Jeremy Gussick, MBA, CFP, of LPL Financial, is no stranger to our subscribers. He has become one of our Social Security and retirement planning go-to experts. Today, he talks about Medicare and other Social Security benefits and when, where, and if taxation comes into play.
When looking at your Social Security Statement as you approach retirement, you will see the amount of monthly benefits you can expect to receive, depending on the age at which you plan to file for Social Security. However, what’s NOT listed on that statement are some factors that may reduce how much of that monthly benefit is actually deposited into your bank account each month, including the cost of your Medicare coverage in retirement.
For some of you who are collecting Social Security and enrolled in Medicare, you may have already experienced a surprise reduction in your Social Security benefits. But for those of you who have not filed yet, here is some insight so you won’t be as surprised if and when your Social Security deposits are perhaps a bit less than you were expecting.
How Do You Pay for Medicare?
As you likely know, Medicare Part A, which covers hospitalization, is provided at no cost once you are eligible. However, with Medicare Part B, the portion of Medicare that provides standard health insurance, you will pay a standard premium for this coverage, which is currently $148.50/month in 2021.
- If you enroll in Medicare Part B BEFORE collecting Social Security, your premiums will be billed quarterly by Medicare.
- If you enroll in Medicare Part B and are also collecting Social Security, your premiums will be automatically deducted from your monthly Social Security payments, reducing those payments.
How Does Your Income Impact Your Medicare Premiums?
As I mentioned above, the standard Part B premium amount in 2021 is $148.50/month. This is true if your modified adjusted gross income (MAGI) was $176,000 or less (married filing jointly) or $88,000 or less (single). Most people pay this standard Part B premium amount. However, if your MAGI as reported on your IRS tax return from two years ago was above those levels, you'll pay the standard premium amount PLUS an Income Related Monthly Adjustment Amount (IRMAA). IRMAA is an extra charge added to your premium (Source: https://www.medicare.gov/your-medicare-costs/part-b-costs).
The chart below outlines the current income thresholds which will cause these extra IRMAA charges to your Medicare Part B and Part D premiums:
That First Year of Medicare Premiums Can Be Tricky!
If your MAGI from when you were working pushes you into one of the higher Medicare premium brackets above, but your new income when you retire will be in a lower bracket, you’ll likely want to contact Social Security to file an appeal for the cost of your Medicare, to reduce any potential IRMAA charges. This is very common for high income earners in the first year of their retirement.
You may also need to contact Social Security if you experience a life-changing event, other than retirement, that will have a significant impact on your future income compared to the prior year, such as a marriage, a divorce, death of a spouse, or other such event. Here’s a link to the Social Security form that you’ll likely need to complete with the assistance of your tax-advisor to report such an event: https://www.ssa.gov/forms/ssa-44-ext.pdf.
Will Your Retirement Account Distributions Increase Your Medicare Premiums?
For most of you when you first retire, your income may be significantly lower than it was when you were working full time. However, if you plan support yourself in retirement with your Social Security benefits and withdrawals from pre-tax retirement accounts, you need to be careful about how much you withdraw from those accounts each year, as this may have an unexpected impact on your Medicare premiums, and therefore your Social Security payments.
Remember that withdrawals from your pre-tax retirement accounts are treated as income, so those withdrawals will be included in your MAGI as reported on your tax return. It’s important to note that tax-exempt interest is also included in the MAGI calculation as well. If your MAGI is above those thresholds on the previous chart, you’ll see your Medicare premiums go up accordingly, which will reduce your monthly Social Security payments.
Lastly, remember that once you get to age 72, you MUST begin to take money out of your pre-tax retirement accounts in the form of Required Minimum Distributions (RMD’s), even if you don’t need the income to live. And naturally those RMD’s will be included in your MAGI tax calculation and can therefore impact your Medicare premiums and Social Security payments as well.
Plan Today to Minimize Taxes Tomorrow
As you can see, many of the items discussed above are interconnected. The best way to potentially avoid extra costs for your Medicare premiums, and to reduce your taxes in retirement is to plan ahead. I strongly encourage you to review your retirement income strategy with your financial and tax advisors. This will help you and your trusted advisors to better understand the tax impact of your various sources of retirement income, and your investments, to explore what planning, if any, can be done to help minimize your taxes in retirement. And hopefully some thoughtful planning will help keep your Medicare premiums lower, and your Social Security benefits fully intact.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions.
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Jeremy Gussick may only discuss and/or transact securities business with residents of the following states: AZ, CA, DE, FL, IN, MI, MO, NC, NJ, NY, PA, TN, TX.
Jeremy R. Gussick, MBA, CFP® is an independent CERTIFIED FINANCIAL PLANNERTM professional who focuses on Retirement Income Planning. He can be reached at email@example.com. Jeremy Gussick is not affiliated with Drucker & Scaccetti, which is a separate entity from LPL Financial.