For some retirees, there is an additional cost associated with Medicare premiums that can ambush family budgets.
Most Medicare enrollees pay the standard premium amounts for Part B (outpatient care) and Part D (prescription drugs). However, it is estimated that 7% of the 64.3 million Medicare beneficiaries end up paying more because their income is high enough for the monthly income-related adjustment amounts, or IRMAA, to start, according to the Medicare and Medicaid Service Centers.
Whether you pay the surcharge is based on your adjusted gross adjusted income as defined by the Medicare program: your adjusted gross income plus tax-free interest income. By 2022, IRMAAs begin when that amount exceeds $ 91,000 for individuals or $ 182,000 for married couples filing joint tax returns. The higher your income, the higher the surcharge.
You only have to contribute $ 1 above this [lowest] breakpoint and you’re subject to IRMAA. If you’re close to that or close to going to a higher level, you really have to be proactive.
In other words, there are some planning strategies and techniques that can help you avoid or minimize these IRMAAs. Here are four things to keep in mind:
Consider converting to Roth IRA accounts
One way to reduce your taxable income is to avoid having your entire nest instead of retirement whose distributions are taxed as ordinary income, such as a traditional IRA or 401 (k). Therefore, whether or not you are still enrolled in Medicare, it is worth converting taxable assets into a Roth IRA.
Roth contributions are taxed in advance, but qualified withdrawals are tax-free. This means that while you would pay taxes now for the amount converted, your Roth account will provide tax-free income in the future, as long as you are at least 59 and a half years old and the account has been open for more than five years, or find an exclusion.
“Now pay a little more to avoid higher tax brackets or IRMAA brackets later,” Meinhart said.
It also helps that Roth IRAs do not have required minimum distributions, or RMDs, during the life of the owner. RMDs are amounts that must be withdrawn from traditional IRAs as well as traditional and Roth 401 (k) once you reach the age of 72.
When traditional account RMDs are initiated, your taxable income could increase enough to be subject to IRMAAs or a higher amount if you already pay the surcharge.
“A lot of people have trouble not taking money out of their 401 (k) or IRA, and then they have their first RMD and put them in one of those IRMAA brackets,” Meinhart said.
Monitor capital gains
If you have assets that can generate taxable profit when sold, that is, investments in a brokerage account, it may be worth evaluating how you can manage those capital gains.
While you may be able to schedule the sale, for example, of a valued stock to control when and how you would be taxed, some mutual funds have a way of surprising investors at the end of the year with capital gains and dividends, both. feed the IRMAA calculation.
“With mutual funds, you don’t have much control because they have to pass on the profits to you,” O’Neill of Money Talk said. “The problem is you don’t know how big these distributions will be until very late in the fiscal year.”
Depending on the specifics of your situation, it may be worth considering having publicly traded funds instead of mutual funds in your brokerage account because of their tax efficiency, experts say.
For investments whose sale you can schedule, it is also important to remember the benefits of collecting tax losses as a way to minimize your taxable income.
That is, if you end up selling assets at a loss, you can use those losses to offset or reduce your profits. Generally speaking, if the losses outweigh the profits, you can use up to $ 3,000 a year against your regular income and move the unused amount to future tax years.
Touch your philanthropic side
If you are at least 70 and a half years old, a qualifying charitable contribution, or QCD, is another way to reduce your taxable income. The contribution goes directly from your IRA to a qualified charity and is excluded from your income.
“It’s one of the few ways you can really make money from a completely tax-free IRA,” Meinhart said. “And when you’re 72, that charity can help offset your required minimum distributions.”
The maximum you can transfer is $ 100,000 a year; if you are married, each spouse can transfer $ 100,000.
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