can I use a self directed 401k (keough) to reduce AGI to avoid IRMMA penalty

Submitted by stephen barrymore on Wed, 2019-03-13 20:44

I have read several posts that say a traditional IRA contribution will reduce AGI to avoid an IRMMA penalty for going over the limit. However, does that equally apply if the contribution is to a “self-directed 401k (Keough)” as well? I am an LLC and am faced with the medicare penalty, but have the ability to contribute enough money as per the rules to a self directed 401k, but not sure if the same rules apply to drop the AGI for IRMMA purposes as t they do to a regular IRA. May just be a matter of semantics, but my CPA seems to think if it is a self directed IRA I cannot use that income reduction to get me under the AGI limit to avoid IRMMA vs just an regular IRA contribution. To get my AGI under the $170k, I need the flexibility to do it through my business to a self directed IRA because of the higher limits vs regular IRA. Does it really matter what kind of IRA it is as long it is not a Roth?



Submitted by Alan - IRA critic on Wed, 2019-03-13 22:54

  • I think you interchanged 401k and IRA a couple times in your post. But for IRMAA purposes your MAGI (actual AGI plus tax exempt income) is reduced just as effectively with a pre tax 401k contribution as with a deductible TIRA contribution, and the amount contributed and therefore the amount of MAGI reduction can be much higher with a (non Roth) 401k contribution. 
  • Re CPA position – contributions to a qualified plan go on Sch 1, line 28, then transfer to Form 1040, line 7 as an adjustment to income that reduces AGI including for IRMAA purposes.
  • It might provide a small hedge factor to understand that your 2018 MAGI is used to determine your 2020 IRMMA, but the IRMAA tiers will again be increased for inflation starting in 2020. Your 2019 MAGI is used for 2021 IRMAA, and the IRMAA tiers will have received 2 inflation increases by 2021. Probably not a big jump, maybe only a couple thousand for each year, and will just give you a little more margin for error.

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