Practical Applications of Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees

Abstract

Practical Applications Summary In Investment Implications of the Rising and Falling Pattern of Marginal Tax Rates for Retirees, from the Summer 2020 issue of The Journal of Retirement, authors William Reichenstein (of Social Security Solutions, Inc. and Retiree, Inc.) and William Meyer (also of Retiree, Inc.) explore strategies for optimizing Medicare premiums and taxes. Medicare premiums are based on one’s income from two years earlier, and they rise sharply at certain income thresholds. Meanwhile, taxes on Social Security benefits cause marginal tax rates for middle-income retirees also to rise sharply on a wide range of income, and then drop sharply at still higher incomes. This humplike rise and fall in rates is called the tax torpedo. Reichenstein and Meyer argue that some retirees should convert assets in their tax-deferred accounts (TDAs) into Roth IRAs if their income is at or beyond the end of the tax torpedo, thus allowing them to achieve a lower tax rate on the converted assets. However, those who will be on Medicare two years hence may need to limit their Roth conversions to avoid increasing their future Medicare premiums. TOPICS: Wealth management, retirement, social security