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Baby Boomers are arriving at retirement with large accumulations that have not yet been exposed to federal income tax (FIT) and are grappling with ways to access those assets without incurring inordinate tax bills. The 2017 Tax Cuts and Jobs Act contains provisions that enable Boomers to liberate their pre-tax assets at highly favorable tax rates. I describe a program that synchronizes the distribution of pre-tax assets with availability of generationally-low tax rates, while keeping the dictates of Medicare, Social Security and the governing IRS tax code firmly in view.

The program is suitable for Baby Boomers confronting retirement with large pre-tax accumulations. Importantly, the program is designed to avoid the Income-Related Monthly Adjustment Amounts (IRMAA) that can raise Medicare Part B and Part D premiums in retirement by over 140%. I show how to open up headroom for the planned distributions by deferring income and capital gains on the Boomer’s taxable investments. I also discuss the chronology related to the moving parts of the program.

Introduction

Since the 1970s, Congress has passed numerous bills meant to encourage retirement savings by deferring taxation on contributions and subsequent earnings. In addition to the “alphabet soup” of tax-qualified 401(a), 401(k) and 403(b) plans enabled in eponymous sections of the tax code, various other deferred-compensation arrangements and employee stock option plans can contribute to Boomer pre-tax balances. According to the Investment Company Institute, a trade group, $17.6 trillion was held in defined-contribution and IRA plans alone as of March of 2019, about half owned by Baby Boomers (i.e., those born between 1946 and 1964). Fidelity reports that the number of its own customers with a 401(k) balance of $1 million or more jumped to a record 196,000 in the second quarter of 2019.

The 2017 Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act reduced tax rates across the board and made other changes to the tax code. For a married couple taking the standard deduction of $24,400, the following are the applicable 2019 tax rates at key income breakpoints:

During the remaining years of the 2017 Tax Cuts and Jobs Act, taxpayers with an adjusted gross income at the $170,000 level can expect to pay an average tax rate of about 14%.

Medicare considerations

Since 2011, couples on Medicare with a modified adjusted gross income (MAGI) over $170,000 have been paying an additional monthly premium or IRMAA for their Medicare Part B and D coverages. (MAGI is calculated as adjusted gross income (AGI) plus tax-exempt interest income.) (According to the Centers for Medicare and Medicaid Services, IRMAA affects fewer than 5% of current Medicare beneficiaries.) In order to avoid IRMAA, MAGI must not exceed $170,000. (IRMAA is invoked if MAGI exceeds $170,000 by even a dollar.) In order to maximize the amount of MAGI available for the liberation of pre-tax assets, competing sources of taxable income must be removed or deferred to the extent possible.