Tax deferred should read ‘tax delayed’. Do you know what taxes will be when you’re 73/75 and required by the I.R.S. to take distributions? Would you like to take a guess? Good tax planning begins with thinking ahead.
It’s not only highly likely your accounts (and therefore your RMDs) will be much larger, but the tax rates may be much higher, too. And, of course, all this will impact the tax rates on your Social Security benefits – and those brackets aren’t adjusted for inflation; so, inflation alone will push many into higher Social Security tax brackets.
Oh yes, tax planning can’t ignore Medicare. Medicare premiums are impacted, too. Have you met IRMAA?
IRMAA stands for “Income-Related Monthly Adjustment Amount.” The emphasis is on “income” because it is a monthly tiered surcharge (again, a kind of tax) that is tacked on to people’s Medicare Parts B and D premiums. But it only happens if you have income over $103,000 for single filers and $206,000 for married couples filing a joint return. Let’s take a look at what this means in action.
Take George and Martha. This hypothetical couple are a high-earning married couple, and both are Medicare Part B and D participants. Point worth remembering: IRMAA surcharges affect income from two years prior, and this couple was on track for $322,000 of modified adjusted gross income, or MAGI.
But on December 1, George decided to sell a stock he bought for $10,000 back in 2007. He sold the stock for $11,000. The resulting $1,000 of gain was taxed at the 15% long-term capital gains rate, plus an additional 3.8% net investment income surtax for a total federal tax bill of 18.8%. (That 3.8% net investment income surtax is another tax that comes into play when your MAGI exceeds $200,000 for singles and $250,000 for married couples.)
So, George and Martha owe $188 of tax on the gain from their sale of the stock, right – 18.8% of $1,000.
Nope.
They’re in for a surprise. You can read the whole story here.
