Medicare Income-Related Monthly Adjustment Amount (IRMAA) Surcharge – What Does It Mean, What Can I Do, and How?

Medicare Income-Related Monthly Adjustment Amount (IRMAA) Surcharge – What Does It Mean, What Can I Do, and How?

 

 

Co-written with Jeffrey Barnett

 

The first question on many retirees’ minds is how to pay for expensive healthcare costs and health insurance when you’re no longer covered by the employer plan you relied on throughout your career. Medicare is the U.S. government’s answer for supporting healthcare costs throughout retirement. While you might have already enrolled in Medicare or are at least looking forward to beginning benefits at age 65, you may not know how Medicare premiums work. Let’s explore Medicare premiums and an important potential speedbump known as IRMAA.

 

What Is IRMAA?

 

To provide some background, approximately 75% of the costs of Medicare Part B (Medical Insurance) and Part D (Prescription Drug) are paid directly from the General Revenue of the Federal Government, with the remaining 25% covered through monthly premiums paid by Medicare enrollees. If you receive Social Security or Railroad Retirement Board benefits, your Medicare Part B premiums are typically deducted automatically from your monthly benefits. For those who don’t receive these benefits, you’ll receive a bill to pay your premiums instead. Medicare premiums increase as your income grows through Income-Related Monthly Adjustment Amount (IRMAA), which is an additional surcharge for higher income individuals on top of the 2021 Medicare Part B baseline premium of $148.50.

 

Medicare premiums and any surcharges are based on your filing status and Modified Adjusted Gross Income (MAGI) with a two-year lookback (or three years if you haven’t filed taxes more recently). That means your 2021 premiums and IRMAA determinations are calculated based on MAGI from your 2019 federal tax return. MAGI is calculated as Adjusted Gross Income (line 11 of IRS Form 1040) plus tax-exempt interest income (line 2a of IRS Form 1040). The table below details the base premium amount you’ll pay for Medicare in 2021 depending on your MAGI and filing status, inclusive of any additional IRMAA surcharge.

 

 

Fortunately, the Social Security Administration (SSA) tracks these numbers for you and uses MAGI data from the IRS. For every year that they determine IRMAA applies to you, you’ll receive a pre-determination notice explaining what information was used to make the determination and what to do if individuals feel the finding is incorrect, like due to a life-changing event as defined by the SSA. After 20 or more days, the SSA sends another notice with additional information regarding your appeals rights. For the instances you feel an incorrect determination was made, you can request a “New Initial Determination.”

 

Am I Eligible to Request a New Initial Determination?

 

There are five qualifying circumstances where an individual may be eligible to request a “New Initial Determination.” They are:

  1. An amended tax return since original filing
  2. Correction of IRS information
  3. Use of two-year-old tax return when SSA used IRS information from three years prior
  4. Change in living arrangement from when you last filed taxes (e.g., filing status is now “married filing separately” but you previously filed jointly)
  5. Qualified life-changing event(s)

 

According to the SSA, a Life-Changing Event (LCE) can be one or more of the following eight events:

  • Death of spouse
  • Marriage
  • Divorce or annulment
  • Work reduction
  • Work stoppage
  • Loss of income-producing property
  • Loss of employer pension
  • Receipt of settlement payment from a current or former employer

 

A common scenario we often see is with new retirees age 65 or over where income is much lower in retirement than it was two years ago, but the SSA determines that the IRMAA surcharge should be applied to your premium costs given the lookback period. Fortunately, an exception can be requested under the “work stoppage” LCE, and we can help you navigate that process. Luckily, this is typically irrelevant after the first or second year of retirement since post-retirement income is often significantly reduced and naturally falls below the IRMAA threshold. Another common scenario for retirees is having portfolio income that pushes you above the IRMAA tiers. However, it’s important to point out that portfolio income from things like capital gains or Roth conversions are not allowable exceptions to request for the IRMAA surcharge in a high-income year.

 

If you don’t qualify to request a new initial determination based on the 5 qualifying circumstances noted above, you also have the right to more formally appeal the determination, which is also known as requesting a reconsideration.

 

 

Requesting a New Determination

 

If any of the above life-changing events apply, individuals are likely eligible to request a new initial determination by calling their local Social Security office or, alternatively, completing and submitting this form for reconsideration along with appropriate documentation. We highly recommend calling the Social Security hotline at 800-772-1213 to discuss if more than one LCE applies to you, if you have questions about why IRMAA applies to you, or if you have questions about requesting a reconsideration.

 

We know that Medicare can be tricky and that this only scratches the surface, so we also encourage you to contact us if you have any questions. We regularly serve as a resource for questions around enrolling for Medicare along with many of the other factors involved in planning for retirement, and we are happy to help you as those questions move to the forefront.

Sources:
Income Thresholds:  https://www.medicare.gov/your-medicare-costs/part-b-costs

Life-Changing Event: https://www.ssa.gov/OP_Home/handbook/handbook.25/handbook-2507.html

Determination Notices: https://secure.ssa.gov/poms.nsf/lnx/0601101035

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

The Ultimate Guide to 401k Rollovers

The Ultimate Guide to 401k Rollovers

Introduction written by: Daniel Hill

Meeting new clients is one of my favorite parts of working in wealth management. They come to us from all walks of life, and there’s a certain fascination associated with discovering each client’s journey that brought them to Merriman. Part of that discovery process involves understanding a client’s financial situation and looking at their previous work history. We see asset statements for IRAs, brokerage accounts, and, more often than not, an old 401(k) plan from a previous employer that’s been hanging around. Trust me, I’ve been there. Everyone switches jobs, and in the hustle and bustle of getting set up with a new company, the previous company’s 401(k) plan is left to its own devices with the assumption that it’ll continue to grow in value. But at what cost?

There are several options you can pursue in handling your old 401(k). We’ve put together a great tool to help you decide what to do: The Ultimate Guide to 401(k) Rollovers! We discuss your options, ranging from doing nothing to rolling your 401(k) into a traditional IRA. We walk through the advantages and disadvantages of each option as well as what to think about before making a decision. Every person has a different set of circumstances that must be taken into consideration, so ultimately, the decision you make has to be the one that is best for you. As always, if you find yourself wanting to speak with an expert, don’t hesitate to reach out to us at Merriman.

 

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

How Do Incentive Stock Options (ISOs) Impact Alternative Minimum Tax (AMT)?

How Do Incentive Stock Options (ISOs) Impact Alternative Minimum Tax (AMT)?

 

One of the most common areas where we see clients introduced to Alternative Minimum Tax is when Incentive Stock Options (ISOs) enter the financial picture.  To learn more about AMT and how it is calculated, so you can avoid a shock, check our blog post from last week.

ISOs can be a tremendous benefit to creating wealth, but they are often misunderstood and can pack a large surprise if not appropriately planned for.  Here are a few key terms to get us started:

  • Grant Date/Amount– Original date and number of shares awarded
  • Vesting Date– The date at which you are allowed to exercise your options
  • Exercise Price– Price paid for options, usually discounted from the current share price.
  • Bargain Element– Difference between exercise price and fair market value (FMV); drives potential AMT liability

ISO preferential tax treatment is attained when the shares are sold one year after exercise and two years after grant. When this criterion is met, the gains upon the sale will be considered long-term capital gains, as opposed to short-term gains which are taxed at current income rates.

 

Qualifying vs Disqualifying Disposition:

 

Qualifying Disposition
  • Exercise and sell one year after exercise and two years after grant – AMT liability in the year you exercise, and gains are considered long-term capital gains
  • Exercise and hold – AMT liability in the year you exercise but no additional immediate tax liability because the shares have yet to be sold

 

Disqualifying Disposition:
  • Exercise and sell within one calendar year – no AMT liability and gains are taxed as regular income
  • Exercise and sell within 12 months, across two calendar years – AMT liability in the year you exercise, and gains are taxed as regular income
  • Exercise and sell more than one year from exercise but less than two years from grant – AMT liability in the year you exercise, and gains are split between regular income rates for the bargain element and capital gains depending on holding period

 

The AMT tax liability mentioned in the scenarios above is determined based on the difference between the exercise price and the fair market value (FMV) of the shares on the date of exercise. AMT may result in a larger tax bill than a typical year without exercising options and thus will directly affect your household’s cash flow.  The good news is that when you end up paying AMT related exercising ISOs, you will likely receive an AMT tax credit, which can be used to offset your federal income tax bill in future years.  This is a great reason why involving a CPA to help keep track of all the moving pieces is highly recommended.

The 83(b) Election is an alternative approach to divesting company stock. If your company allows, you have 30 days from the grant date to notify the IRS and your company of the 83(b) election. This involves paying tax on the exercise price from the grant at regular income rates; there would be no AMT implication and depending on when you sell the shares, you would later realize short- or long-term capital gains. For shares which you expect to increase in value, this can provide a fantastic tax break. This is however considered a risky approach because the shares could lose value and you would have overpaid on taxes by making this election.

Please reach out to us if you would like to work through your specific situation.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

How Do I Correct Excess Roth IRA Contributions?

How Do I Correct Excess Roth IRA Contributions?

 

Co-written by: Scott Christensen & Katherine Li

 

Contributing to a Roth IRA is a great way to receive tax benefits for retirement savers. If you already do or are planning to take advantage of this tax savings vehicle, it is important to familiarize yourself with the rules that govern these accounts. The IRS has put in place strict limits regarding the amount that individuals can contribute to their Roth IRAs, as well as income limits for determining who qualifies.

 

If you are a single tax filer, you must have Modified Adjusted Growth Income (MAGI) under $140,000 in order to contribute to your Roth IRA. The amount you can contribute to your Roth IRA begins to phase out starting at a MAGI of $125,000; if your MAGI is greater than $140,000, you can no longer contribute to the Roth IRA. For those who file as married filing jointly, your MAGI must be under $208,000 in order to contribute. The phaseout range in this case applies to those with a MAGI between $198,000 and $208,000. The maximum IRA contribution in either case is $6,000 for those under 50 and $7,000 for those 50 and older.

 

As a result of these strict limits, it is easy for taxpayers to overcontribute. So what happens when taxpayers contribute in excess of their contribution limit?

 

For every year that your excess contribution goes uncorrected, you must pay a 6% excise tax on the excess contribution. In order to avoid the 6% tax penalty, you must remove the excess contributions in addition to any earnings or losses on that excess contribution by the tax filing deadline in April. To determine your earnings on your excess contribution, you can use the net attributable income (NIA) formula.

 

Net income = Excess contribution x (Adjusted closing balance – Adjusted opening balance) / Adjusted opening balance

 

Note: If you find that you have losses on your excess contribution, you can subtract that loss from the amount of your excess contribution that you have to withdraw.

 

Reasons for Overcontribution

 

  • You’ve contributed more than the annual amount allowed.
    • Remember that the $6,000 and $7,000 dollar maximum applies to the combined total that you can contribute to your Traditional and Roth IRAs.
  • You’ve contributed more than your earned income.
  • Your income was too high to contribute to a Roth IRA.
    • Unfortunately, single tax filers who make $140,000 or more and those who are married filing jointly who make $208,000 or more are unable to contribute to a Roth IRA.
  • Required minimum distributions (RMDs) are rolled over.
    • RMDs cannot be rolled over to a Roth IRA.
      • If it is rolled over to a Roth IRA, the amount will be treated as an excess contribution.

 

Removal of Excess Prior to Tax Filing Deadline

 

If you find that you have overcontributed prior to filing your tax return and prior to the tax filing deadline, you can remove your excess contributions before the tax filing deadline (typically April 15) and avoid the 6% excise tax. However, your earnings from your excess contribution will be taxed as ordinary income. Additionally, those who are under 59 and a half will have to pay a 10% tax for early withdrawal on earnings from excess contributions.

  • Keep in mind that it is your earnings that are subject to an ordinary income and early withdrawal tax, not the amount of your excess contribution.

 

If you find that you have overcontributed after filing your tax return, you can still avoid the 6% excise tax if you are able to remove your excess contribution and earnings and file an amended tax return by the October extended deadline (typically October 15). 

 

Recharacterization 

 

Recharacterization involves transferring your excess contribution and any earnings from your Roth IRA to a Traditional IRA. In order to avoid the 6% excise tax, you would have to complete this transfer process within the same tax year. It is also important to note that you can’t contribute more than your total allowable maximum contribution. Thus, you must make sure that you can still contribute more to your Traditional IRA prior to proceeding with recharacterization.

 

Apply the Excess Contribution to Next Year

 

You can offset your excess contribution by lowering the amount of your contribution the following year by the excess amount. For example, say that you contributed $7,000 to your Roth IRA when the maximum amount that you could contribute was $6,000. The next year, you can offset this excess amount of $1,000 by limiting your contribution to $5,000. You are, however, still subject to the 6% excise tax due to the fact that you were unable to correct the excess amount by the tax filing deadline, but you won’t have to deal with withdrawals. 

 

Withdraw the Excess the Next Year

 

If you choose to withdraw the excess the following year, you will only have to remove the amount of your excess contribution, not any earnings. However, you will be subject to a 6% excise tax for each year that your excess remains in the IRA.

 

These rules can be confusing to navigate which is why we recommend involving your tax accountant or trusted advisor in these situations. We are happy to connect you with a Merriman advisor to discuss your situation.

 

 

Sources:

https://www08.wellsfargomedia.com/assets/pdf/personal/goals-retirement/taxes-and-retirement-planning/correct-excess-IRA-contributions.pdf

https://www.nerdwallet.com/article/investing/excess-contribution-to-ira

https://investor.vanguard.com/ira/excess-contribution

https://www.fool.com/retirement/plans/roth-ira/excess-contribution/

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

 

Demystifying Retirement Income

Demystifying Retirement Income

 

You’ve worked hard. You’ve saved your pennies and watched every cent. Yet now that retirement is just around the corner, you’re second guessing whether you’re truly ready.

We see this often at Merriman. Near-retirees get cold feet not because they’re unprepared for retirement but because they’re unsure how to manage their retirement income. There’s less room for mistakes without a salary coming in. At the same time, retirement is full of financial uncertainties, ranging from personal health to the economy.

The solution isn’t to delay the retirement you’ve worked hard to secure. If you want to feel financially secure heading into retirement, start by learning the ins and outs of your retirement income.

 

How Much Income Do You Need in Retirement?

Outliving your savings is a top fear for retirees. Rather than letting worry consume you, do the math to understand your retirement budget. Account for major budget items like housing, transportation, and healthcare along with variable expenses. Then, take stock of your retirement benefits to see how they stack up.

Is there a big gap? Consider how you can reduce living expenses in retirement. Housing is a major expense, and many older adults are paying for more housing than they need. Downsizing saves money and cashes out home equity to put towards retirement savings. However, this only works if you have enough equity to make selling worthwhile. To estimate home equity, subtract the mortgage balance from the home’s current market value.

After housing, recurring bills and lifestyle expenses have the biggest impact. Rather than assuming small expenses don’t make a dent, use a budget to see how it all adds up and then adjust as needed.

 

Understanding Retirement Income Sources

Now that you understand the expenses side of the equation, let’s examine retirement income.

 

How to calculate Social Security benefits

Social Security retirement income depends on two main factors: lifetime earnings and the age you claim benefits. Filing early reduces benefits whereas delaying past full retirement age increases Social Security payments. Estimate your Social Security benefits online.

 

What about pensions?

Workers with a pension enjoy a second fixed income source in retirement. Pension plans distribute monthly payments according to a vesting schedule. Making the most of a pension requires understanding minimum distributions, age requirements, and other fine print to maximize your payout.

 

Other fixed income sources in retirement

In addition to Social Security and pension plans, retirees rely on fixed-income investments for income generation and capital preservation.

Fixed income investments include:

  • Bonds and bond funds
  • Certificates of deposit
  • Fixed annuities
  • Mortgage-backed securities
  • Preferred stock or securities

 

How to Supplement Fixed Retirement Income

Fixed-income sources provide stability and peace of mind. They don’t, however, keep up with rising costs of living. To maintain their standard of living over time, retirees need diversified income.

 

Building a balanced investment portfolio

It’s standard for near-retirees to shift asset allocation towards low-risk investments. However, stocks are still an essential part of a balanced portfolio due to the return potential. An experienced financial advisor can determine the right asset allocation for your goals. They’ll also develop a withdrawal strategy to maximize retirement savings. Common approaches include the 4% withdrawal rule, fixed-dollar withdrawals, fixed-percentage withdrawals, systematic withdrawal plans, and withdrawal “buckets.”

 

Working in retirement

Many older adults are starting businesses for flexible retirement income. The best businesses for retirees are low-risk and low-cost, such as consulting in a field where you have niche experience. Beyond less financial risk, consulting businesses are easy to start: Simply file a “doing business as,” also known as a DBA, with the Washington Secretary of State to operate as a sole proprietor under your brand.

 

Retirement shouldn’t feel like the great unknown. If you feel like you’re walking into retirement without a plan, contact Merriman to learn how we can help. Merriman’s fee-only services will help you clarify your retirement goals and understand your options for achieving them. Contact us toll-free at 800-423-4893 or email info@merriman.com to learn how you can invest wisely and live fully.

 

 

 

Written exclusively for Merriman.com by Katie Conroy.
Katie Conroy is the creator of Advice Mine. She enjoys writing about lifestyle topics and created the website to share advice she has learned through experience, education and research.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Navigating Healthcare Options

Navigating Healthcare Options

 

We strive to deliver peace of mind to our clients, not just about investments and taxes but about everything that touches their financial lives. One subject that continually comes up is healthcare. How will I be able to afford healthcare? Should I work until age 65 so that I qualify for Medicare? To help answer this question, we partner with outside experts to help our clients evaluate different healthcare options. We spoke to Ed Steffens at Propel and asked about health insurance through the Exchange versus COBRA.

 

How do you help your clients?

I help clients navigate their options with individual healthcare, Medicare, life insurance, and long-term care insurance.

 

COBRA vs Affordable Care Act (ACA)

Since the rate increases in the individual market back in 2017, COBRA is usually the better option, depending on the tax credits (subsidies) available to you. If you have to pay full price on the ACA exchanges, COBRA plans tend to be better. The network of doctors with the COBRA plan option has fewer limitations and is generally available throughout the US. These networks offer coverage in and of network, with higher costs using an out of network doctor.

ACA plans, on the other hand, use more restrictive networks of doctors. Generally, your available network is your home area and surrounding areas. There is no coverage out of network, with exception to true emergencies. In this case, ER and ambulance are covered anywhere in the country.

Before you choose a COBRA or ACA plan, spend time with a professional and/or on the healthcare website: https://www.healthcare.gov/glossary/exchange/ and www.wahealthplanfinder.org.  Subsidies are estimated based on the current year of total estimated MAGI. When determining MAGI, your income includes unemployment benefits and your spouse’s income. If the tax credits are deep enough, ACA may end up being a better option than COBRA.

 

When should people reach out to you?

The sooner the better. Separation from service, marriage, death, permanent move, and the birth of a child are all qualifying events. It might just be a 10-minute call. If tax credits are an option, however, a longer conversation will be necessary. For Medicare, please reach out three months before your 65th birthday.

 

How are you compensated?

I am compensated by salary and not by enrollments. This allows me to work in the best interest of my clients.

 

What kind of clients do you most enjoy working with?

I enjoy helping everyone. People who are in their fifties and sixties are the most common clients I work with, as they are more likely to experience the above-mentioned qualifying events—including those who are contemplating retirement. I am unable to help people with Medicaid though Such cases are redirected back to the state.

 

What would you tell someone who does not think they should retire because of the cost of healthcare?

People should analyze their situation and explore the options. They are often pleasantly surprised. It should really be explored on a case-by-case basis, regarding both the coverage available and the cost of coverage. This analysis should be taken into account along with the individual’s entire financial picture in order to make this life transition.

 

What are common misconceptions about healthcare on the open market?

It goes both ways. Some people think they should get tax credits but don’t. Other people think they won’t get credits and do. The amount of tax credits you may receive is unrelated to the level of health coverage (labeled as Gold, Silver, or Bronze, depending on what coverage you purchase). In general, the three tiers of health coverage look like this:

Bronze level plans: Lowest cost, highest deductibles, highest cost sharing after deductible.

Silver level plans: “Reasonable” cost, deductibles and cost sharing.

Gold level plans: Highest cost, highest level of coverage, lowest deductibles and cost sharing.

 

Tell me about the recent changes in the stimulus package. 

The new administration opened new enrollments through May 15, and then extended it to August 15t. They raised income limits on tax credits. Everyone has an opportunity to make changes now through August 15th. The government is trying to make insurance as accessible as possible. You can use a subsidy calculator for an estimate.

 

How should clients contact you?

I can be reached at 541.494.7714 or via email at ed.steffens@propelinsurance.com to schedule an appointment.

 

Written by: Michael Van Sant, CFP®. CSRIC™

Disclosure: Edward Steffens is a licensed insurance agent/broker for Propel Insurance. All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the article. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any particular individual. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax or legal or accounting advice, and nothing contained in these materials should be taken as such.