Without the right planning, accumulating a large IRA can come along with some unexpected consequences, including higher future taxes and increased Medicare costs for high income earners.
Here’s how the situation arises in the first place. Medicare charges premiums to participants in Medicare Part B, which covers doctor visits, and Part D, the prescription drug benefit. In 2018, the basic premium for Part B is $134 per month, while it varies for Part D depending on the plan.
However, high-income earners are required to pay more.
High income, as it applies to this topic, is defined as those with modified adjusted gross income over $85,000 on a single tax return or $170,000 on a joint return. Their premiums are subject to a surcharge known as an Income Related Monthly Adjustment Amount, or IRMAA for short. These surcharges increase with income and can more than triple what Medicare participants pay for their benefits, costing thousands of dollars each year.
Below are some basic planning strategies you can implement now and in the future to minimize your future Modified Adjusted Gross Income and minimize those surcharges:
Strategies to consider prior to Medicare age:
- Take advantage of Roth 401k options: Balance your pretax (Traditional 401k) and Roth 401k contributions, so you can enjoy more flexibility and lower taxes when it comes time to take distributions from these accounts.
Distributions from a Roth 401k, or eventual Rollover Roth IRA, are not included in your MAGI calculations thereby reducing your exposure to unnecessary Medicare premium surcharges.
Also, ask if your company 401k plan provides after tax contributions beyond your allowed $18,500 deferral amount or $24,500 for those over 50. After tax contributions may also be rolled over into a Roth IRA in the future.
- HSA plans: Younger clients may want to consider funding an HSA, if they have a choice. No one is expecting the cost of medical expenses in retirement to decrease. They can make deductible HSA contributions in their working years, then access their HSA tax and penalty free to pay for qualified medical expenses in retirement. This is the best of both worlds. These qualified distributions are not included in MAGI for Medicare purposes.
Strategy to consider those 70 ½ and older:
- Qualified Charitable Distributions: For those 70 ½ and older who are facing Required Minimum Distributions from their IRAs, QCDs may help minimize the impact of an IRA on Medicare costs. With a QCD, an IRA owner (or beneficiary) who is age 70 ½ or older can transfer up to $100,000 annually from their IRA to a charity tax free.
Key Point: The distribution from the IRA must go directly from the IRA to the charity. If an IRA owner takes an RMD then donates to the charity and claims a charitable deduction, the RMD would still be included in MAGI.
A QCD can satisfy an IRA owner’s RMD for the year, and the RMD is never included in income at all, so it is not included in MAGI. Keeping the RMD amount out of MAGI can result in big savings.
If you have a portfolio of $1,000,000 and above, contact us and we’ll walk you through how these and other simple and clear strategies can help you secure and enjoy your wealth.