But I’m not rich, IRMAA

What is IRMAA?

The Income Related Monthly Adjustment Amount (IRMAA) is an additional premium (aka surcharge, aka more money) you have to pay on top of your Medicare Part B standard premium (currently $170.10) and your Part D premium, if your Modified Adjusted Gross Income (MAGI) exceeds certain income levels. MAGI is your adjusted gross income (AGI – line 11 of your 1040) plus any tax-exempt interest (line 2a of your 1040).

IRMAA (for 2022) starts out at an additional $68/month for Part B and an additional $12.40/month for Part D for married filing jointly earning over $182,000 and less than $228,000. The maximum, per month, is $408.20 and $77.90 for those earning over $750,000. (Note – they are likely not reading this…)

Social Security sends you an IRMAA letter if you are going to owe IRMAA premiums. You will get it soon after Medicare enrollment when you first sign up. You can also get the IRMAA letter late in the year if they will assess you for the next year.

The full breakdown of filing statuses, incomes, and IRMAA premiums is here https://secure.ssa.gov/poms.nsf/lnx/0601101020

Rich or not

Regardless of your actual wealth, Social Security and Medicare will look at the latest income level they have for you from the IRS. Typically, that is from 2 years prior.

You may be rich enough for IRMAA even if you see yourself as a humble retiree just making it. One scenario is right as you retire and your 1040 showed a couple of high (over $182,000) earning years prior to retirement.

Another scenario might be a DIY! You might cause yourself some windfall that places you over the limit by selling an asset or winning a lottery. This could be selling assets that have appreciated (stocks, investment real estate) or taking a large distribution from your 401(k) or IRA.

Some real, painful, cases

One tragic case was when an acquaintance of mine had a family member with cancer. As you may know, medical insurance does not cover everything and this person ended up owing medical providers a significant bill. They took out large sums from their IRA to pay the bill and, bingo, got hit with IRMAA.

In another case, I heard of someone who cashed in an annuity as part of their income plan. They would not need all the money in the current year, but wanted to simplify their investments. Bingo, they hit IRMAA.

In another case, a friend did well income-wise and found out right after retirement and going on Medicare that he would be paying not only Part B, but IRMAA, too!

So, how can I avoid IRMAA – planning

The easiest way to avoid IRMAA is to plan your income. If the income that generated the IRMAA is not as a result of a ‘life changing event’ you are likely going to have to pay the IRMAA. So, let’s look at ways to avoid IRMAA without your life changing. Income and expense planning are your best friends here.

I like to lead with expense planning – find out how much money I will need for the current year, including things like mortgage, Medicare premiums, property taxes, food, gas, and the rest of my expense list. Basically, we build an annual family budget.

Once you know how much you plan to spend, look at where the money is coming from, including regular savings, Social Security, annuities, pensions, and tax-favored money (IRA, 401(k), etc.)

Watch the income at least quarterly so that you know where you are relative to quarterly tax payments, tax rates, and the IRMAA limits throughout the year.

On the income side, remember my friends who cashed in the annuity policy. Their goal was account simplification. Unfortunately, the simplification cost them. Their solution might have been to take the annuity money early in the year and then take smaller amounts from the other accounts as needed to meet their income plan.

The friend with the medical expenses might have been able to do a short term house second mortgage and then pay that off over a few years from their IRA while avoiding the IRMAA limits.

A wish? Wedding, car, trip?

If you know that you will have a large expense coming up that you will be funding, consider increasing your income withdrawals for a year or two prior to the year the money is needed so that you avoid IRMAA each year, but the money is all there the year it is needed.

So, how can I avoid IRMAA – life changing event

From my perspective, the most likely way to be relieved of IRMAA after it has been assessed is to have a ‘life changing event’. If you had a ‘life changing event’ you may be able to appeal. Per Social Security, life changing events include:

A Life-Changing Event (LCE) can be one or more of the following eight events:

Death of spouse (HI 01120.010);

Marriage (HI 01120.015);

Divorce or annulment (HI 01120.020);

Work reduction (HI 01120.025😉

Work stoppage (HI 01120.030);

Loss of income-producing property (HI 01120.035);

Loss of employer pension (HI 01120.040); or

Receipt of settlement payment from a current or former employer (HI 01120.043).

If you have a life changing event, you can appeal to Social Security using a form SSA-44. Work stoppage, such as retirement or being laid off, is a big one. Make sure that you use the Social Security reason first, then amplify as needed. Example – “I had a work stoppage because I retired on May 30^th, 2022.”

Fine points

Remember that if IRMAA is assessed, it will apply to each spouse’s Medicare premiums, if married.

Don’t wait. If you are assessed IRMAA and you can appeal, do so immediately. If you wait you will have to pay the higher premiums until your appeal is approved, then Medicare will not bill you until your overage is cleared. Also, if you wait to long, your appeal may be denied because it was filed too late.

Share, please.

Please share your IRMAA tips in the comments!

Actions you can take include:

If you have not seen the “Why you should read this blog…WIIFY” post, it’s here https://nosurprisesretirement.com/2017/07/09/first-blog-post/

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

I RAPped!

Blizzard, A. Goicolea, Phoenix Art Museum

Per the NWS, we’re getting a blizzard here this afternoon – three to eight inches of fluffy snow!

Don’t miss the retirement action calendar after ‘Rapping’.

Rapping

As part of my RAP (Retirement Activity Plan and Free stuff!), one of my goals is to remain socially connected. Connection is not usually a problem when you’re employed because you have coworkers. I’m still employed 80% of the time and my coworkers are great (now, please tell me where my laptop is…).

Fortunately, for the 20% of the time when I am retired, the gentlemen from the old neighborhood have invited me to their weekly breakfast meeting. They are interesting and engaged people and the restaurant has excellent coffee and is extremely generous with the meat on the country breakfast. They are now one key part of my social connection in retirement. Excellent people and good food – what more could one ask for?

If you’ve seen the RAP template, it has areas for creativity, social, personal, and activity.

Looking back at last year, I give myself about a C for activity. I tracked exercise and averaged almost 12 times per month. My goal is about 17 times per month (4 times per week) or better.

I was pleased with my personal work. I made it through Pimsleur French I and most of II. I watched a French subtitled movie. I read a couple of investing books. (The one I recommend is The Four Pillars of Investing by William J. Bernstein. Get the old version; it’s cheaper and has 99.9% of the content.)

I was also happy with my creativity. I continued the blog. I completed some house projects and fixed a few laptops.

Retirement Action Calendar

I borrowed a genius idea from Vanguard, Merrill, Kiplinger, and Forbes and synthesized (RAP – creativity!) a spreadsheet with key dates for pre- and post-65 retirees. Excel and Google Sheets versions are located here.

The one time events show some dates for my friends Rick and Jean (pseudonyms), but will likely be useful you, too. The one time tab includes Medicare sign-up, initial RMD, any initial pension payments, and starting Social Security. You’ll need to research and customize your own dates. As an example, Rick will sign up for Medicare on, or soon after, 6/1/2020 because his Medicate will start 9/1. If Rick is too late (after 12/1), he’ll have a Medicare penalty.

The annual events tab includes Medicare open enrollments, estimated tax payments, a budget and RIP checkup, and a medical (Obamacare) open enrollment.

Actions you can take include:

Download and personalize your Retirement Action Calendar.

Do a check of your RAP for 2018. How did you do? What will you change for 2019?

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here https://nosurprisesretirement.com/2017/07/09/first-blog-post/

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Danger, money mirage!

First a picture that’s kind of a mirage.

Georgia O’Keefe, Canyon Country, 1963. Phoenix Art Museum.

Fidelity says

Fidelity Investments recently published their second quarter 2018 Retirement Analysis . Fidelity administers over 30 million retirement accounts, so my suspicion would be that their results should be reflective of the total population of retirement account holders. For the second quarter of 2018, Fidelity found average account balances $104,000 for 401(k)s, $106,900 for IRAs, and $83,400 for 403(b)s.

For millennials, Fidelity determined an average IRA balance of $15,150.

So far, very positive, but there’s more. Fidelity has 168,000 401(k) millionaires and 156,000 IRA millionaires.

Money mirage

You may look at Fidelity’s figures, and possibly your own 401(k) or IRA, and feel reasonably good about the state of retirement savings. You are in a money mirage and seeing what is not real.

What makes the Fidelity figures (or yours!) a mirage has three parts:

Taxes – in a regular 401(k)/IRA/403(b), you will likely owe taxes on your withdrawals and that makes the money shrink, like water in a mirage as you get closer.
Price changes – if you are in mutual funds, your amount could go up but it could also go down. If the market goes down, that makes the money shrink, like water in a mirage as you get closer.
Longevity – the amount may look big, but it may need to last you for a 20 to 30 year retirement. Taking some out, year over year means the money shrinks, like… you get the idea.

Taxes

The problem with taxes on regular 401(k)/IRA/403(b)’s (let’s call them retirement savings), is that the more you withdraw, the more tax you will owe. Not only more tax, but if you withdraw enough from your retirement savings in a year, you may make your Social Security payments subject to tax. Depending on how much your MAGI is, you may make 50% to 85% of your Social Security taxable.

The $62,000 example

Now let’s say you’re a couple (the Example family!) with close to the average Social Security of $1400/person per month or about $33,700/year. The Examples’ budget and retirement income plan (see the RIP here) has them grossing $62,000/year so they will need about $28,300 from their 401(k). Now the mirage hits. The Examples are well over the standard deduction of $20,000 for a married couple, so there will be tax on the 401(k) distribution, plus they will exceed the Social Security MAGI so part of their Social Security benefits will be taxable. I eyeballed it (don’t try this at home if you don’t do a LOT of 1040’s) and it looks like the Examples will have approximately a $1,900 Federal tax liability. The mirage was the $28,300 from the 401(k) that turned out to be about $26,400 after Federal taxes. There may also be state income taxes that shrink the initial amount.

Price changes

If your retirement savings are in a mutual fund (non-money market) and the price goes up, we’re all happy. If the price goes down (remember 2007-2008?), we have the mirage of shrinking fund balances. If you are nearing retirement, this mirage can be a real problem unless you have some cash for the early years of retirement, so you don’t have to sell shares at a low price. Consult your financial planner to have a plan for this.

But I saw it with my own eyes!

We saw Fidelity’s decent average retirement plan balances and the impressive number of retirement plan millionaires, above. But what happens if they live too long?

Your retirement savings balance, like the average balances above, may sound fairly high, but once you start withdrawing funds, your accounts can deplete rapidly. Remember the Example family, above. They were planning to use approximately $28,000 from their retirement plans annually. Unfortunately, if they have an average 401(k) or IRA balance, that will only be possible for about three to four years before they are out of money and living solely on Social Security and any other sources of income.

And here’s a mirage-like Victor Vasarely (Tridim-mc, 1974) from the Phoenix Art Museum:

Actions you can take include:

Develop a retirement income plan and discuss it with your tax advisor and your financial planner.

Know what the tax impact of withdrawals will be to your income.

Manage your retirement budget with your income plan to avoid bad surprises.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Maybe MAGI is not a gift

We got to visit the Aalsmere flower auction facility near Amsterdam a few years ago. They have a cafeteria for visitors and workers, welcomed by what I call scary Chef!

The Gift of the Magi

The original Gift of the Magi is an O. Henry story about a young couple sacrificing their individual prized possessions to give the other a special Christmas gift. For Social Security and Medicare, MAGI is a whole different ballgame that gives you the potential opportunity to plan (a gift to yourself!) to avoid sacrificing (money.)

This blog post will be a little technical, but could contribute to tax savings when you plan for MAGI. I will try to keep it as entertaining as possible given the subject matter.

What is MAGI

MAGI is Modified Adjusted Gross Income and is calculated by taking your Adjusted Gross Income (AGI) and adding in tax-free income, like interest on state and municipal bonds. There are some other, less common items, that get added back also, for example savings bond interest excluded from income because it was used for post-secondary education; check with your tax advisor.

Why is MAGI important?

For pre-retirees, a higher MAGI may restrict your ability to contribute to a traditional pre-tax or a Roth IRA.

For retired people, a higher MAGI may subject some of your social security income to taxation and may cause you to pay higher Medicare Part B premiums. The Medicare higher premium, the Income Related Monthly Adjustment Amount, is called IRMAA (I pronounce it like the name, Irma.) The wind is called Mariah. (The Mariah link is fun, really.)

But I’m not rich!

Most of us aren’t rich, but MAGI can still affect us. A MAGI as low as $25,001 for a single person (or $32001 for a married couple) will start to subject Social Security payments to income taxes.

How can I plan around MAGI?

First the disclaimers – If you’re a wage earner, like me, your planning possibilities are limited. Small business owners have more control over wage versus business income and can exercise some control over timing of income. I have to warn you again to discuss planning with your qualified tax advisor; we are discussing generally available information here that will not directly apply to your personal tax situation.

For pre-retirees, you may be able to use a technique called the ‘backdoor Roth’ to fund a Roth IRA, regardless of MAGI. A good article from Ed Slott, an IRA expert, on backdoor Roth IRAs is here.

For both pre-retirees and retirees, the ways to lower MAGI are fairly straightforward:
-lower your W-2 and/or 1099-R income
-lower your tax-exempt income.

One way for retirees to lower 1099-R income is to take out less from the retirement accounts you have control over (IRA, SEP, 401(k), 403(b), etc.), subject of course to the Required Minimum Distribution (RMD) for those 70 ½ and over. If you have a Roth IRA, withdrawals from the Roth won’t count towards MAGI.

Zero coupon municipal bonds exist that would pay out no tax-exempt interest until maturity. Your financial advisor could help you plan the use of municipal zeros, instead of municipals paying semi-annual interest, to support MAGI planning.

If you have bank accounts, you could use withdrawals from savings accounts or CD’s as a substitute for the 1099-R income that you are avoiding.

Finally, selling mutual funds or stocks that have capital gains will contribute to AGI and MAGI only to the extent that you have a gain when you sell.

MAGI – gift or not?

I guess there are similarities to the Gift of the Magi because MAGI planning and executing requires you to give up something special, your time and perhaps payments to a tax advisor. The gift you get back (a gift to yourself and loved ones) is the tax and Medicare Part B premium savings from your efforts that could be significant.

Citroen

When I was a child I lived in France for a while courtesy of the USAF. Citroen cars were popular and this model of a DS in the window of a toy car shop in Haarlem, NL brought back memories.

Actions you can take include:

-Consider how MAGI can affect your tax situation pre- and post-retirement.

And if you have not seen the “Why you should read this blog…WIIFY” post, it’s here.

A correction

Back in the post Why not make money on your groceries? I thought a quote was from the movie ‘An Officer and a Gentleman’. A reader informed me it was from ‘A Few Good Men’. Thank you for the correction!

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.

Closeup on the Potential Social Security Surprise!

WIIFY – Quickly learn about getting from gross to net on Social Security so you don’t have an ‘income below expectations’ surprise.

We got a question from a reader on Medicare premiums being subtracted from Social Security. Medicare Part A has no premiums, but Medicare Part B does. (Trust me, you most likely need Part B, so you’ll be paying premiums.)

Social Security gross to net (or, ‘What’s my take home?’)
From the Medicare website:
“If you get Social Security or Railroad Retirement Board (RRB) benefits, your Medicare Part B (Medical Insurance) premium will get deducted from your benefit payment.”

So the arithmetic looks like:
Social Security gross monthly payment
-Less Medicare Part B premium (see below!)
-(Maybe) Less Medicare Part D premium (can pay directly to provider or have it deducted from Social Security
-Less any Federal tax withholding (see below, again!)
Social Security net monthly payment to you

Medicare premiums
Medicare Part B monthly premium ranges from $134 (most of us) to $428.60 (very few of us), depending on MAGI income (taxable income plus tax-exempt interest income). The premium is per person. To learn more specifics, see the Medicare Part B costs website.

Federal income tax on Social Security
Social Security can be taxable, depending on your ‘combined income’. 0-85% of your Social Security may be subject to tax. Sample scenario – you have $10,000 of Social Security gross income, and because of other income (pension, IRA withdrawals, interest) you have 85% of the Social Security gross included in income. That 85% is $8,500 and is taxed at your marginal rate (10%-39.6% depending on taxable income).

Up next – Look for the next update on Friday, July 21 at 12:30 PM.

Actions you can take:
-Read up on Medicare and Social Security on the links above or the books in Resources below.

Resources from your library or Amazon.com
Phil Moeller’s Get What’s Yours for Medicare: Maximize Your Coverage, Minimize Your Costs (The Get What’s Yours Series)

Questions, comments, or suggestions for retirement surprise areas you want to know more about?
-Leave a comment
-Use ‘Contact’, above, to send an email.