IRMAA has complex rules and Pralana can't model the complexity of what happens when you retire, so I thought I'd share some background on the rules and a workaround in Pralana that will help you get Roth Conversions right.
When you are on Medicare, the part B and D cost is dependent on your income from 2 years prior, stair stepping at various MAGI trigger points to what are called IRMAA tiers. So your cost in the year you turn 65 is dependent on your income when you were 63 and Pralana does that OK.
However, when there is a life changing event (LCE) such as retirement, then in that year and the two following, you get to pick a more favorable year for IRMAA determination. So if you retire in 2026, you file form SSA-44 and estimate your MAGI for 2027 and they will base your Medicare cost on that (correcting it later if you were wrong). Then in 2027, you file SSA-44 again and still give them an estimate for your 2027 MAGI. You repeat this in 2028, again using your 2027 MAGI. In 2029, you do not file SSA-44 as things are back to normal with a two year lookback, so Medicare automatically selects 2027 again. The upshot is that the year of the LCE is never used in IRMAA calculations, the year after the LCE can be used for year LCE, LCE +1, LCE +2 and is naturally used for year LCE+3. So you are free to make whopping Roth Conversions while working or in the year you retire without IRMAA impacts. Then it's crucial to control MAGI in the year following after your retirement year as that year is used four! times.
The notion of Pralana basing IRMAA on the prediction of a future year's income is too much for it to handle, but it really messes up Roth conversion math to have Pralana adding in IRMAA surcharges while working or in the year of retirement, when there would be no surcharges in real life if you just file the form. I did not know this and so once I turned 63, I started limiting Roth Conversions to IRMAA tiers even though I was working enough to get creditable health coverage so IRMAA was not ever going to apply.
My workaround in Pralana to let the Roth Optimizer still work for me is:
1) Tell Pralana that the Medicare start date is at the end of the year 2 years after my actual intended retirement date.
2)Make sure not to go above the IRMAA threshold during those 2 years.
3) Align health care costs with base Medicare costs during that 2+year period.
4)Since my company's health plan is much cheaper than Medicare, I add a non-taxable windfall income in those transition years to make up for the falsely high cost of health care I input in point 3.
Note that there are other life changing events that the SSA recognizes:
Marriage, Divorce, Loss of Income Producing Property, Loss of Pension Income, Reduction in Work hours, Employer Settlement Payment and of course Death of Spouse. So in the year when one spouse passes, the same situation occurs. The surviving spouse can make a large Roth Conversion that will never be subject to IRMAA by the same procedure as above.
To work around death of a spouse in Pralana is not so simple, the only thing I can think of to do is make a non-taxable windfall equal to the excess IRMAA surcharges that Pralana finds.
Clever, thanks for sharing that. It was nagging me too. The only thing I think it lacks is that, for those two years, you can't constrain Roth conversions to not exceed a particular IRMAA tier. Also, for point (2), if you do exceed an IRMAA tier, you could just add a miscellaneous expense for the added cost (or factor it into point (3)).
[Actually, it looks like Pralana enforces IRMAA tier constraints on Roth conversions even before Medicare starts.]
I guess I was writing on how I remembered it working (not sure my memory is correct), but I think you are right that it won't respect the IRMAA tier in a year before I tell it that your on Medicare, so I guess I have to manually enter the conversion amount. Still I think most folks don't realize they get a "free pass" on IRMAA in the year they retire or a spouse passes, so I'll leave my somewhat errant post up. Sometimes Pralana is caught between being not being complex enough to do it right and being too complex to fool it.
@ricke I think you missed my update (last line) - it does respect the IRMAA limits on Roth conversions even for years before you've specified Medicare to start. Maybe that's a bug, but it's a useful one....
