The government requires you to take your first required minimum distribution (RMD) from tax-deferred funds in the year you turn 72.
Because of their larger RMDs, retirees in higher income brackets frequently pay higher Medicare premiums. Reduce the amount of money in your tax-deferred accounts before you turn 72 if you want to avoid these large RMDs. The IRS has produced worksheets to help you determine your RMD.
Converting to a Roth IRA necessitates the payment of income taxes, but it reduces the balance in your tax-deferred accounts and lowers your required minimum distribution (RMD).
Traditional IRAs compel you to take minimum distributions, whereas Roth IRAs do not. As a result, you have more assets in your Roth but less income from the previously scheduled distributions. As a result of this conversion, you may be able to lower your Medicare premium by moving to a lower income band.
It is critical that you understand how to handle your money and what may or may not count against you, regardless of how you look at it or whatever path you intend to take.
Do Roth IRA withdrawals count as income for Medicare?
Will a transfer from my Roth IRA be considered income and subject me to an IRMAA penalty on my Medicare Parts B and D premiums? What about a traditional IRA withdrawal?
Your Medicare premiums will not be affected if you take tax-free Roth withdrawals. Traditional IRA distributions, on the other hand, are considered income in the computation that calculates those premiums.
How does Roth IRA affect Medicare?
Medicare beneficiaries who convert to a Roth IRA should anticipate to pay a higher Part B premium as a result of the conversion. If your taxable income rises above a specific level as a result of the conversion, you’ll have to pay an income-adjusted surcharge on Medicare premiums for a year or two.
What income is considered for Medicare premiums?
It’s possible. You pay extra for Medicare Part B, the health-insurance element of Medicare, if you are a “higher-income beneficiary,” as defined by Social Security. (Most Medicare Part A members don’t have to pay for hospitalization.)
Medicare premiums are calculated using your MAGI (modified adjusted gross income). That’s your total adjusted gross income plus tax-exempt interest, according to the IRS’s most current tax data available to Social Security. Social Security most likely used the tax return you filed in 2020, which outlines your 2019 earnings, to determine your Medicare cost for 2021.
If your MAGI was less than or equal to the “higher-income” threshold in 2019, which is $88,000 for an individual taxpayer and $176,000 for a married couple filing jointly, you will pay the “regular” Medicare Part B premium of $148.50 per month in 2021. Premiums climb with higher income, reaching a maximum of $504.90 per month if your MAGI is over $500,000 for an individual and $750,000 for a couple.
If a “life-changing event” caused considerable income decrease or financial upheaval in the previous tax year for example, if your marital status changed or you lost a job, pension, or income-producing property you can ask Social Security to alter your premium.
The Social Security website “Medicare Premiums: Rules for Higher-Income Beneficiaries” has more information.
Keep in mind
- You are not covered by the policy if you pay a higher premium “Hold harmless,” the provision that keeps most Social Security users from seeing their benefits reduced if Medicare rates rise. “Only persons who pay the standard Part B payment and have it deducted from their Social Security check are considered “hold harmless.”
- If you have Medicare Part D (prescription drug coverage), your premiums will also climb when your income rises.
Are IRA distributions subject to additional Medicare tax?
It’s crucial to remember that, while IRA distributions are excluded from investment income for tax reasons, they increase MAGI, which can lead to a taxpayer being subjected to the 3.8 percent Medicare levy.
How do IRA withdrawals affect Medicare premiums?
Individual retirement accounts, or IRAs, are a typical way for people to save for retirement. Traditional IRAs allow workers to deduct money from their paychecks when they deposit it into their account, but they must pay taxes when they withdraw it.
It may appear simple, but the timing of your withdrawal can have a significant impact on how much you pay in taxes and fees to the government.
Before you take money out of your traditional IRA, there are five things you should know:
Once you reach the age of 72, you must make minimum withdrawals from traditional IRAs.
The tax benefit on conventional IRA contributions comes at the cost of a time limit on when you can remove money from the account. The government charges a 10% tax penalty on money withdrawn before age 59 1/2 to dissuade people from tapping into their accounts before retirement.
“IRAs are intended for retirement, and the government wants to make sure the money is put to good use,” says Stuart Chamberlin, president of Boca Raton-based Chamberlin Financial Inc.
The penalty for early withdrawal is in addition to the income taxes that must be paid. For someone in the 12 percent tax band, the additional penalty might eat up roughly a quarter of the money removed due to taxes and penalties.
While you should avoid withdrawing funds from your IRA too soon, waiting too long to begin distributions can also be a mistake.
Mike Piershale, president of Piershale Financial Group in Barrington, Illinois, explains that when people retire, they frequently have a ‘window of opportunity’ where they have low income years.
According to Piershale, the first years of retirement are ideal for converting money from a standard IRA to a Roth IRA. The money you convert will be subject to taxes, but a Roth IRA will allow the fund to grow tax-free. “In most circumstances,” he says, “it may make sense to convert just enough to keep you in the same tax rate,” emphasizing that you don’t want to end up in a higher tax bracket by accident.
Another reason to take money out of an IRA sooner rather than later is to put off filing for Social Security. From full retirement age to age 70, you get an 8% increase in payments for every year you wait to claim. You can delay the commencement of Social Security and maximize your benefits by taking money out of an IRA before you turn 70.
Whether you took money out of your IRA early or not, everyone with a traditional IRA must start taking required minimum distributions, or RMDs, at the age of 72. The CARES Act, which was passed in response to the COVID-19 epidemic and waived the need for 2020, is the only exemption to this regulation.
Failure to take these annual dividends in any other year results in a tax penalty equal to 50% of the required distribution amount. A individual with a $700,000 retirement account may have an RMD of roughly $27,000, according to Piershale. That person would be fined $13,500 if they missed the deadline to withdraw the RMD.
“The money in these accounts hasn’t been taxed yet,” says John Mantia, co-founder and director of finance at PARCO, a Washington, D.C.-based organization that assists federal employees with their retirement benefits. The government ensures that this money is not tax-deferred permanently by mandating RMDs.
The RMD is also why, during a low-income time early in retirement, it makes sense to convert or withdraw money from a traditional IRA. RMDs will be lower later in life if more money is converted or withdrawn before age 72. Reduced taxes could result from the lower RMD.
“Plan out how much to move over to a Roth account if you don’t need the money,” Mantia suggests. However, until you reach the age of 72, money transferred to a Roth account is not considered an RMD.
RMDs and other IRA withdrawals can effect Medicare payments in addition to taxes. The normal Part B premium for 2020 is $144.60 per month, but those with higher incomes may have to pay much more.
People with adjusted gross incomes of more above $87,000 will begin paying higher Medicare Part B and prescription medication premiums in 2020. Additional premiums will be charged to married couples filing jointly with adjusted gross incomes of $174,000 or more. When establishing your income level, the government looks back two years. For example, data from the 2018 tax year is utilized to calculate Medicare premium payments in 2020.
Single taxpayers with incomes of $500,000 or more can pay as much as $491.60 per month for these increased premiums, which start at $202.40 per month and go up to $491.60 per month.
Although money in a standard IRA is supposed to be saved for retirement, the government allows workers to use it for specific purposes without penalty.
“Generally, you can’t withdraw from a regular IRA until you’re 59 1/2,” Piershale explains, though there are exceptions. The following are some of the exceptions:
Furthermore, the CARES Act permits COVID-19 victims to withdraw up to $100,000 without penalty in 2020. Those who have been diagnosed with COVID-19 or who have a spouse or dependent who has been diagnosed with a CDC-approved test are eligible for this option. Those suffering from a variety of negative repercussions from the epidemic, such as job loss or reduced hours, can also make a penalty-free withdrawal.
Although there is no penalty for money utilized for a qualified purpose, income taxes still apply. The IRS permits participants to spread their income tax payments over three years for withdrawals relating to COVID-19.
Another way to avoid the penalty is to make at least five substantially equal recurring payments, as permitted by IRS regulation 72. (t). “It’s only used by a small percentage of people,” Chamberlin says. Because changing a payment schedule after it has begun can result in retroactive fines, 72(t) distributions should only be attempted with the help of a finance specialist.
Taking money from a retirement account should not be taken lightly. A financial advisor can help you figure out if you qualify for penalty-free withdrawals and, if so, how that will influence your ability to retire comfortably in the future.
What is included in MAGI for Medicare premiums?
Your monthly Medicare Part B (medical insurance) and Medicare prescription drug coverage premiums must be adjusted as a result of the law. This affects less than 5% of Medicare beneficiaries. The majority of consumers do not pay higher insurance premiums.
If You Have a Higher Income
If your income is higher, you will have to pay a larger premium for Medicare Part B and Medicare prescription medication coverage. The increased payment is referred to as the income-related monthly adjustment amount. The following is how it works:
Part B contributes to the cost of your doctor’s services and outpatient care. Other medical services, such as physical and occupational therapy, as well as certain home health care, are also covered. The government covers a large amount of the Part B premium for most beneficiaries roughly 75% and the beneficiary pays the remaining 25%.
You’ll pay a higher proportion of the overall cost of Part B if we conclude you’re a higher-income beneficiary based on the income you regularly disclose to the Internal Revenue Service (IRS). Depending on what you report to the IRS, you’ll pay monthly Part B premiums equal to 35, 50, 65, 80, or 85 percent of the entire cost.
Prescription drug coverage provided by Medicare assists you in paying for your medications. The government pays a large amount of the overall cost of this coverage for most recipients, and the beneficiary pays the rest. The cost of a prescription drug plan varies based on the plan and whether you are eligible for Extra Help, often known as a subsidy, to help with your Medicare prescription drug coverage costs.
If you have Medicare prescription medication coverage and are a higher-income beneficiary, you’ll pay monthly premiums plus an additional amount based on what you report to the IRS. Because individual plan premiums vary, the amount is calculated using a basic premium, according to the legislation. The additional amount you pay is tied to the base beneficiary premium, not your own. We deduct this amount from your monthly Social Security checks if you’re a higher-income recipient, regardless of how you regularly pay your monthly prescription plan premiums. You’ll get a second bill from another federal agency, such as the Centers for Medicare & Medicaid Services or the Railroad Retirement Board, if the amount is more than your monthly Social Security payment or if you don’t get monthly installments.
How Social Security Determines You Have a Higher Premium
The most recent federal tax return provided by the IRS is used by Social Security. If you have to pay higher premiums, we calculate the adjustments using a sliding scale depending on your modified adjusted gross income (MAGI). Total adjusted gross income plus tax-exempt interest income is your MAGI.
If your MAGI is larger than $176,000 and you file your taxes as “married, filing jointly,” you’ll pay higher Part B and Medicare prescription drug coverage rates. If you file your taxes under a different status and your MAGI is more than $88,000, your premiums will be higher (see the Modified Adjusted Gross Income (MAGI) chart below for an estimate).
If you must pay higher premiums, we will send you a letter stating the amount(s) of your premium(s) and the basis for our decision. You’ll pay greater rates for both Medicare Part B and Medicare prescription drug coverage if you have both. You’ll pay an income-related monthly adjustment amount just on the benefit you have if you only have one Medicare Part B or Medicare prescription medication coverage. If you decide to join in the other program later in the year and already pay an income-related monthly adjustment amount, we’ll apply an adjustment to the other program automatically when you enroll. We won’t write you another letter to explain how we arrived at this conclusion in this circumstance.
Remember that if your income does not above the aforementioned thresholds, this rule does not apply to you.
Your Tax Return
Let us know if you changed your tax return and it affects the income we use to calculate the income-related monthly adjustment amounts (your MAGI). A copy of your revised tax return as well as your IRS acknowledgment receipt are required by Social Security. With the information you supply, we’ll update our records and, as needed, correct or delete your income-related monthly adjustment amounts.
If Your Income Has Gone Down
- A tragedy or other unforeseen occurrence caused you or your spouse to lose income-producing property.
- A scheduled halt, termination, or rearrangement of an employer’s pension plan affected you or your spouse.
- Because of a company’s liquidation, insolvency, or restructuring, you or your spouse got a settlement from a current or previous employer.
If any of the following applies to you, we’ll need proof of the occurrence and the resulting loss of income. A death certificate, a note from your company about your retirement, or something similar should be included in the documents you supply. You must show us a signed copy of your federal income tax return for the year in question if you filed one. To report a major life-changing event, fill out Form Medicare Income-Related Monthly Adjustment Amount Life-Changing Event. You can also utilize Form SSA-44 to request a reduction in your income-related monthly adjustment amount if your income has decreased.
Monthly Medicare premiums for 2021
For 2021, the usual Part B premium is $148.50. The following chart applies to you if you’re single and filed an individual tax return or married and filed a joint tax return:
If you were married during the taxable year and lived with your spouse at some point throughout the year, but filed a separate tax return, the chart below applies to you:
If You Disagree With Our Decision
You have the right to dispute our judgment on your income-related monthly adjustment amounts if you disagree with it. The fastest and simplest option to appeal your decision is to do so online. You can file your appeal online and submit supporting papers electronically. Even if you live outside the United States, you can file an appeal online.
You can also file an appeal by completing a Request for Reconsideration (Form SSA-561-U2) in writing, or by contacting your local Social Security office. You can use the appeal form online or request a copy by calling 1-800-772-1213 (toll-free) (TTY 1-800-325-0778). If you’re requesting a fresh decision because one of the events listed caused your income to decrease, or if you’ve shown us the information we used is incorrect, you don’t need to submit an appeal.
You must correct the information with the IRS if you disagree with the MAGI amount we got from the IRS. If we decide that you are required to pay a greater amount for Medicare prescription drug coverage and you do not have it, you must contact the Centers for Medicare & Medicaid Services (CMS) at 1-800-MEDICARE (1-800-633-4227; TTY 1-877-486-2048) to fix the situation. CMS provides Social Security with information regarding your prescription drug coverage.
Learn More
The Medicare & You 2021 Handbook is available to read. Visit the Medicare website or call 1-800-MEDICARE to enroll in Medicare prescription drug coverage or learn more about what Medicare covers (1-800-633-4227; TTY 1-877-486-2048). Your state’s SHIP (State Health Insurance Counseling and Assistance Program) can also assist you with Medicare questions. You may locate the contact information for your local SHIP in the back of your Medicare & You 2021 Handbook online or request it when you call.
If you have limited resources and income, you may be eligible for Extra Help with Medicare prescription drug coverage costs, such as monthly premiums, annual deductibles, and prescription copayments. For more information, go to Extra Help with Medicare Prescription Drug Costs.
Do Roth IRA distributions affect Magi?
Almost all withdrawals from a traditional IRA effect your income, and thus your MAGI. After-tax IRA contributions are an exception. If 40% of your account is made up of after-tax contributions, 40% of your withdrawal will be tax-free and will not affect your MAGI. With a Roth, withdrawals of your original contributions are never considered taxable income, so taking them out again has no impact on your MAGI. Nothing you withdraw from a Roth is taxable if you’re over 59 1/2 and have had the account for more than five years.
Does Roth conversion affect Social Security?
- You anticipate a lower tax rate in retirement. Roth conversions aren’t a good idea if you’re in a high federal tax bracket now and expect your retirement income to be low enough that your tax rate will be lower as well. However, you still have to worry about what Congress will do with tax rates in the coming years.
- Taxes are paid in advance. Do you have enough free cash flow to handle the additional tax burden that a Roth conversion would entail? If you have high-interest credit card debt or a small emergency fund, you should address those issues before racking up a larger tax burden.
- Concerns about Social Security. If you’re already collecting Social Security, your income determines whether or not your benefit is taxable, as well as how much it will be taxed.
Your taxable income will increase the year you make a Roth conversion, which might result in a portion of your Social Security benefit being taxed or pushing you into a situation where more of your benefit is taxed.
- Monthly Medicare Part B and Part D rates are increasing. Once you’ve signed up for Medicare, the monthly Part B and Part D premiums you pay are determined by your modified adjusted gross income (MAGI) from two years ago. If you plan to enroll in Medicare at the age of 65, a Roth conversion at the age of 63 may result in higher starting Medicare premiums than the standard rates. Your premiums reset every year, based on your taxable income from the previous two years, so if your income doesn’t stay high, you’ll rapidly revert to lower rates.
- There is little protection from bankruptcy. A creditor cannot touch money in a 401(k), but the protection of IRA funds is limited. In 2021, the total amount of IRA assets protected from creditors is $1,362,800. The cap is reset every three years to account for inflation, with the next adjustment scheduled for April 2022.
How do I get my Medicare premium reduced?
Yes. In the event that your financial circumstances change, you can petition to Social Security for a reduction in your Medicare premium.
To determine if you are a “higher-income beneficiary,” Social Security looks at tax data from the previous year usually the most current data it has from the IRS. If this is the case, you will be charged a higher premium for Medicare Part B (health insurance) and, if you have it, Part D. (prescription drug coverage).
However, because a lot can happen in a year, Social Security allows you to have your premiums reviewed if you have a “life-changing event” that has a major impact on your income, such as:
- A financial settlement with an employer that inflated your salary one year but does not reflect your current financial status (for example, due to a firm reorganization or bankruptcy).
To request a Medicare premium reduction, call 800-772-1213 to make an appointment at your local Social Security office, or fill out form SSA-44 and send or deliver it to the office. You’ll need to provide a copy of your most recent tax return as well as proof of the life-altering event (the SSA-44 includes a checklist of acceptable documentation).
- Increases from the normal premium of $148.50 per month in 2021 begin with incomes of more than $88,000 for an individual and $176,000 for a married couple filing jointly.
Does Social Security count as income for Medicare?
We published a primer on the basics of MAGI last week, outlining how the standards for calculating household size and income to determine Medicaid and CHIP eligibility have been linked with Marketplace subsidies. The transition to MAGI has resulted in a lot of changes in Medicaid and CHIP, but there are some differences that are unique to Medicaid and CHIP. Today, we’ll get into one of MAGI’s more perplexing aspects: when does Social Security income count?
Retirement, survivor benefits, and disability payments are all part of Social Security income. In most cases, only taxable sources of income are used for calculating household MAGI-based income. Tax filers’ Social Security income, regardless of whether it is taxable or not, is counted. However, if they are compelled to file taxes, Social Security income is only recorded for tax dependents – those individuals claimed as a tax exemption on someone else’s tax return. SSDI (Social Security Disability Insurance) is sometimes mistaken with SSI (Supplemental Security Income) (SSI). Under no circumstances is SSI used to calculate a household’s MAGI. Let’s begin there.
- Supplemental Security Income (SSI) vs. Social Security Disability Income (SSDI) (SSI). SSDI is a benefit paid by the Social Security Trust Fund to those who are fully handicapped and have paid Social Security taxes for a long time. If a parent obtains SSDI, dependent children may be eligible as well. SSI, on the other hand, is not a Social Security payment; rather, it is a supplemental income program for the elderly, blind, or disabled who have little or no income. SSI payments, like TANF, are always excluded from MAGI-based income. SSDI is included in MAGI-based income for tax filers, much like other forms of Social Security income. Children and tax dependents are only counted if they are obligated to file taxes, as explained below.
- Counting taxpayers’ Social Security benefits. In order to be eligible for Medicaid and Marketplace financial help, a tax filer’s household income must include all sources of Social Security income, whether taxable or not. Because MAGI income includes non-taxable Social Security income, some people who aren’t required to file taxes may be denied Medicaid due to having too much income. Individuals must attest that they will file taxes for the applicable coverage year in order to qualify for Marketplace financial assistance in these scenarios. It makes no difference whether they haven’t filed before.
- Children’s and tax dependents’ Social Security income is counted. If the individual is obliged to file a federal income tax return, Social Security income only counts toward the total household income for children and tax dependents. Even if the check is made out to the parent or guardian, a child’s survivor benefits or SSDI only count if the youngster is compelled to submit taxes. Children have a tax-filing threshold of $6,300 in earned income or $1,000 in unearned income in 2015, while other tax dependents have a threshold of $3,950.
This regulation is perplexing because Social Security income is taken into account “Although it is referred to as “unearned income,” it is rarely taken into account when assessing whether a child or tax dependant is needed to submit taxes. Only taxable Social Security is utilized to determine if an individual meets the tax-filing threshold, according to IRS guidelines. Only if half of a single person’s Social Security income plus other income exceeds $25,000 is there taxable Social Security income. As a result, if a child or tax dependent’s main source of income is Social Security payments, he or she is unlikely to be needed to file a federal income tax return, and the benefits will not be included in the total household income. If the dependent is required to file income taxes (for example, because of earnings from a summer employment), the total household income will include all of the dependent’s earnings, including non-taxable Social Security benefits.
Social Security income is counted for individuals who are claimed as a tax dependent by someone other than a parent or spouse, regardless of whether they are obligated to file taxes (See Medicaid/CHIP Exception #1). In these cases, regardless of whether the individual satisfies the tax-filing requirement, all of the individual’s income, including all Social Security payments, counts toward his eligibility.
The extended short has examples of various circumstances, which may be useful in learning how Social Security benefits are calculated. Stay tuned for tomorrow’s blog, where we’ll discuss some of MAGI’s more perplexing elements. The Robert Wood Johnson Foundation deserves special recognition for its sponsorship of this project “This blog series is based on the book “Getting MAGI Right: A Primer on the Differences That Apply to Medicaid and CHIP.”