What you need to know
- Medicare supplements for higher income retirees can affect income.
- With proper income withdrawal strategies, your customers can reduce these burdens.
- Roth IRAs, life insurances, and reverse mortgages can be valuable tools.
Retirees are much more likely to file for bankruptcy today than in years past. Indeed it is The bankruptcy rate for people aged 65 and over has increased from 1991 to the present by more than 200%.
A major reason for this rise in bankruptcies is the rising cost of medical care. Case in point, a 65-year-old couple retiring in 2021 will need a staggering $ 300,000 to cover their health and medical expenses during retirement, according to Fidelity Investments’ latest annual retiree health care plan estimated costs.
Financial advisors need to be aware of the long-term risks that can arise from these health care costs and should be prepared with solutions. They also need to understand how Medicare’s Income-Related Monthly Adjustment Amount (IRMAA) can affect retirees’ financial security.
IRMAA is a means testing program established in 2003 to increase Medicare solvency by increasing the premium some Medicare beneficiaries pay based on their income. Since 2003, the income classes of the IRMAA, which are calculated from the modified adjusted gross income (MAGI) of a pensioner for the last two years, have determined the surcharges paid by higher earners.
Individuals who have reported MAGIs below $ 85,000 and married couples who jointly reported MAGIs below $ 170,000 pay the current Medicare Part B premium of $ 148.50 per month.
Individuals and couples who report higher MAGIs in 2019 currently pay an IRMAA surcharge for both Part B and Part D. These surcharges are assessed on five levels. In the worst case, if a single applicant’s MAGI exceeds $ 500,000 and a couple’s MAGI exceeds $ 750,000, the supplement would be more than double the Medicare base premium. Someone who pays the premium plus the surcharge could pay more than three times the Medicare base premium compared to those not affected by IRMAA.
Indexed on CPI-U
Fortunately, a law was passed in 2020 that resulted in the IRMAA brackets now being indexed to the Urban Consumer Price Index (CPI-U). This means that a retiree must have a higher MAGI than in previous years in order to pay the supplements. The MAGIs for 2021 are $ 88,000 for single filers and $ 176,000 for joint filers.
But there are still a few subtle but significant pitfalls that advisors can help their clients set up retirement and retirement income distribution plans. These can be triggered by:
- Additional expenses at the beginning of retirement. Many retirees tend to spend more at the beginning of retirement when they are healthy, active and ticking off their bucket list items. Since the IRMAA surcharges are calculated on the basis of a two-year “lookback” period for MAGI, customers can be affected by IRMAA surcharges even if their income drops significantly in the middle of retirement.
- Start of the required minimum distributions. Americans, with the exception of Roth IRAs, are required to make withdrawals when they reach the age of 72 on most retirement plans. The amount of the payout is based on the remaining life expectancy of the customer, which is determined by the IRS uniform table and the total December 31st qualifying account value.
The higher the value of the year-end account, the higher the annual RMD. In the early years of RMDs, the investment balance may grow faster than the percentage required by the RMD calculation, and consequently as the RMD factor increases with age, the RMD factor will be applied to a larger investment value. This could catapult customers into a higher IRMAA class, leading to 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 for as long as possible. It is assumed that many people will have a lower tax bracket when they retire than when they were employed. Unfortunately, a qualifying account balance can result if, after retirement, taxes on distributions from qualifying accounts (i.e. 401 (k) s, IRAs, 403 (b) s, 457s, etc.) (s) continue to grow large enough to cause the RMD not only forcing more income than the retiree wants or needs, but also puts him in an IRMAA surcharge class on his Medicare premiums.
This could result in future IRMAA fees in excess of $ 100,000 that could be avoided with proper planning. There is no “rule of thumb” to the liquidation order that works best for everyone. Avoiding IRMAA is one factor that affects the liquidation order, but there are others that should be considered.
2. Consider Roth conversions.
A Roth conversion, which converts all or part of the balance of an existing traditional IRA to a Roth IRA, is another way to avoid getting pegged into higher IRMAA brackets.
This can mean that more taxes and IRMAA surcharges are paid now for a short time, but later ongoing IRMAA surcharges are avoided if the customer is forced to generate more income due to higher RMDs. Remember, Medicare will determine your IRMAA bracket based on your tax return from two years prior to RMDs. Complete your Roth conversions by the age of 69 if possible.
3. Use RMDs for charitable giving.