Medicare Income Planning
It’s important to keep your Medicare costs in check while taking distributions from your IRAs and other retirement plans. This includes timing of Roth conversions too. Without smart planning for retirement, distributions from 401(k)’s, IRA’s and other plans, can cause higher Medicare costs.
To understand how distributions can impact your Medicare costs, you need to understand some basics about how Medicare works.
Medicare was established in 1965 to provide a basic level of care for older people. (My philosophy now is that 65 is the new 45). When you reach age 65, you become eligible to enroll in Medicare. Below are the different parts:
· Part A covers hospitalization, skilled nursing home and hospice care. It is free to anyone who has paid the Medicare payroll tax for at least ten years.
· Part B covers doctor visits, lab work, x-rays, some preventative care and outpatient costs.
· Part C provides Medicare Advantage plans, which are all-inclusive plans offered by private insurers. Details of paying for Part C vary by plan.
· Part D was launched in 2006 and is Medicare’s prescription drug program.
Individuals can also purchase Medigap insurance plans to cover the gaps left in Medicare coverage.
Medicare – Part B Premiums 2019
As the above chart shows, standard Medicare Part B premiums are increased by surcharges imposed on upper-income individuals, those with Modified Adjusted Income (MAGI) exceeding $85,000 on an individual return or $170,000 on a joint return. The extra amount higher income individuals must pay is called an Income Related Monthly Adjustment (IRMAA). For IRMAA purposes MAGI is defined as Adjusted Gross Income (AGI) plus tax exempt interest and untaxed foreign income. The MAGI amount is usually used for a year that is reported on the federal tax return that was filed two years previously.
When Income Falls
An individual’s current-year income may have fallen to a level much lower than was reported on the tax return filed two years previously. In that case it may be unfair to incur IRMAA surcharges on income that no longer exists. It is possible to ask to have the IRMAA income amount adjusted downward. Do this by submitting Form SSA-44, Medicare Income-Related Monthly Adjustment Life-Changing Event”, to the Social Security Administration.
Life Changing Events
· Divorce or Annulment
· Death of a spouse
· Ending employment
· Significant reduction in work hours
· Loss of income-producing property due to a disaster or similar circumstance
· Loss of pension income due to termination or reorganization of a pension plan
· The income reported on the prior year’s tax return resulted from a settlement with a former employer related to the employer’s bankruptcy or reorganization
As listed above, the end of employment is a qualifying “life changing event”, that should be considered for anyone who retires at age 65 or later. If an IRMAA surcharge will result from high salary income reported on a return filed two years earlier, but that salary no longer exists, relief from the surcharge may be readily available.
Penalties will occur in the form of higher premiums if you don’t apply when eligible. Medicare eligibility occurs as follows: (1) If you retire before age 65, you have a 7 month window (3 months before your turn 65, the month of your 65th birthday and 3 months after the month you turn 65) and (2) If you retire later than age 65 you have an 8 month window (the month your retire and seven months after the month you retire). For every year you delay enrolling in Medicare since you first became eligible, you will pay a permanent 10% penalty, which means paying 10% more. For example, if you decide to enroll in Medicare Part B five years after your eligibility date, then your premium will be 50% higher for as long as you live.
It is important to be aware that as you approach Medicare eligibility years it is very important to make good planning decisions and seek out professional help. The earlier you include Medicare planning in your overall financial plan, the more strategies you’ll be able to apply. There can be a ripple effect when it comes to retirement planning. You may have done a commendable strategy of saving wisely for your retirement years but find yourself paying for unforeseen consequences such as higher Medical costs. A qualified financial advisor can assist you with careful planning with retirement accounts to help minimize the bitter bite of Medicare costs. Strategies such as Roth conversions, Health Savings Accounts (HSAs), and Qualified Charitable Deductions (QCDs) are all strategies that you may want to consider.