In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss the tax problem quietly building for anyone with a large 401(k) or IRA, required minimum distributions, Roth conversions, and the Medicare IRMAA surcharge that catches even careful savers off guard.

Listen in to learn about how RMDs are calculated once you reach your 70s, why a disciplined saving habit can turn into a bigger tax bill than expected, how a Roth conversion strategy can smooth that out over time, and how Medicare’s IRMAA surcharge fits into the timing of it all.

In this episode, find out:

• What a required minimum distribution (RMD) actually is, and why it can surprise even the most disciplined savers
• A simple way to estimate what your own future RMD could look like, using nothing more than your current balance and a rough growth assumption
• How a Roth conversion strategy can smooth out RMDs over time, including a real example from POM’s tax strategy sessions that projected six figures in lifetime tax savings
• What the Medicare IRMAA surcharge is, why it’s tied to your income two years before you enroll, and why it can add hundreds or thousands of dollars a year to your Medicare premium
• Why RMD planning and Medicare IRMAA planning can’t be handled separately, and need to be revisited every year as part of a real tax strategy

Tweetable Quotes:

“Not everybody should do a Roth conversion, but everybody should have an analysis done to find out if it makes sense.” — Radon Stancil

“A big 401(k) is a good problem to have, but it’s still a problem you need a plan for.” — Murs Tariq

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

So, Murs, I wanted to talk to you a little bit today on the podcast about a topic I think we’re 

both running into. which are people that have been good savers. They’ve put a lot of money away in 

their 401ks. Now it’s in a traditional IRA for a lot of people. Or they’re getting ready to retire. 

And sometimes we’re seeing people, even in their early 60s, with $2 or $3 million saved in 401ks, 

IRAs, between maybe themselves or their family. And the problem that we run into is this idea of 

what we know is this looming thing that’s going to happen for most people today. If you’re 62, 

it’s going to be 73. If you’re a little bit younger, it could be even 75, which could make this 

problem even worse. And what the problem is, is that at 72, you’re going to be required by the IRS 

to start taking a distribution. called the required minimum distribution out of your IRA and 401k. 

And I’m going to just set this up here. And by the way, there’s another topic that just 

bounces right into this, which is the Medicare IRMA. And people are like, what does IRMA even mean? 

We’re going to talk about that a little bit. But I mean, the good news is we run into a lot of 

people and we get to sit with a lot of people that have been good savers. They’ve been disciplined. 

They lived with this mentality that They were going to defer the taxes into the future. 

And then when they get into retirement, they’re going to take the money out of the IRA at a lower 

tax rate. And for a lot of people that have been good savers, that’s really not what they’re going 

to run into. They’re going to run into this scenario where they could be in a bigger problem. So 

could you just speak to maybe some of your conversations and your thought process around this idea? 

of required minimum distributions, what it means, what it could look like, especially if you think 

about the concept of a person who says, let’s just go 62 right now. Right, yeah. I mean, with the 

good saver, it’s one of those things where it’s one of those, you could kind of phrase it in this 

way of it’s a good problem to have. It means that they’ve done a good job of saving, building up 

that retirement nest egg, but now there’s a future issue that we’ve got. And, you know, a lot of 

people say in meetings with me is they say, man, I wish I just knew about this sooner. Because all 

I was really told was to save it into that 401k. And while I did that, I liked that a lot because I 

was getting some tax benefit by putting money into the 401k. It came off of my income. It helped me 

out year by year. But now I’ve got this problem that has snowballed over time. And because I’ve got 

this $2 million 401k, I’m worried about my taxation in the future. 

And everyone said, you know, my tax rate is going to be lower in my retirement years.” But I don’t 

think it’s going to be that. So, for everyone listening, the required minimum distribution is kind 

of this rule that the IRS put in place that when you hit a certain age, we’re going to force you to 

start taking money out of that tax-deferred bucket. For most people, it’s going to be that 401K or 

that IRA. And the reason is you got that big tax benefit up front for putting money in. 

You didn’t pay income on that money that you put into that bucket of money. And now it’s grown and 

it’s got the power of compounding growth over time. And so, I kind of joke with people and I just 

say, you know; the IRS usually knows what they’re doing. And they know that the dollar amount is 

going to be much bigger if it has some time to grow. And then, of course, the government needs 

their tax revenue, so they’re going to force that withdrawal at some point for most people at age 

of 73. Now, there’s a whole formula for it. We don’t need to get into that too much, but rule of 

thumb is around 4% of the IRA balance. So, take your example of the person that’s 62, 

and they’ve got $2 million, and let’s just say that their required minimum distribution age is 73. 

So that’s about 10, 11 years from now. And in most cases with decent management, 

decent markets, we could expect that $2 million bucket to double in a 10-year window. 

And so now that $2 million has grown to about $4 million. So now an even bigger tax-deferred 

bucket, and now they’re walking into the required minimum distribution phase. So, we say 4% of $4 

million, well, that’s about $160,000. $160,000 that the IRS says it has to come out every single 

year, regardless of whether you want it or not, whether you need it or not. You got to pull it out and 

pay the tax on it. And then you can do whatever you want with the rest of it. So, for most people, 

you know, that $160,000 is going to be, you know, pretty close to what their highest earning years 

were or, you know, not all that far off. And so, you kind of get into this phase of like, 

man, I’m going to be making more if not for the same if not more in retirement. And so, what do I 

need to be thinking about? The good news is, in this example, the person’s 62. So there’s 11 years 

of strategy we can talk about and talk through. And so that’s the big thing, 

I think, is having the realization at first of, well, I’ve done a good job saving, 

but what am I missing in this plan or my lack of a plan? 

Because not only is it the required minimum distribution that’s going to generate taxable income, 

what I say, $160,000. But also, you’ve got your Social Security that’s going to be coming in by 

then. And then also maybe other income sources. And then maybe you have a brokerage account that is 

generating interest and dividends and maybe some capital gains tax. So, you can quickly see how it 

just starts to snowball on us if we don’t stay on top of it. And, you know, it’s not about… 

I think there’s two things. One is that we want to balance and optimize taxation as best as possible. 

But on the same token, we also want to live the retirement life that we want to live and not really 

give up things just because we’re scared of tax. And I think the only way to do that is through 

just proper tax planning year over year. And, you know, Radon, 

I think a big strategy that does come up in planning conversations to kind of tackle this behemoth 

of an issue of required minimum distributions is this concept of Roth conversions. 

I know it’s a big one. It’s got its technicalities to it, but, you know, we talk about it all the 

time. In tax strategy meetings, what are you seeing as far as these Roth conversations? 

I always tell people not everybody should do a Roth conversion, but everybody should have an 

analysis done as to whether or not a Roth conversion makes sense or not. The beauty of it is that 

we actually have an in-house person. That’s what she does. 

She’s a tax strategist. We talk about her a lot. If you’re on the podcast, she’s been on the 

podcast quite a bit. Her name is Taylor Wolverton. And she’s our director of financial planning and 

tax strategy. And what I love about what Taylor does, because she loves this topic of Roth 

conversions, because she can see the impact of it. And in fact, I asked her, 

I said, could you share with me an example? And we talk about it a lot sometimes when we’re doing 

our live presentations. But the idea was, is that if I can convert money today that was in a tax 

-deferred status and get it over into a tax-free status, status. Well, that’s going to be good for 

me because imagine if I’m 62 and I can convert money today and go back to your numbers around the 

double. So, if let’s say I convert, let’s just call it a hundred thousand dollars today. Now in 10 

years, my hundred thousand should be 200,000. The difference is it doesn’t have required minimum 

distributions and it’s all now tax-free. That money grew tax-free for 10 years. And so that is 

extremely powerful. And so, one of the things that we do is say, let’s do a smoothing process. 

So instead of just letting that money defer from 62 to 73 and then have these big, required minimum 

distributions, what if we took a portion, let’s just say half of the money, and we converted half 

the money? Well, now my required minimum distribution instead of $160,000 is $80,000. 

And now I’ve got this money that’s over in my tax-free status. One of the examples that we use in 

our live presentations a lot are we talk about Frank and Lily. Frank and Lily, they wanted to fill 

up their 22% tax bracket. And so basically what that means is if you know how our tax code works 

is that I’ve got different brackets. And what a lot of times people think if I go into the next 

bracket, so let’s say I go into the 22% tax bracket, sometimes people think that the entire amount 

of money is going to be taxed at 22%, but it’s not. It’s if I go into the 22% tax bracket by $1. 

Then that $1 tax at 22%, not everything else. So, what they said was, I want to fill up the 22% tax 

bracket, which we did. That was around $66,000 a year. And we did that for five years. 

Here’s the key to it, though. Taylor basically said, hey, by doing this to Frank and Lily. 

It’s going to save you over $300,000 by the time you’re age 90. That’s huge. 

That’s huge if a person does that. Now, the key is if I wait until I’m in my 70s, I don’t have the 

window of time. And so, this is really kind of like what we call a tax time bomb, you know, 

a tax time bomb that’s going to come into play. And so, we really talk a lot to our clients about 

saying, let’s make sure we look at these conversions sooner than later. And does it make sense? 

And so, the beauty of it is, is that every single year. No matter what, Taylor’s going to do a Roth 

conversion analysis for every single one of our clients in these tax strategy meetings. But here’s 

another little gotcha that I think we ought to talk about. We’ve done episodes on this as well. But 

is this thing that if we don’t do it, it’s another penalty that’s going to come hit us, and it’s 

dealing around Medicare, and it’s called Medicare Irma surcharges. Can you just speak about that? 

Because I know you’ve talked a lot about that with clients, and that’s a big surprise sometimes. 

Yeah, I think it’s one that kind of goes under the radar for a lot of people, and then it shows up 

usually at the wrong time, or it just always ends up being a surprise when they get that letter in 

the mail from Social Security that says, hey, you’ve got this Irma surcharge tacked on to your 

Medicare premium. What IRMRA is in a nutshell is, and I’m going to try to guess the acronym. 

I know it’s income-related Medicare adjustment amount. The last A may be wrong, 

but it’s a phrase that kind of helps recognize that you’re going into some area. 

I would call it a penalty. It’s not really a tax. It’s more of a penalty. I bet you nobody’s going 

to ever name their child Irma ever again. Right. And so basically, it’s a penalty for generating too 

much income in retirement. That’s how I explain it to people. And really, 

the point at which you need to start paying attention to this is when you’re at the age of 63. 

Now, you may be thinking at 63, I’m not in Medicare, so why does that matter? Well, the way 

Medicare operates if they look back two years to determine. if you are in a surcharge window or 

not. So, you’re eligible for Medicare at 65, and at 65, 

they’re going to look at your income at your age 63. So, it’s a two-year look back. 

So, when you’re 67, they’re looking at your 65 incomes. Why that matters is because if your income is 

over certain thresholds, and we can round it, we can say for married filing jointly, 

Over $200,000. There’s a specific number, and I’m not going to get specific on exactly what that 

is. It actually moves every year based off inflation too. And so, if you go above this, 

kind of like tax brackets, if you go above a certain dollar amount, you go into the next bracket. 

Well, if you go above this fictional $200,000 amount of income, then you are subject to 

surcharges on Medicare Parts B. and Parts D. And that can amount to hundreds, 

if not additional thousands of dollars a year for a married couple if they’re on Medicare. 

And so that really, you know, people hate paying taxes, but I would say in my experience, 

what they dislike even more is having to be subject to IRMA surcharges if they weren’t aware of it 

or if we didn’t purposefully go into it. So, what does that mean? Well, 

so, when we’re thinking about our withdrawal plan and how we want to live and the money that we need 

every single month to live the way we want to live, you’ve got Social Security coming in. That’s 

usually a small portion of people’s needs. And then it’s the withdrawals that we’re making. And if 

we’re withdrawing so much that we go into this IRMA threshold, well, that could be problematic for 

some in that their Parts B and Parts D gets a little bit more expensive every single month. 

But when we think about this timeline, so go back to our example of the person that’s 62 and they 

have required minimum distributions coming at 73, I think a really important thing to know and just 

think about is your RMDs are based off of the value of your IRA every single year once you’re in 

the RMD phase. So, if we can get the value of our IRAs down or our pre-tax buckets down, 

then the calculation goes down, the math goes down. And so, the only way to do that to get your IRA 

balances down is either it’s almost as simple as you spend it, you give it away, or you convert it 

to Roth, which is what you were just talking about. And so, while that conversion to Roth seems 

really attractive, outside of the fact that you have to pay some tax to do that, we do have to now 

think about this other layer that’s being added on, which is this IRMA surcharge. And so, I think 

what’s amazing about Taylor and the tax team as far as these tax strategy meetings, we definitely 

take IRMA into account and saying, hey, if we want to get X amount into the Roth bucket, 

so that $4 million IRA balance, if we want to get a portion of that, 

maybe $1 million into a Roth account over time, how much do we do every single year to not just pay 

attention to the tax brackets, but now introducing this IRMA concept, we have to pay attention to 

the IRMA brackets as well. and staying within those thresholds and kind of just chipping away at it 

every single year until we reach that age of 73 and the required minimum distributions flip on. I 

think there’s plenty of reasons. We have some clients that say, no, I want to tackle this problem, 

get ahead of it, and I’m okay if I go into IRMA. for a few years because I understand the long 

-term tax benefits of it, right? I want to convert it. This is an aggressive stance, 

but I want to convert all of my IRA dollars, and I know for three or four or five years I’m going 

to pay hefty IRMA surcharges, but this is money that I just want to get converted. I don’t want to 

deal with RMDs. In fact, I don’t even need this money. This is all for the kids and grandkids. That 

could be a tremendous reason to pay some additional upfront types of costs to get this money in a 

place where it can grow tax-free for a very long time and then inherit tax. Free as well. So 

that’s one example where it, you know, Irma, while I paint it negatively, you know, 

there’s reasons to go into it. But the only way you figure that out and the only way you figure out 

Roth conversions and, you know, your withdrawal strategy and what your tax is going to be year over 

year is you talk about it every single year. And we believe it needs to be done through a formal 

tax strategy meeting because really every family is different. They’re going to have different 

goals and wishes and legacy wishes and everything like that. So, you got to. You’ve got to kind of 

do them individually. So, I know I kind of went in circles there. Rayden, did I miss anything on the 

Irma piece that you want to add in there? No, I think it was good. I think this really does, if we 

want to close it out, to me it shows the power of having a written holistic financial plan focused 

on the income plan part of that, I always ask people when they come in. 

And we talk about our five critical areas to a successful retirement, which we call our route to 

retirement. And when you look at that, the O in the route to retirement is optimized income. 

And then the T is tax planning. Both of those works very closely hand in hand. And that’s why you need 

to have an actual written plan. So, what I would encourage if you’re listening to this and you’re 

thinking, hey, does a Roth conversion make sense to me? I would encourage you to go to our website, 

which is pomwealth.net. go to schedule a call, and we would be glad to hop on a phone call with 

you and kind of walk you through what that route to retirement looks like. A big piece of that is 

tax planning, tax strategy, and as well as having a plan in place. creates what we hope, 

which is peace of mind as you plan for and live throughout retirement. So, thank you very much, 

Murs, for the nice discussion. And we’ll talk to everyone again.