3 Financial Conspiracy Theories: IRMAA, Social Security, and Roth IRAs

I asked for a lot of questions last week and I only got one, but it was asked by a dozen or more people.  It fits right in with something I’ve always wanted to talk about so the timing was good.  I left something important out of the Roth conversion discussion and it affects a lot of people, especially when taxable income spikes in certain years.  Income Related Monthly Adjusted Amount (IRMAA) hits when you make too much money.  It’s something that I didn’t really hear much about until a few years ago but it’s essentially an increase in premiums for Medicare parts B and D.  Medicare is not just free healthcare and several people have to pay extra for it.

The more you make, the more you pay.  For the most part I can’t really say I feel sorry for anyone who gets stuck with IRMAA.  Boohoo, you make too much money!  But it hits people out of the blue when they try Roth conversions because taxable income goes up.  Currently, individuals are capped at $103K of income and couples at $206K.  If your adjusted gross income is above that then you’ll have to pay extra Medicare premiums.  Most people are below that for regular retirement income but Roth conversions will push people into it that otherwise wouldn’t have to pay it.  Calculations regarding the viability of tax-free conversions are incomplete without it.

It’s nothing more than a means test for Medicare.  What was once promised as a free benefit for all has turned into a mess so you have to pay for it.  It reminds me of all the other rules that have changed over time and because it has happened plenty of times before then we should expect it to happen again.  I love a good rabbit hole so this is a good opportunity to show you guys a few of the places I’ve been digging.

Social security is set to be reduced in 2033 if nothing is done to fix the system and we know they won’t do anything about it.  Any solutions are guaranteed to be unpopular but I have my ideas.  If they means test Medicare, why wouldn’t they also do it for social security? In the same sense that few will feel sorry for someone stuck with IRMAA, most people won’t feel bad for someone with millions of dollars who gets social security payments adjusted or taken.  Let’s not forget that social security was initially supposed to be tax-free income but that changed in 1984.  Just like the frog in boiling water, everyone is now used to extra heat.

But let’s be realistic about social security.  It started in 1935 when life expectancy in the US was right around 60 years.  Technically it’s called Old Age Survivors and Disability Insurance.  Back in the 30s anyone over 60 years old was considered to be of extremely old age.  If payments were adjusted for life expectancy then it shouldn’t be available for anyone under 75 or 80 years old.  Instead it is now a foundational piece of retirement for most people and available well before life expectancy.  It only paid out for a few people in the beginning and for only a few years in most cases.  Now people expect to live on it for 20 years or more.

I’m also convinced that the mainstream financial media pushes the idea to delay payments because the government knows they won’t have to pay out as much.  It kicks the can down the road which is a good thing for a system that is functionally bankrupt.  Considering that payments break even around age 80, at least half of people won’t ever get there.  Some will capitalize on a long life but the majority of people will fall short and save the system some money.  All cases are individual and I’m just talking about averages.  It’s going to be different for everyone.

Roth IRAs are another thing that I don’t trust.  It seems like the kind of good deal that might be taken away at some point.  My goal is not to scare anyone but to add some logic so you can make good decisions.  Whether this would eventually be means tested or just eliminated altogether is something we can argue about.  Maybe you think I’m crazy but the only reason I bring it up is because I don’t think it’s right to go full-force into a Roth conversion.  Last week I basically wanted to illustrate how expensive it is.  If tax benefits are reduced or eliminated then it would be a screw job all the way around.  

The actual tax code basically says that you don’t get a deduction for contributions and any distributions are not includible in gross income.  It’s not stated as tax-free so wording of the rule is important.  Is there a door open for Roth IRAs to be taxable?  That’s purely speculation but I’ll give you my best evidence to date.  Last year I processed my first death claim on an annuity.  It was qualified as a Roth IRA.  Along with the death benefit check, the widow received a 1099 and called me in a panic.  I was not present and couldn’t look at the document so I called the insurance company to ask about it.  The rep on the phone told me that the taxable amount is 0$ but they are required to send a 1099 anyway.  Perhaps changing the code would be as simple as changing the taxable amount on the 1099.

Again, this is not meant to scare anyone.  Cooler heads prevail so take this all into account if you are making big financial moves in retirement.  Roth conversions were first allowed in 2006 and IRMAA came about in 2007.  Coincidence?  I’m sure it’s not because the Feds will use every angle to get as much money out of you as possible.  Elimination of stretch IRAs, taxable social security and IRMAA have been rolled out before.  I think it’s silly to expect nothing less to support a defunct system.  Promises made have always been promises broken and I don’t expect that to change.

Let me know what you think…


Podcast Episode: Financial Conspiracy Theories: IRMAA, Social Security, and Roth IRAs

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Last Updated on June 7, 2024 by Bryan Anderson