Medicare Planning and Retirement
Distribution Planning could seem like a long way off for some and more near-term for others. Becoming Retirement-Ready is a life-long endeavor. Certain strategies can be implemented pre- and post-retirement that could have the ability to positively impact your cash flow in retirement.
Medicare premiums are not the same for every household. The higher the household income, the higher monthly Medicare premiums are. For 2019, monthly Medicare Part B premiums start at $135.50. However, once income exceeds certain thresholds over $85,000 for singles and $170,001 for married couples, the Medicare premium could sky-rocket to as much as $460.50 per month per individual.1 Medicare Part D premium Surcharges also apply based on Modified Adjusted Gross Income (MAGI). This comes as a surprise to most individuals.
All of your income in retirement from your 401(k), IRAs, Capital Gains, etc. will affect your MAGI. Allocating money to Roth IRAs either through a Roth Conversion program or contributing to Roth IRAs as part of your annual saving and investing strategy could help reduce MAGI in retirement. Additionally, many employers now provide for Roth 401(k) deferrals, so that might be something to consider as part of your pre-retirement strategy. Distributions from Health Savings Accounts (HSAs) are also not includable in MAGI. Loans or distributions up to a point from cash value life insurance are also another way to receive funds in retirement without impacting MAGI. Direct Charitable Contributions from an IRA as part of a Required Minimum Distribution will also help shield RMD money from impacting MAGI (otherwise known as a QCD… Qualified Charitable Distribution).
I want to disclose that I am not a tax accountant. However, by working with clients on their retirement income strategy, I see that accountants often want to save individuals money every year on taxes, which could inadvertently create a larger taxable situation when someone enters into their retirement distribution years. If all retirement distributions are income-taxable and not enough post-tax sources are utilized, taxes on Social Security and surcharges for Medicare premiums could become factors. That is why a multi-disciplinary approach to retirement planning is a good idea. Professionals see situations through different lenses. An accountant might not see the ratio of pre-tax to post-tax assets while preparing tax returns. A financial advisor is generally able to look at retirement assets on a comprehensive level to see the ratio of 401(k), IRA, Roth IRA, and other investable assets and look at projections to determine potential retirement income generation scenarios.
If you or a loved-one is approaching age 65, there are some important dates to keep in mind.
Lifelong penalties could apply for late enrollment into government sponsored Medicare programs. Yes… that is correct, “lifelong penalties” could add up to a lot of money from your retirement savings that could have otherwise been used for more enjoyable, life-enhancing purchases. Lifelong penalties for late enrollment for Medicare Part B are 10% per year and 1% per month for Part D.
During the year an individual turns 65, there is a seven month enrollment period for Medicare. That seven-month enrollment period begins three months before a 65th birthday. To qualify for a penalty-free exception, an individual needs to have “credible” health insurance through an employer or through a spouse’s employer, but getting an exemption is still necessary. After an employer coverage ends, there may be up to eight months for an enrollment period for Medicare Part B and only two months for Part D (drug coverage).
Time has a way of going by in chunks. Let’s keep our eye on the prize of enjoying life free of penalties that are potentially avoidable with some organization, a team approach, and diligent saving in multiple asset classes during our working years.
1Social Security Administration Publication: Medicare Rules for Higher-Income Beneficiaries, Page 5-7