We have gotten into a pattern of making sure we have paid enough taxes in to Federal and to State. I keep track of this with a folder for taxes, and when we do things (like the conversion to Roth IRA, or simply a 401k withdrawal) - they do a federal tax estimate/required (I believe it is 10%), which for us has been sufficient. Instead of doing quarterly taxes with the State, I estimate an amount and electronically send it in (as our state has this set up) - and make a notation in our checkbook as well as note it in our tax folder. To me, peace of mind. I have hated paying a penalty - and had to do this once years ago when DH had some work bonuses and also we cashed out some company stock. The penalty was small but was an annoyance to me. We have annuity payments that do a federal withdrawal, so we send in money directly electronically to the state to not have a state penalty.
We still are doing some shifting into Roth IRA each year during our lower income years in retirement prior to the required withdrawal amounts when we hit that age (we are both 68 now).
For those who are taking RMDs from their own IRAs or inherited IRA, if your RMD is large enough to cover your entire federal tax liability, you can keep the money in the IRA throughout the year and then take the RMD at year end, remitting as much as needed to the IRS to cover your federal tax tax obligation for the year. I believe that 99% of the distribution is the maximum amount that Schwab allows to be sent as taxes.
As I learned the hard way, not every state will recognize this approach, so be sure to check your stateās rules before assuming that the state treats the tax payment the same way the IRS does.
"Although estimated tax payments are considered made when you send in the checks ā and must be paid as you receive your income during the year ā amounts withheld from IRA distributions are considered paid evenly throughout the year, even if made in a lump sum payment at year-end.
So, if your RMD is large enough to cover your entire tax bill, you can keep your cash safely ensconced in the IRA most of the year, avoid withholding on other sources of retirement income, skip quarterly estimated payments . . . and still avoid the underpayment penalty."
We donāt do any withholding. Instead my husband coordinates quarterly estimated taxes. We work with the FA to verify proper annual amounts since it can vary by that yearās Roth rollover and investment activity.
In the past few years the FA has coordinated two Roth rollovers. Early in the year we do one conservative chunk. Near the end of the year, with more factors known, we do a second chunk based on tax rate and IRMAA boundaries. We do leave a bit of buffer in case there are surprises.
IRMAA (medicare extra ātaxā): For 2025 (based on 2023 MAGI income), it does not kick in until 212K/married or 106K/single. Each year those cutoff numbers go up a bit.
In other words, if a married couple doing Roth rollover keeps MAGI under about $200Kā¦ it seems tax situation not horrifying, no IRMAA penalty. DO YOUR OWN RESEARCH / FA CONSULTATION to verify and analyze your own situation.
All respect here. I have been able to gleam a bit about your finances over the years. If you fall into IRMAA that couldnāt possibly affect your life or what you are going to leave to your heirs all that much. Almost a rounding error.
If that is the case why would spend time thinking about it.
IRMAA is adjusted each year with data from 2 years before, so the 2025 IRMAA calculation was based on MAGI from 2023 and was announced in the fall of 2024.
So, a lowered income for a couple of years might help for some, but once the income goes back up, so does the IRMAA.
Your IRMAA bracket can change from year to year (50% more than Part B, or double, or more) but you might not be stuck with a higher IRMAA should disaster strike.
@gpo613, partially correct in that I do not even know what my IRMAA payment is, just that it was a non-trivial expense I was not expecting and hence surprised me. The way I have organized my affairs, all of my medical/health care expenditures are paid out of pre-tax income, so the after-tax cost is lower that if I were not still working.
What I would say is that by virtue of luck, skill, hard work and inflation, I frequently pay in tax significantly more than I thought (when I was a grad student) that I hoped to make. When you add my tax payments to the payroll-related taxes I pay for my employees, my tax bill is pretty large. This is a first-world problem. At the same time, I really wish that my tax money was being well spent to help people or solve problems and on that score, I donāt feel that positive. In part as a consequence, Iām pretty careful about structuring my business life in a tax efficient way. Then something like IRMAA comes up that I wasnāt expecting.
The IRMAA payments will not affect my life. But tax-efficiency has been part of my discipline since I went out on my own. So somehow extra tax payments hurt my psyche more than they hurt my wallet. Iām currently figuring out where the funds will come from to fund this yearās installment of the backdoor Roth IRA.
So for your company then you are a sole proprietor? If those tax payments are āyourā tax payments. I doubt your organization is set up as a sole proprietor. It is probably a S-Corp, LLC or Partnership. Which means it is a Corporation and not you. I do understand the earnings could flow from the corporation to your 1040.
But as a business owner I know there are tax advantages you are able to use.
The taxes you are referring to probably are employer portion of Social Security and Medicare. Change your mindset and think of them as a business expense instead of a tax. What happens to many business owners as well as well to do people they feel because they pay a larger amount of taxes then therefore they are entitled to have a larger say in how those taxes are being spent. Just be happy that those in charge donāt have the gonads to life the social security limit like they should.
You have been very successful in life and business. Donāt spend the rest of your time fretting over trivial amounts that you donāt have that much control over. It is a waste of you mental time. Spend your time doing/thinking about stuff that is fun and rewarding. You have done all the heavy lifting and have won the game now enjoy.
For me, IRMAA for some reason is more annoying than my income tax rates. Life has been good to us, and I feel the progressive tax system is fairā¦ ok to pay more when we make more (especially since my mother benefited from 2 decades of Section 8 housing benefits). Maybe it is because we pay my husbandās IRMAA effect (done consciously, for Roth rollover) in the medicare autopay, so I see that monthly payment whenever I balance the checkbook. Yea, Iām old school -still balance the checkbook monthly, even though most payments are autopay. Actually in retirement I take a pass at checkbook entries early in the month too, make sure the direct deposits worked as planned.
Iām not sure which of my posts youāre responding to, but I think I mentioned IRMAA because if we did a Roth conversion it would of course increase our taxable income, and that would impact our Medicare part B cost. (I turn 63 this year, so I am in the look-back period, and my husband is older than I am).
We are not even sure we will take Medicare Part B, because we have very good health insurance we can keep for a relatively reasonable cost in retirement. But, I tend to be risk averse, so I may pay for both.
There are certainly many complicated decisions related to retirement and investments, and Iām sure I havenāt always made the best. Doing nothing is often the easiest answer, but certainly not the best answer :).
IRMAA bugs me more than taxes, too. We envision selling something in the future that will generate a capital gains event that will be taxed. It seems wrong to have to pay a stiff penalty monthly for two years ā¦ for both of us ā¦ that could, between the tax and the Medicare & Part D penalties, possibly wipe out much of the actual profit. We might escape it, depending on other factors, but it just rubs me the wrong way that it could happen.
If you do the transaction and cap gains in the same tax year, itās only 1 year of IRMAA. For example, you sell a rental property in 2025 putting you into an IRMAA bracket, that means youāll pay IRMAA in 2027 (two-year look back). But, if your income in 2026 goes back to what it had been prior to 2025, no IRMAA in 2028.
Thus, for financial planning, once in an IRMAA bracket, folks should consider maxing out that bracket.
That is exactly what IRMAA is. A sort of means-test for Parts B & D of Medicare. Higher premiums for those that make more. The IRMAA fees are supposedly going into the Medicare trust fund.
I think it makes total sense to strive for tax efficiency. I know I could do much better than I have done in that regard (see doing nothing comment in my post a few minutes ago ).
On the other hand, I am thankful that we are in a position to have to āworryā about paying āmore/too muchā in taxes.
Surcharges are one of the reasons I keep my husband on my insurance plan. Cheaper. And it is creditable coverage, so it is all good. Iām a bit younger than Mr. B, so the plan is for me to work for a while until I stop enjoying it. Then we will do the Medicare enrollmentā¦ I dread that day because my husband HATES dealing with forms! Taxes, open enrollment, 401(k) contributions election are all my chores.
My experience with IRMAA has been that if you have a one time event that puts you over the limit you are likely to be able to get it waived. If, on the other hand, your yearly income will continue to be above the limits you will have to pay a more. But only up to a point. Once you are making $500k($750k for a couple) it stops going up. You can always opt out of part B all together and self-insure!
Iām not opposed to some means testing but the brackets are weird.
).