Author Topic: Reducing expense ratios and avoiding the dreaded IRMAA  (Read 3193 times)


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Reducing expense ratios and avoiding the dreaded IRMAA
« on: May 04, 2017, 09:01:56 PM »
It's been real quiet around here.  Now that everyone's recovered from tax season, let me start a new question.

As some of you know, I'm my father's conservator.  He first noticed his Alzheimer's symptoms in 2008, he's been in a care facility since early 2011, and this year he's entering late-stage.  The next five years are totally unpredictable. 

I've been handling his finances since 2011, under the benevolent supervision of the Denver probate court.  I've conservatively projected his investments out to 2025, well past most of the Alzheimer's survival bell curve, so I doubt that Medicaid will rear its ugly head.  Let's not turn this thread into a Medicaid tactics discussion.

I'm getting ready to mess with Dad's taxes, and I thought I'd talk through it here to make sure I understand it.  Feel free to poke holes in my plan.

Back in 2011 (when I started my fiduciary forensic financial analysis on his files) I learned that for at least 20 years he'd been living on less than half of his income from investment dividends/interest, a small pension, and Social Security.  His AGI was about $65K and he'd generally spend about $25K.  He was Mustachian before it was cool.

During that time he'd invested heavily in Fidelity mutual funds and by 2011 his asset allocation was over 85% equities.  Back then we were all still scared to death of the stock market's recovery and legislation was expiring for the low tax rates on capital gains.  In 2012 it seemed prudent to rebalance to 25% equities, 25% bond funds, and 50% CDs. 

Since then the capital-gains tax rates have been extended, Dad's long-term care insurance payout has finished, and he's slowly drawing down his assets.  His asset allocation has drifted up to 35/15/50 over the last five years, and I could let that continue to drift.

However his investment expenses are higher than they could be.  He's held some of his Fidelity shares since the early 1990s.  They're in actively-managed funds with expense ratios: 
0.86% Value Discovery
0.82% Blue Chip Growth
0.75% Capital & Income Fund
0.68% Contrafund

Meanwhile the Fidelity S&P500 index fund has an expense ratio of about 0.09%. 

Dad's current fund expenses aren't exactly highway robbery... well... among today's choices maybe they are.  Expenses could be reduced.

When Dad was receiving the payout from his long-term care insurance policy, that was considered untaxed reimbursement on his medical expenses.  He was paying the usual federal and Colorado taxes on his usual taxable income.  But now that Dad's long-term care insurance policy has completed its payout, his medical deductions are about $100K/year.  He paid zero taxes in 2016 and might never have a tax bill again.

Dad used to be in the 25% income-tax bracket, but now his medical deductions put him in the 0% bracket.  More significantly, those medical deductions mean that he could take a lot of capital gains at the 0% rate.  When I play around with MoneyChimp's calculator (, he could realize up to $37K of long-term capital gains at the 0% capital-gains tax rate and take an additional $34K in deductions & exemptions. 

But not so fast.

In 2012 when I drastically rebalanced Dad's portfolio, my blissful ignorance ran head-first into the Medicare "Income-Related Monthly Adjustment Amounts" rules.  IRMAA premium hikes cost an extra $2000 on that rebalancing, and I haven't sold any shares since then.
I'm going to avoid IRMAA issues this time around by keeping Dad's modified adjusted gross income just below $85,000. 

His mutual funds have a low cost basis, but I could use those AGI constraints to gradually replace the Value Discovery and Blue Chip Growth funds with a simple S&P500 index fund.  That would save about $150/year on expenses for each year that I took about $20K in cap gains.

If the markets continue to go up, Dad wins.  If the markets stall out, Dad wins.  If the markets go down, Dad has an opportunity for tax-loss harvesting of the S&P500 fund while ditching even more of the other funds with their high expense ratios.  I'd call that a win too. 

I'm still going to model this in Turbotax and make sure that I haven't overlooked something.  Has anyone else dealt with this sort of financial management?  Anything else I might be missing?
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