year.
Steve Lewit: Okay. So, let’s say you’re 60 or 55 and you know 65, you’re going to have IRMA and you’ve got a lot of IRA money, why not start a process of moving that money from the tax deferred bucket into the tax free bucket by using, well, let’s say Roth conversions?
Gabriel Lewit: Yeah, I mean, Roth conversions are a great way to bit by bit lower your future RMDs, right, and those RMDs, which might trigger an IRMA surcharge when they’re forced to be withdrawn. If you can lower those enough before you hit RMD age, and sometimes you continue to do that even after you’re 65 up to an-
Steve Lewit: Definitely.
Gabriel Lewit: … IRMAA level-
Steve Lewit: Definitely.
Gabriel Lewit: … that may help you substantially down the road, right? And we talk a lot about value that’s provided through planning, and many times the value is through the tax planning piece, not just the investment portfolio management. This is a great example of that, right?
If we can help you to avoid 20 years worth of $1,000 IRMAA surcharges, yes, for an easy example, that’s right there, 20,000 bucks.
Steve Lewit: Well, that assumes that taxes don’t go up in the future. The prices don’t go up in the future. Folks, the real wealth, I’m just going to say this, it’s nice to make money in the stock market. It’s great. We like making money in the stock market, but the real wealth, the real wealth is tax savings.
And things like IRMAA planning, Roth conversions is using specially designed life insurance to build tax-free income, all of these tax planning items put more money in your pocket that you can either spend, give to your kids or give away to charity.
Gabriel Lewit: Yeah, no, exactly. And that’s really the big deal here. And look, there are things that don’t trigger IRMAA, Roth IRA withdrawals, HSA, health savings account distributions, reverse mortgage income, life insurance, tax-free policy loans. That’s what you were talking about.
Steve Lewit: Exactly.
Gabriel Lewit: So, if you plan this ahead of time, right, you can really identify strategies to help eliminate or reduce IRMAA substantially, save yourself tens or maybe even hundreds of thousands of dollars in taxes. Again, these aren’t taxes, right? They’re charitable contributions you’re making to the government.
Steve Lewit: What tax is that?
Gabriel Lewit: Yeah, yeah. No, again, taxes, penalties, surcharges, whatever you want to call it, right? Save yourself tens, if not hundreds of thousands of those over your lifetime and build greater wealth, but not be surprised by this either, right? That’s, I think, a big deal.
Steve Lewit: Now, if you’re over 65 and on Medicare, it becomes a little more problematic because every time you do a Roth conversion, you’re raising your income. So sometimes folks will accelerate their Roth conversions and take a bigger hit over three years instead of taking it over 10 years and paying the IRMAA for 10 years instead of three years.
Gabriel Lewit: That would be a bit more of an advanced strategy. We’re not suggesting you rush out to do that. Maybe you offset that with charitable contributions or other things.
There’s things you can do. There’s a long list of withdrawal-based tax strategies to help avoid or eliminate the effects of IRMAA. But now you know what IRMAA is. And so when you say, my friend IRMAA is not so much of a good friend-
Steve Lewit: Well, it’s my piano teacher’s name is Irma. Every time I say Irma, I think of my piano teacher.
Gabriel Lewit: Okay. Well, I was thinking every time I hear the name Irma, I think income related monthly adjustment amount.
Steve Lewit: You’re such a financial professional.
Gabriel Lewit: Yes, yes, yes. So, if you’ve got questions, give us a call, 847 499 3330 or go to sglfinancial.com or you can email us info@sglfinancial.com.
We’ve navigated the world of IRMAA, Medicare surcharges, tax planning, all sorts of fun things here as well as if you think you want to move to the number one happiest state in the United States or one of the top 10 or anywhere, we’re here to help you. Give us a call anytime.
Steve Lewit: Well said.
Gabriel Lewit: All right. Well, we hope you have a wonderful rest of your week. Go Bears. Go your favorite football team, whichever it may be. May the best team win, and we will see you on the next show.
Steve Lewit: Stay well, everybody.
Gabriel Lewit: Bye-bye.
Steve Lewit: See you now.
Announcer: Thanks for listening to Our 2 Cents with Steve and Gabriel Lewit. For any questions about your finances, give SGL a call at 847 499 3330 or visit us on the web at sglfinancial.com and be sure to subscribe to join us on next week’s episode.
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