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HOW ROTH CONVERSIONS CAN AFFECT MEDICARE PREMIUMS

My husband and I just found out that our plans to convert our retirement funds into Roth IRAs will have a huge negative affect on our Medicare premiums!  We both have pensions and planned to use our retirement funds as our insurance in case we need long term care down the road.  Otherwise we wanted to convert so the funds will be inheritable by our children as Roths without RMDs.  We also wanted to reduce our eventual RMDs that will start when we're 72.

 

In all our research about the benefits and risks of conversion, we NEVER heard of the affect this would have on our Medicare premiums.  

 

What I'm looking for is the reason why this happens, when we're already going to pay the taxes due on those funds, and are not cashing them out to use as income, but really rolling them over into the Roths to stay invested?  This really doesn't seem fair, and now we're stuck with the choice of paying extremely high medicare premiums, or discontinuing our conversions, losing the benefits of converting into Roths, and then being hit with higher RMDs and higher Medicare premiums when we're even older!  

 

I would appreciate anyone's help in understanding why this is set up to feel like we're being punished for being good savers, and being doubled-taxed on our savings.  Why aren't conversion amounts that are rolled back into savings investments exempt from counting as income?

- Shocked Susan

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Periodic Contributor

Hey Susan,

Yeah, that’s a tough spot to be in. I had a similar situation a couple of years ago when we started our Roth conversions. It was a shock to see our Medicare premiums go up because the conversion income pushed us into a higher bracket. It feels unfair, especially since we're just trying to be smart about our savings.

We ended up spreading our conversions out over a few years to manage the impact. It’s a bit of a hassle, but it helped keep our premiums more reasonable. I’d recommend chatting with a financial advisor if you haven’t already. They can help you figure out the best strategy for your situation.

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@RichS265119 As I mentioned earlier in this thread, I agree that IRMAA is a shock for many folks. Although the IRMAA provisions have been in place since 2007, not many review this Medicare provision when affecting a large Roth Conversion. Prior to 2018, the tax laws allowed one to undo (recharacterize, if this is the proper spelling) a Roth Conversion,if you did not want to pay the federal income tax or IRMAA or incurred a of loss of value of the securities. However, this was eliminated by the Tax Cut and Job Act of 2017. So, from 2018 and after, you are "working without a net". It has been my experience that most financial advisors are not knowledgeable about Medicare unless they are selling Medicare Supplement Plans. And, in that group of financial advisors, their knowledge is limited to the Medicare Supplement Plans and not Medicare Provisions. I am providing a link from the SS website that explains the Medicare Modernization Act which was enacted in 2003 and implemented in 2007. https://www.ssa.gov/privacy/pia/Medicare%20Modernization%20Act%20(MMA)%20FY07.htm The section that addresses the Medicare Part B System informs the reader that the premium paid by the Part B Beneficiary covers approximately 25% of the per capita cost of Part B. The balance (approximately 75%) is subsidized by the federal government which is, in effect, the taxpayers. That was  a very good subsidy especially for the folks with higher incomes who can afford to pay more. The MMA now requires folks with higher incomes to receive a lessor subsidy based on established income thresholds and pay more via the IRMAA . Is the IRMAA fair? In concept, it is fair. However, the IRMAA amounts are still a great deal for the folks that exceed the thresholds whether from capital gains, Roth Conversions, "gold plated" pensions, municipal bond (tax free) income, earnings from a job or business, etc. For example, in 2024, the standard threshold for the current $174.70 Part B premium is $103 K Single and $206 K Married Filing Jointly (MFJ). The next threshold, $129 K Single and $258 K MFJ or $26 K and $52 K, respectively, is only $244.60 or about $70/month ($840/year) per beneficiary greater. You can review each tier and see that for the increase in income, the IRMAA is a very small percentage increase compared to the increase of income. I guess the question is, should the IRMAA be greater? Also, why should the taxpayers be subsidizing highly income folks? 

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Thanks for your response, Rich.  Yes, we're still unhappy about what seems to be double taxation for folks who are just trying to be wise savers.  We have also adjusted our conversions to stay in a tolerable Medicare IRMAA tier, and have touched base with financial advisors to think clearly. Would still love to see some legislation aimed at correcting what we consider to be an  unfair Medicare rule.  Hopefully this conversation will help others to become aware of this early enough to consider how to avoid being shocked like us!  Good luck to you.

Thanks again - Susan

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@SusanA657950 Please read my reply to Rich regarding fairness of the IRMAA. The legislation (MMA) that was enacted in 2003 and implemented in 2007 is new. It was created to reduce a very generous subsidy for Medicare Part B to folks that exceed certain income thresholds. I believe there is more merit in trying to move Congress to increase the thresholds for taxing your SS Benefits at the 85% level which for Married Filing Jointly is only $44,000. For example, if a couple (MFJ) with combined SS Benefits of $45,000 exceed the $44,000 threshold, $38,250 of SS Benefits are taxable income. If that couple is in the 12% tax bracket, $4,590 is the tax on that $38,250 of taxable income. Ir will be a greater amount if that couple is in a greater tax bracket such 22%, 24%, etc. That amount of tax is split between the SS Benefit Trust and Medicare Part A Trust. Moreover, this tax calculation could occur year after year as long as the couple's income exceeds $44,000 under the SS Benefits formula. So, IRMAA is less for  significantly higher thresholds. I believe IRMAA is fair and, perhaps, should be increased regardless if income is the result of earnings, capital gains, Roth Conversions, municipal tax free income,etc. Maybe future legislation will be addressing the amounts of IRMAA.. 

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When my financial advisor did a Roth conversion projection for us, he did not take into account the higher premiums for Medicare Part B and D. If I do it, I plan on converting a larger amount than planned in the first year, so my Medicare premiums would only increase for the one year. However, you also have to be careful how that affects your tax bracket. Way too complicated. 

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@sooz301 There are a number of factors to review before affecting a Roth conversion. You indicated tax brackets which means federal income taxes (FIT); and, in some States, possibly state income taxes (SIT). For example, you are in the 12% tax bracket and convert a sizable amount (i.e., $100,000, etc.) from a Traditional IRA to a Roth that moves you into the 22% tax bracket. You will be paying 10% more FIT initially; and, thereafter, have the loss of use of those dollars compounding at the rate of return you were earning. Obviously, you do not want to increase your FIT and/or SIT unless there is a compelling reason to do so. This analysis is complicated and finding the appropriate amount, if any, to convert takes some "sharp pencil" work. Also, you need to review the 5 year rule concerning Roth conversions. There may be additional FIT implications if you make a withdrawal from the Roth conversion before 5 years.. There are some exceptions (i.e., attain age 59.5, etc.) that eliminate additional FIT. The bottom line is that the strategy of tax free and no RMDs may be expensive.

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@sooz301 


That’s why most people would want to end their  conversions at age 62 so that this is not the case of higher Medicare Part B and Part D premiums.

 

If you can just watch how much you convert after age 62, keeping your total income below the IRMAA MAGI income limits which are set each year in the fall for the following year.

 

You probably already know the limits for 2024 but if you don’t - here they are

- this will list all of the various ones just in case you fall into some other categories for these premium.surcharges.

CMS.gov 10/ 12/2023 - 2024 Medicare Part A & B Premiums and Deductibles

 

 

It's Always Something . . . . Roseanna Roseannadanna
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@GailL1 

There once was an old online retirement calculator that was really awesome; I was fortunate enough to be able to use it for a number of years before I retired. It was designed to optimize one's retirement income based on savings of all forms, Social Security, etc and report annual distributions to take from IRAs and other savings accounts, including retirement (Roth and 401K) and taxable investments. The user had control over how the distributions were to be distributed annually over the course of the lifetime (or couples lifetime). It actually considered the effect of IRMAA and would recommend Roth conversions. The result was a table showing annual income from each source, what Roth conversions to make, etc, all "optimized" to maximize available spending money. As I recall, for myself it was extending Roth conversions for a number of years into my 70's.

This was the i-ORP.com site. The "internet - Optimized Retirement Planner" by James Welch. Sadly, James ended up with a stroke a few years ago and the program has languished. It was unavailable for while but is back on its site, though I don't know its current condition.

 

I used it in-depth for several years and verified many of its calculations. James was very open to working with me and was patient with my bug reports (many of which he set me straight on). 

 

It was mentioned a lot at the bogleheads forum and at earlyretirement.org. But I don't think it ever got the use that it was worthy of.

 

There are commercial programs that provide similar analyses. These can cost upwards of a thousand bucks, or even much more. I find the concept of the financial optimization fascinating. James worked in the chemical processing industry and the mathematics of mixing tanks full of various chemicals and catalysts to get a desired yield is pretty much the same as the mathematic of having various bins full of savings or cash flow and optimizing the "flow" to get the desired result. 

One commercial program is the MaxiFi software by Larry Kotlikoff. The last I looked at it it was oriented more towards people still working and not actually retired. Again, its raison d'etre is to optimize savings and lifestyle over the course of one's career. There are other similar commercial programs.

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Well it's been almost a year and a half, and I still am irked by this subject, but I'm glad to see that maybe my first rant was useful to others who might not know that Medicare premiums are affected by Roth conversions.  I still think that it's unfair to treat all conversions as distributions without a way to distinguish those that are not taken as income, but it is what it is for now.  

Gail - your second paragraph is really the key for those of us in this boat.  We wish we had been told about the wisdom of starting to convert pretax retirement funds early enough to be done, or near done, by age 62, but now we just are careful to adjust our conversions so we stay in an acceptable Medicare/IRMAA bracket.  And we try not to get angry every month!  It is absolutely way too complicated.  Good luck to all.

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@SusanA657950 It appears that you and Gail have already discussed the pertinent factors regarding a Roth conversion and additional Medicare premiums (IRMAA). I agree that IRMAA is a "shock" for many folks. Moreover, a financial  advisor may not be helpful unless he/she is well versed with the tax code, Medicare, and Social Security, if applicable. Anyway, I will try to answer your initial question. If you are transferring assets or rollover (direct) assets from a pretax account (i.e., 401 K, 403 B, IRA, etc.) to another pretax account, that transfer/rollover is not taxable income. However, if you are converting a pretax account to an after tax account such as a Roth IRA, the amount of the conversion is taxable income. All Roth IRAs are funded with after tax dollars whether from taxable earnings or conversions. Otherwise, you will have both pretax and after tax monies in a Roth IRA which is prohibited by the Internal Revenue Code (IRC).The IRC stipulates that the value of any distribution from a pretax account is taxable income regardless if received in cash or "in kind" (i.e., stock certificates, mutual fund shares, etc.) even if converted to an after tax account such as a Roth IRA. The IRC does not care if you spend or save that distribution. It taxes the value of that distribution. And, that value is reported to the SSA  after the current tax year. Because it takes time to report, there is a two year look back. 

Based on some of the info you provided, it appears you converted to a Roth IRA in 2020 and received the IRMAA notice in 2022. I am surprised the trustee (or a representative) receiving the converted monies did not give you a "heads up" since the amount of the conversion had to be significant. To double your Medicare premium in 2022, your MAGI had to exceed $228 K in 2020. Lastly, I realize that there are many reasons for a Roth conversion. Generally, if you expect to be in a higher tax bracket in the future, it makes sense to pay taxes today at a lower tax rate. For example, if your current tax bracket is 12% and you anticipate your future tax rate will be 22%, it makes financial sense to convert today at 12% to avoid paying at 22% in the future. The strategy or difference in tax rates is less appealing when you are looking at a current  22% tax bracket and a future 24% tax rate (only 2% difference). It may be financially sound to preserve the tax savings benefits of the pretax account as long as possible and simply pay taxes on RMDs at the lower 22% tax rate. Remember, at age 72, RMDs start at about 3.8% of the prior year value at December 31st. Of course, future tax rates are subject to change. Hope this helps.

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I assume you are talking about the Medicare IRMAA (Income Related Monthly Adjusted Amount).

 

Everybody pays Medicare premiums for Medicare Part B and Part D.  These premiums fund these programs - 25% of the cost to keep these parts of Medicare running is paid by the beneficiary and 75% of the cost is paid by the government out of general revenues.  

 

We have a lot of people that make so little that they can't pay all of these premiums so somebody else has to directly help out since Medicare is a closed "Trust Fund" system - actually (2) separate ones -

1.  Part A or HI (Hospital Insurance) Trust Fund - funded by payroll deductions which you and your employer pays while you are working.  Medicare Part A is free for most people since they have made these contributions while working.  

2.  Part B or SMI (supplemental medical insurance) Trust Fund is developed based on usage of the program and the % which I described above (25%/ 75%)

 

To help out, in this regard, those with higher incomes (begins at $ 91,000 for a single or $ 182,000 for couple) pay a surcharge added to the monthly Medicare Part B and Part D premiums, based on your yearly income. The Social Security Administration (SSA) uses your income tax information from 2 years prior to determine if you owe an IRMAA in addition to your regular Part B & Part D monthly premium.

 

The income-related monthly adjustment amount (IRMAA) sliding scale is a set of statutory percentage-based tables used to adjust Medicare Part B and Part D prescription drug coverage premiums. The higher the beneficiary’s range of modified adjusted gross income (MAGI), the higher the IRMAA.

 

Doing a ROTH conversion takes planning to avoid this MAGI increase and thus higher Medicare premiums.  You can do it prior to this (2) year mark - in fact, it is best to do it over several years to modify any income tax liability by increasing one's income and thus tax rate.

 

The reason why IRMAA premiums are affected by a ROTH conversion is because that is when you have to pay regular income taxes on the amount you are converting from a tax deferred retirement (IRA) to a growing tax free retirement account (ROTH).

 

Any other time, you would pay ordinary income tax on just distributions from your deferred retirement account - 

 

Income taxes have to be paid on the deferred retirement distribution OR ROTH conversions - how this money flows to you in amount is up to you as long as you meet the RMD. 

 

A ROTH conversion is NOT one of the allowable exceptions to the IRMAA surcharges.

HHS.gov - Medicare Part B Premium Appeals | HHS.gov

Because you are deciding to do this - and for how much - your choice - as to when the income is reported - taxes have to be paid either at the time of conversion or if left alone when they are distributed from your IRA.

 

Here are the tables and the (statutory) government policy:

SSA.gov - Policy For IRMAA Medicare Part B And Prescription Drug Coverage Premiums Sliding Scale Tab...

 

These are surcharged premiums based on your annual tax return so if you can get your income less than $91,000 (single) or $ 182,000 (joint) then the IRMAA goes away and just regular premiums remain or until you income goes back up  - remember the look back is 2-years before.

 

It's Always Something . . . . Roseanna Roseannadanna
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I want to thank you for your prompt reply and appreciate that you took the time to explain what we have just come to know about this issue.  It still stings quite a bit to find this out at this point.  FYI, I'm a retired school teacher and my husband was a public inspector and neither of us made mountains of income over our 40+ years of service - so since we were good savers, it's really disappointing to feel like we're being taxed twice on the same savings.  I can only assume we are not the only people who have this situation. So, I guess I'll end with two suggestions for AARP as an organization who puts so much effort in standing up for the welfare of older folks who all work hard and try to be good citizens.

1) Please consider adding in articles and spotlighting this potential impact for those who have tax-deferred retirement funds and are planning on converting them after retirement. If we had known about this earlier on, we could have started converting even sooner before age 65 when Medicare is a mandatory expense.  I reread all the articles I found about Medicare through AARP and could not find any mention of this risk anywhere.  

2) Since our particular situation involves funds that are being converted to Roths in order to pay the taxes rightly due to the government, but NOT to be used as monthly income but rather rolled back into savings accounts,  I would like AARP to consider raising this issue as one to possibly change for future seniors.  We worked a long time and saved instead of spent,  we think that these conversions should be allowed as exceptions to the IRMAA surcharges.  

I thank you again for your consideration.

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@SusanA657950 

 


I still don't think you understand that you do not have to take any distributions from a ROTH.  Once you have met the timeline for the ROTH earnings, you can withdraw at will and NO income taxes are assessed on the principal of the ROTH nor the earnings of it - it isn't even reported on your tax documents.  THERE ARE NO RMD ON A ROTH IRA.

You said yourself in the OP, not withstanding having to use the ROTH for somelong-term care - "we wanted to convert so the funds will be inheritable by our children as Roths without RMDs. "

 

You are not being taxed twice on the ROTH IRA - it is once and done - as long as you meet the timetable on the earnings, there is no more income tax on the ROTH principal (you paid the taxes when you did the conversion) nor the earnings - ROTH earnings are tax-FREE.

 

RMD are for Traditional IRAs or something equivalent - tax deferred retirement accounts - Those you will pay income tax on when you take a distribution - RMD or otherwise scheduled.

 

Yes, doing a ROTH conversion reduces the amount in your tax deferred retirement account and thus keep down the RMD figure.  But you pay income taxes on all of it - only one time - 

1.  ROTH CONVERSION amount - tax is due when it is converted and the taxes should NOT come out of the converted amount - you must pay it out of other funds - otherwise the amount of tax will be considered a distribution rather than a conversion.

2.  Trad IRA or equivalent tax deferred retirement account - ordinary income taxes are due on distributed amounts - RMD or otherwise scheduled distribution amounts, age regulated.

 

You don't have to do anything with the ROTH once it is established - no distributions are required from this type of retirement account.  It can just sit there and grow and be sent on to your heirs - with rules as to how long they have to get it all out - in most cases, no tax is due from them either.

 

I had to look a bit but AARP does have at least a couple of FAQ on the subject we are discussing - there could be others.

 

AARP.org - 09/21/2021 - How to Convert Retirement Savings From a 401(k) Into a Roth IRA

 

AARP.org - 10/22/2021 - Take Withdrawals From Your Traditional IRA First

 

I would have thought that your financial advisor or CPA should have clued you in on the IRMAA Medicare surcharges. 

 

The other thing that confuses people is that the Medicare sign up age is 65 but their SS retirement age could be long after that - FRA or even 70 for delayed retirement credits - so they get confused as to when to do the conversion.  It has to be 3 years BEFORE age 65 OR if one keeps working and has employer coverage - then 3 years before they lose this coverage or 3 years before they are signing up for Medicare Part B.

 

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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You are really sweet to keep trying to understand my point.  Everything you just wrote is correct and understood.  We know that Roths will not be taxed after we convert and pay the taxes using other funds - that's why we're doing it.  However, it FEELS like a double tax because we pay the income taxes owed AND then we just found out that our Medicare premiums will be twice as much as the base rate - that feels like another tax for us - yes, I know it's technically a "surcharge."  And. because we started to do this 2 years ago and didn't find out about the Medicare impact until now, we're going to have this surcharge for at least 2 years. What feels bad is that we know many other people who have much more wealth than we do, and spent and own more than we do, but they are paying the base premium because they don't have these tax-deferred funds.  And it would indeed have been good if someone had clued us in to this potential impact of converting, but alas, no one mentioned it all.  

I must say that there is a common issue that the people who you deal with are generally younger and may not be well versed with this very "senior" detail.  Truthfully, until we got here to this moment (turning 65), Medicare was just someone else's issue.  We do our own taxes, and have no real "financial advisor" who should have made us aware of this.  

We also were never made aware that the savings that we were building up throughout our working years would present us with the RMD reality which lead us (too late obviously) to our plan to convert and reduce our eventual RMDs.

Anyway, thank you again for your interest and support.  I do still hope AARP can put more out there on this topic to help folks like us.

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@SusanA657950 

Just a suggestion but why don't you consult with a tax advisor on doing the ROTH movement by doing a conversion contribution - 

IRS.gov Publication 590 A - Contributions To A Individual Retirement Arrangement

under the heading of:  

Converting From Any Traditional IRA Into a Roth IRA

(about middle ways down the page)

The way it works is (simply put)

1.  When you begin your RMD from your Traditional IRA, you take more than the RMD as a distribution.  

2.  You pay taxes on the whole amount that is distributed to you in any given year.

3.  Then you take the excess distribution (the amount in excess of the calculated RMD) and do a conversion contribution into your ROTH IRA account.

That way, you can move some of the Trad IRA amount to the Roth IRA yet you get to control the amount of the conversion contribution to stay below the Medicare IRMMA surcharge income limits.  

It will take longer but will save you these Medicare surcharge fees if you keep your income amount less than the surcharge limits. 

  • The government gets their income taxes,
  • you build up your ROTH IRA,
  • your Traditional IRA gets lowered to reduce RMD going forward
  • and you can control the distribution amount so that you don't get hit with the Medicare IRMAA surcharges.

WIN-WIN - but do consult a tax professional so that everything is set up correctly, and done correctly.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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The IRMAA premium surcharge income thresholds are going up in 2023 -

CMS.gov - 2023 Medicare Premiums - Medicare Part B Income-Related Monthly Adjustment Amounts

 

Just posting this to keep you informed.  

It's Always Something . . . . Roseanna Roseannadanna
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Here's an article that I found to be quite useful - just thought I'd pass this on as well.

 

https://www.financialalternatives.com/financial-alternatives-inc/2022/5/8/should-you-consider-a-roth....

 

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That is a pretty good article - 

But the author said this:

If this happens on a one-time basis (as opposed to every year), Clients can request a Medicare premium adjustment. There are no guarantees the adjustment will be granted and lower premiums reinstated, but it is possible.

 

I disagree with him here - There are only some reasons why SSA would/could modify the Medicare premium surcharges - A ROTH conversion isn't one of them because it is more of a tax planning event than a qualifying life changing event. 

Here are the details to an appeal:

HHS.gov Medicare Part B Premium Appeals

You can try it if you want - all they could say is NO - which most likely, they will.    But wait until you get the actual Notice.

To add to your knowledge on this - Here is the actual SSA Program Operations Manual System (POMS) on the appeals process -

The appeals process is similar to other government / legal appeals - in steps up the appeals legal ladder, you can take it as high as you want to go in the legal process - maybe even the SCOTUS  😉

 

 

 

It's Always Something . . . . Roseanna Roseannadanna
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Great minds think alike!  Yes, I agree that moving forward, it looks like we can just keep converting smaller amounts as we approach 72, then continue on converting amounts, but keeping our income within a Medicare premium level that works for us.  

And yes, the article gives some hope of appealing to reduce the surcharge, but for one thing, people converting are probably using multiple years to do so, and as it stands right now, the conversion rule is very clearly stated as not being an exception.  

I'll give the resources you mentioned a look, and thank you so much for all your encouragement.  Perhaps the SCOTUS should indeed consider this matter!

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@SusanA657950 wrote

 

 Perhaps the SCOTUS should indeed consider this matter!

===================================================

Oh, I was being factious -  a Roth IRA conversion is just a glorified tax deferred retirement account distribution that ends up in a tax advantage account - when one takes it is a personal choice.

It is all in the planning.

 

But you bring up an interesting point - How do people find out about things in government rules and regs that affect their lives?

  • Some people hire others to keep up with all this stuff.
  • Others just research and research and get a kick out of learning things related to government 
  • Others just accept whatever happens - OH Well !

For me, I hang around some people from all walks of life with various expertise in all things related to money, taxes, government programs - 

I find government and what comes from it - fascinating.

I don't get it right all the time but learn from it none the less.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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