Highway To The IRMAA Zone

IRMAA recently came up in passing in a conversation. This has been coming up a little more recently. IRMAA stands for Income Related Monthly Adjustment Amount. 

The context is Medicare. If you make above those dollar amounts you can pay more for Medicare. If a couple is between $218,000 and $2740,000 the surcharge is $81.20 above and beyond the $202.90.

Someone of Medicare age, still enjoying their work and earning enough to trigger IRMAA probably wouldn't stop working for that sole reason but the idea of trying to manage income to avoid IRMAA if possible is worth studying for anyone who might be affected. The IRMAA income calculation is different than earned income for income tax purposes. Interest from municipal bonds counts toward IRMAA. Gemini says Roth IRA distributions do not count toward IRMAA but Roth Conversions can move the needle. Withdrawals from HSAs for qualified medical expenses do not count but HSA withdrawals for non-qualified medical expenses do count. 

It's tricky. I am not a tax expert by any means, my understanding could be best thought of as usually knowing the right question to ask someone who is an expert. 

This is an area where ROC, return of capital strategies can help. The portion of fund distributions deemed as ROC is excluded from the IRMAA calculation. If a person/couple's circumstance is such where eliminating IRMAA-able (a play on the word taxable) income from a taxable account would keep someone out of the IRMAA zone, there are a few ways to do that. 

The simplest and least volatile way would be to leave cash in the default "money market" option at Schwab or Fidelity. In taxable accounts, not IRAs, the default cash option pays effectively no interest, just a handful of basis point. I'm not sure how that is ok but these are non-competitive, non-market rates. You have to buy a money market like SWVXX at Schwab or SPAXX at Fidelity to get a competitive yield. Of course this strategy will have no chance of keeping up with purchasing power. In ten years, $100,000 might grow to $101,050.

Putting it all in box spread ETFs provides a similar effect to owning T-bills in terms of gross return. A box spread is an option combo that neutralizes out equity market risk to the point of a very steady T-bill sort of return.

BOXX has no distributions to speak of, the price just accretes. Someone in the 24% tax bracket who bought BIL has had an after tax CAGR of 3.45%. Buying BOXX and not selling has owed no tax. BOXX did have to pay $0.29 in 2024 but the NAV was over $100, effectively no distributions but technically the one. There are at least three other box spread ETFs; CBOX, XCSH and LBOX but BOXX is the first one and is huge with $14 billion. BOXX is a client holding.

The drawback is not being able to sell in the IRMAA context because sales are subject to capital gains taxes and cap gains count toward IRMAA. So there's some growth in the money but no utility if staying out of the IRMAA zone if the problem trying to be solved. 

This is where products that return capital in their distributions can help. ROC frequently takes a bad rap but there are uses and advantages and tax deferred income is one of them. The basic building block of understanding is that ROCs reduce cost basis. If the ROCs actually take cost basis down to zero, then after that, distributions are taxed as long term capital gains. Gemini thinks that YieldMax TSLA went to zero cost basis in early 2024 for original holders who never sold. If correct they've been paying long term gains on the ROC portion of their distributions ever since. It's probably worth running the numbers for selling once the cost basis gets to zero. There may be nuance to that beyond my understanding so ask a CPA or the like. 

We recently looked at JP Morgan Equity Premium ETF (ROCY), not to be confused with JEPI, that seems to have all of its distributions paid as ROC. The fund is only six months old. So far so good with ROCY but still, it's just six months. SPYI from NEOS has been pretty good about paying 95% of its distributions as ROC.

Some autocallable funds pay ROC too but some do not. CAIE does as well as the brand new ProShares ACSP.

ACSP seeks to pay 18-19%, versus 14% for CAIE, and the volatility seems sky high for ACSP. 

In the context of the $450,000 bridging strategy we've looked at a few times lately where a smaller, probably taxable account is willing to deplete to get the investor to the next milestone like Social Security or RMDs, it is possible to have much of the income be tax deferred. 

In six months, ROCY has paid about 4% which implies 8% annualized. SPYI has a much longer track record and yields 12% (95% of which has historically been ROC), CAIE pays about 14% of which 85% or so has been ROC. We've looked at the Westwood Enhanced Midstream Income ETF (MDST) pays out 9-10% and the fund's website notes 100% ROC from its previous distributions. Some of the lower yielding funds from the crazy high yielding firms have funds that return a lot of capital for distributions to sift through. BIGY from YieldMAX targets a 12% payout but there has been variability in the percent of distributions that has been ROC.

Loading up on SPYI (or ROCY), CAIE and BOXX is not something I would consider but if there isn't a way yet to cobble together a portfolio that diffuses issuer risk, there soon will be. A scenario where $40,000-$50,000 of tax deferred income keeps someone out of the IRMAA zone is fascinating. Check with your tax advisor (repeated for emphasis). 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.