A thoughtful subscriber has suggested that the way Pralana handles Roth Conversions in the year before and of a spouse's death is unrealistic. I would appreciate your thoughts on this:
Assume a hypothetical couple Dick and Jane who are doing Roth conversions in the years before Dick's death and they specify an IRMAA bracket limiter.
Dick's life expectancy has him dying in 2040. That year, Jane will file Married Filing Jointly. In 2041, Jane will file as Single and her IRMAA will be based on the 2039 Fed AGI which include 2039 Roth conversions.
When calculating the Roth conversion amount for 2039, Pralana will look ahead and use the 2041 IRMAA bracket income limits based on the known 2041 filing status, which is by definition 'Single'. The 2039 Roth conversion amount will be determined based on 2039 ordinary income and 'headroom' in the 2041 IRMAA bracket income for a Single filer.
The subscriber suggests this is unrealistic because Dick and Jane would be very unlikely, in the real world, to limit their Roth conversions because of future knowledge of Dick's death in 2040 and that Jane will be filing as Single in 2041.
Options:
a) leave Pralana as-is,
b) use the 2039 filing status and the associated 2041 IRMAA bracket (which will cause 2041 IRMAA to exceed the specified bracket income limit...some will be confused by this and think it is a bug).
c) allow users to specify whether to look-ahead and using the filing status 2 years hence.
Thoughts???
On a related note, I am working on adding a feature to allow you to specify a Medicare MAGI 'override' in one or more years due to a 'Life-changing Event', such as death or retirement.
@cstone I'd vote for (b) as it's more realistic than (a) and simpler for the user than (c).
This is difficult to answer so many years in advance. I think users with financial advisors might benefit from c.
Just speaking for myself, I'd likely prefer option b since (1) my spouse will be the one around, and she won't be using pralana, and the conversion plan will need to have been finalized years before, (2) we won't know two years ahead that I'll die two year's hence, (3) the stress around our lives those last several years, from medical and other things, together with cognitive decline, preclude doing nuanced roth conversions. So I agree that in the real world we'd do roth conversion based on optimizing MFJ two years after and then pay the high taxes of the "single" filing when the time comes. Another way of thinking of this is that option b is the most conservative, so the safest to assume.
Given that it happens in one's last year, will there be that much difference between all the options?
@cstone I'd vote for (b) as it's more realistic than (a) and simpler for the user than (c).
Agree that to me (b) is more realistic than (a). If Pralana implemented (c), and set the default to not look ahead, then that would be the same as (b), and still allow someone to enable the look ahead, if they really did have more certainty about the filing status 2 years in the future.
All, thank you for taking the time to review and respond. As the consensus is (b), I will implement that change in the next release.
I don't understand the conundrum. Using an IRMAA limiter in 2039 would simply have turned out to be an unnecessary limit and in retrospect, they might wish they had done more. It would be on the individual to know just how dire the health situation is as to whether Dick will make it to 2041, but the program doesn't need to anticipate it.
In 2041, Jane simply files form SSA-44 and informs the SSA of the Life Changing Event of Dick's death in 2040 and provides the SSA an estimate of her 2041 income. Her estimate will be used for the provisional IRMAA calculation for 2041 to substitute for the 2039 data since 2039 was prior to the LCE. If she is wrong, the SSA will square it up later. In 2042, she repeats the procedure, again filing form SSA-44 and providing her estimate of her 2041 income to substitute for the 2040 income as 2040 is the year of the LCE.
The form Charlie was working on had all this, so I'm not following what the new issue is?
It's not a major issue because we're just talking about Pralana's optimized plan for Roth conversions in the context of an impending death that is specified by the user, so presumably when the time comes and they no longer expect the death they would simply change the plan. On the other hand, Pralana has to make some assumption about filing status when applying an IRMAA tier constraint, and it seems most natural to make the assumption that the user would make at the time, which is that filing status would not change.
Gotcha. You're right, it would be weird for Pralana to be optimizing around a death that might not be foreseeable.
