How to Avoid a Sudden Increase in Medicare Costs July 31, 2017 by Laird Johnson Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. If you re married and planning for retirement, one of the big items you ll need to make sure you cover is healthcare. According to Fidelity Benefits Consulting, a retiree couple will need approximately $260,000 in income to pay for basic medical expenses. That includes premiums for traditional Medicare parts B and D coverage, copayments and deductibles and other out-of-pocket expenses. Most retirees pay Medicare premiums as a direct deduction from their Social Security checks. For those retirees, there is a hold harmless provision in the law that prevents an increase in Medicare premiums from reducing their Social Security checks. However, certain individuals are not covered by this provision, including: First-time Medicare enrollees, Insureds who are currently not receiving Social Security retirement benefits, and Retirees with high incomes. Retirees whose incomes are determined to be high income are assessed on an income related monthly adjustment amount (IRMAA) in addition to their base premium. Their income equals their modified adjusted gross income (MAGI) two years prior. For example, 2017 premiums are based on 2015 MAGI. The IRMAA applies to both Medicare Parts B & D. The charts below show the breakpoints in income to determine the applicability of an IRMAA for Medicare Part B & D. Medicare Part B Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.
Medicare Part D Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.
Married retirees need a fairly high income level to be affected by IRMAA and to have to pay extra. However, after the death of a spouse, the surviving retiree becomes single and therefore subject to a much lower income limit. If a new widow were to receive $85,000.01 in income, she would be put into the higher income bracket and thus have to pay the higher Medicare premium. Additionally, since the widow would now be out of the hold harmless coverage, her Social Security payments may decrease with premium increases. Let s look at an example William and Marie are married, both in their mid-70s, and have a total retirement income of $135,000 Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.
per year: $24,000 William s Social Security Benefit $20,000 Marie s Social Security Benefit $40,000 William s employer pension $15,000 Required minimum distributions (from both of their IRA s) $15,000 Rental Income $19,000 Portfolio Income (Dividends, interest, short & long term capital gains) $135,000 - Total When William passes away, Marie s income will look something like this: $24,000 Marie s Social Security Benefit (Survivors Benefit) $30,000 William s employer pension (75% benefit to survivor) $15,000 Required minimum distributions $15,000 Rental Income $19,000 Portfolio Income $103,000 - Total Prior to William s death, their income level was low enough that they didn t have to pay the extra IRMAA for their Medicare coverage. However, after William s death, Marie s income is now high enough to put her into an income bracket that requires an IRMAA, assuming she uses the standard deduction and that 85% of her Social Security is taxable (based on her provisional income). Assuming Marie s life expenses do not require the full $103,000 in annual income, there are some strategies she may want to consider to minimize future exposure to the IRMAA. Convert some assets to a Roth IRA In the year of William s death, Marie could consider a partial Roth conversion. That would create taxfree income later that wouldn t count towards her MAGI for IRMAA determination. She could potentially convert and increase her taxable income up to $170,000 and not be subject to the higher premiums. This is because, in the year of death, she is allowed to continue filing as married filing jointly. By Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.
accomplishing this conversion, she will reduce the IRA balance on which the RMDs are calculated. Make a qualified charitable distribution A qualified charitable distribution (QCD) is an allowable distribution from an IRA that will satisfy the required minimum distribution. The amount of the distribution is paid directly to a public charity and is not included in the donor s income. However, the donor does not receive a charitable deduction for the donation. There are limits; a maximum of $100,000 per year may be donated via a QCD. Purchase a deferred annuity Marie may also want to consider repositioning some or all of her income-generating assets into a taxdeferred vehicle, such as a deferred annuity (either a variable annuity or a deferred-income annuity DIA). Using a tax-deferred annuity would let her control the timing of when she recognizes gains and includes them in her taxable income. Further, she could utilize various optional annuity riders, available at an additional cost, and other product features that may create income or provide for a death benefit for wealth transfer. Avoid the shock of increased Medicare costs by planning ahead Although the IRMAA amount may be nominal, it can be a shock to many widows and widowers who were not expecting this sudden increase in their Medicare parts B & D premium after the death of their spouse. But, with proper tax-advantaged vehicles and investment planning, the effects of the IRMAA can potentially be minimized or even eliminated by diversifying the taxation of assets, increasing tax deferral or utilizing a tax-free Roth IRA. Laird Johnson is senior director of the Advanced Markets Group for AXA Distributors, LLC, with over 20 years of experience in the financial services industry. A highly sought after speaker, Laird has published a number of articles on financial planning concepts in such publications as National Underwriter and Broker's World. Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.