What would you like to know
- Health insurance surcharges for high-income retirees can reduce income.
- With the right income withdrawal strategies, your clients can reduce their exposure to these charges.
- Roth IRAs, life insurance, and reverse mortgages can be invaluable tools.
Retirees are declaring bankruptcy at much higher rates today than in the past. In fact, the the bankruptcy rate for people aged 65 and over has increased by more than 200% from 1991 to today.
One of the main reasons for this increase in bankruptcies is the skyrocketing cost of medical care. Example: A 65-year-old couple retiring in 2021 will need $ 300,000 to cover their health care and medical costs throughout their retirement, according to the latest annual retiree health care from Fidelity Investments. estimated price.
Financial advisers should be aware of the long term risks that can arise from these health care costs and should be prepared with solutions. In addition, they need to understand how Medicare’s monthly income-related adjustment amount (IRMAA) can affect the financial security of retirees.
IRMAA is a means-tested program that was created in 2003 to help extend Medicare solvency by increasing the premium that some Medicare beneficiaries pay based on their income. Since 2003, the income brackets of the IRMAA, calculated from the modified adjusted gross income (MAGI) of the two previous years of a retiree, determine the increases paid by the highest incomes.
People who reported MAGIs of less than $ 85,000 and married couples jointly filing MAGIs who reported MAGIs of less than $ 170,000 in their 2019 returns pay the current Medicare Part B premium of 148. $ 50 per month.
Individuals and couples reporting higher MAGIs in 2019 currently incur an IRMAA surtax on Parts B and D. These surcharges are assessed on five levels. At worst, if a single filer’s MAGI exceeds $ 500,000 and a couple’s MAGI exceeds $ 750,000, the surcharge would be more than double the basic Medicare premium. A person paying the premium plus the surcharge could pay more than three times the basic Medicare premium compared to those not affected by the IRMAA.
Indexed to the IPC-U
Fortunately, a law was passed in 2020 which resulted in the indexing of the IRMAA ranges to the Consumer Price Index for Urban Consumers (CPI-U). This means that a retiree will have to have a higher MAGI than in previous years to be subject to the surcharges. MAGIs for 2021 are $ 88,000 for single filers and $ 176,000 for joint filers.
But there are still a few subtle but important pitfalls advisers can help clients avoid when setting up retirement savings and retirement income distribution plans. These can be triggered by:
- Excessive spending at the start of retirement. Many retirees tend to spend more early in retirement when they are healthy, active, and ticking off items on their to-do list. Since IRMAA surcharges are calculated based on a two-year “look back” period for MAGI, clients may be affected by IRMAA surcharges even if their income drops significantly in the middle of their retirement.
- Start of minimum required distributions. Americans are required to make withdrawals from most retirement plans – with the exception of Roth IRAs – when they reach age 72. The withdrawal amount is based on the client’s remaining life expectancy as determined by the IRS Unified Table and the December 31 total. qualified account value.
The higher the value of the account at the end of the year, the higher the annual RMD. In the early years of MSY, the investment balance may grow faster than the percentage required by the MSY calculation, and therefore, as the MSY factor increases due to aging, it is applied to a value of d greater investment. This could catapult customers into a higher IRMAA range, resulting in higher premium surcharges.
6 strategies to avoid IRMAA problems
1. Do not assume that unqualified accounts should be used first in a liquidation order strategy.
A popular pre-retirement accumulation strategy is to defer taxes as long as possible. The assumption is that many people will be in a lower tax bracket upon retirement than they were when they were still working. Unfortunately, continuing to defer taxes on distributions from qualifying accounts (i.e. 401 (k) s, IRAs, 403 (b) s, 457s, etc.) after retirement by taking the income first. unqualified accounts, could result in the balance of the qualified account. (s) becoming so important that when the retiree turns 72 when they are required to start receiving distributions, the RMD not only taxes more income than the retiree wants or needs, but also moves them into an IRMAA supplement bracket on their Medicare premiums.
This could result in over $ 100,000 in future IRMAA charges which could be avoided with proper planning. There is no “rule of thumb” for which liquidation order works best for everyone. Avoidance of IRMAA is one factor that influences the wind-up order, but there are others that should be considered.
2. Consider Roth conversions.
A Roth conversion, in which all or part of the balance of an existing traditional IRA is converted to a Roth IRA, is another way to avoid ending up in higher IRMAA ranges.
This may result in paying more taxes and IRMAA surcharges for a short time now, but can avoid ongoing IRMAA surcharges later if the client is forced to collect more income due to higher RMD. Keep in mind that Medicare determines your IRMAA bracket by reviewing your tax return two years before the RMDs. If possible, complete your Roth conversions before the age of 69.
3. Use RMDs for charitable contributions.