Long term capital gains, of course, are taxed at favorable rates as compared with ordinary income.
So thoughts about long term capital gains might generally lean in the direction of puppies, cookies, and beautiful sunny days . . . in short, good things. There is ample reason for this, but not when it comes to the dreaded IRMAA.
As those with experience already know, the IRMAA takes no prisoners. But you might not be aware the IRMAA also gives no quarter when you show up with long term capital gains. So while you might have warm and fuzzy feelings about capital gains generally, and feel safe, the IRMAA will spit in your face, grab you by the ankles hoisting you skyward, and collect your money as it drops unavoidably from your pockets.
In short, be real careful. Long term capital gains, whether from sale of stock, a home, or whatever else, can easily drive you into a higher IRMAA tax bracket and cost you significant money, catching you unaware at the same time. Be on alert and don’t let this happen to you unknowingly.
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I’m clueless about the issue mostly because I won’t need to find out about it for nearly two decades when things may have considerably changed from now, but could you give us a sense of the difference it makes in premiums for different levels of long term capital gains? Is this something that you’d need to tailor your investments for or the opportunity cost may be worse than the savings?
You can find the current IRMAA tax tables here:
Link to 2020 IRMAA tax tables
You’re right, I have no clue what the IRMAA numbers will be like twenty years hence. My post was for those of us currently being fleeced. You can see the completely unfair, incredibly stepwise, nature of the tax.
Point is, long term capital gains can push you over one or more of those steps every bit as quickly as ordinary income. There is no special favorable treatment. It can become quite expensive.
OK, here is a better reference. This one shows the bottom rung of the ladder:
Extra cost imposed by the IRMAA
For example for single filers, if your income jumps from just under $87,000 to just over $136,000, your cost for Medicare Part B more than doubles!
And nota bene, “just under” can mean only $1 under, and “just over” can mean a mere $1 over. That is how tightly strung the IRMAA is.
Thanks for the reference tables.
The steps are indeed pretty steep. Silver lining is that they start pretty high, especially for those married filing jointly. You only get beyond the basic premium if you earn more than a $175k AGI. Honestly outside of maybe going with marginal rates of increasing %, I don’t know what would be more fair. But with the deficit in medicare, I don’t see those premiums going anywhere but up long term so it may get worse before it gets better.
In this case, I think that’d push people towards investments with lower capital gain events.
It’s not for life, right? Just the next year of payments based on last year’s AGI?
Pretty much. You’re right it is not for life. But I think the IRMAA payment level is based on your MAGI from two years ago.
It is also worth noting that they are lowering all the IRMAA thresholds year by year. So going forward more and more people will be ensnared.
Here is a reference:
Use the MAGI from two years back
Course you see right away the trap. How the heck can I know now what will be my MAGI two years hence, and adjust my long term capital gains accordingly? Few of us, I suspect, are that prescient. I’m not, and that is for certain.
The two year period is pretty strange. Still, the worst case scenario only amounts to an extra ~1% in healthcare premiums on an unexpected 500k income year.
I’d never heard of any of this. I had no idea Medicare was means tested. Thanks for the heads up.
Am I correct in understanding that this is a lot like the ACA subsidies for health insurance premiums?
If you have a moment, can you summarize what costs we should expect for Medicare, from the perspective of a younger person with an ACA policy now?
With apology, I am completely at a loss to provide that assist. You see, I am too old ever to have participated in the ACA. I have no working understanding of the ACA whatsoever so am unable to relate it to something else. Sorry
Another case where this can be a problem. My wife has 401k money that we are trying to do in-service rollovers and convert to Roth IRA money so as to avoid required distributions once she quits working. It’s a pain trying to figure out how much to convert each year so as to avoid triggering the IRMAA as the decision has to be made by Dec 31–before I see the 1099s that tell me what gains our mutual fund investments threw off.
Note, also, that there is a three year lookback on this–step over the line by $1 for one year and you pay the higher rates for 3 years. Their website also says you can appeal if it was not representative of your true financial state. In practice that’s not what we found–when she first had to pay Medicare premiums we had a large one-year capital gains spike within the lookback and they couldn’t see that it wasn’t at all representative. We didn’t pursue it, though, as it was going to age off after only two payments and wasn’t worth a big deal.
Sorry Shinobi. Please read that as “How does Medicare work compared to regular insurance someone might buy themselves or get from work?”
Of course, no problem if you don’t want to fool with it.
The premium difference is only 100-200 a month? Doesn’t seem like it is worth a whole lot of time and changing behavior. It seems like any benefit is offset by the risk that if someone misses taking gains and instead take losses.
Because it’s a step function it’s very discontinuous - go from the top step of category 1 to category 2 and it’s a 3.2% surcharge, then 3.9%, 3.9%, and 0.3% (for the $163k to $500k step for singles; $337k to $750k for couples). $163k/$337k corresponds roughly to the break point between 24% and 32% tax brackets, although that’s on a taxable income basis and not a MAGI basis. Going from $87k to $163k comes out to about a 3.7% additional tax.
I plan on retiring before 65 and have already thought about strategically converting Traditional 457 to Roth during the years I’m not working, probably to the 24/32% tax bracket break point. Depending on how the math works out, I may not get Medicare immediately but wait until the last possible month before a late penalty is charged, which would be roughly 15 months after my 65th birthday (I would have retiree health care from a government pension plan).
Certainly during the pre-65 years I would aim to convert 100% of my part time and gig work earnings into a Roth IRA. If I worked part time after 65, I would try to manage my deductible retirement contributions and expenses to try to mind the breakpoints in IRMAA should my income be above $87k. I also continue to buy savings bonds and would manage the withdrawal of interest to have my income come near the breakpoints without going over.
Currently I have a speculative taxable account where I trade stock but my tax deferred accounts are in ETFs. Moving forward as I head towards Medicare age, I might consider flipping that around. The problem is that you can’t trade margin in IRAs and I generally use margin, along with higher level option strategies, in my taxable IBKR account.