Medicare: Investor Alert

Numerous retirees and their financial advisers don't realize that a perfectly commonplace investment choice can wind up costing 1000's of dollars in Medicare premiums. The hit may well last a year or more, but can often be prevented by way of appropriate planning.

The issue: an unusual increase in earnings brought about via a selling of assets or other portfolio moves. One retired Texas pair, for instance, sold some highly appreciated bank stock in 2008 when their broker advised them to diversify their holdings. Despite the fact that the money was promptly reinvested and didn't have an effect on their family budget, the move brought about long-term capital gains.

The revenue pushed the couple's income from approximately $44,000 to $240,000 in 2009. Their 2010 monthly Medicare Part B premiums, which are structured on their 2008 income, increased by $110.50 each. Since Medicare prices are deducted from Social Security benefits, the transfer reduced the couple's monthly benefits by $2,652 for the year.

Medicare Part B is health insurance plan that covers doctors' services, outpatient treatment, physical therapy and some home health care. About 95% of Medicare recipients pay the normal premium, which is typically $96.40 a month per individual. (The government will pay 100% of Part A, which is hospital insurance.)

Since 2007, higher-income beneficiaries have been required to pay an income-adjusted supplement. In 2010, individuals with earnings of greater than $85,000 a year, and couples with incomes higher than $170,000, pay an added quantity ranging from $44 to $243 a month per individual. The highest monthly Medicare Part B premium per person is $354 for singles with earnings above $214,000 and couples with earnings greater than $428,000.

Medicare premiums are predicated on "modified adjusted aggregate income," which is adjusted gross income-that is, assessable income-and tax-exempt interest income. To figure out the Medicare Part B premium, the Social Security Administration utilizes the recipient's most recent income tax return. In 2010, the charges are dependent on returns filed within 2009 for the 2008 tax year.

Melissa Cummings, a financial planner with Sanders Financial Management in Norcross, Ga., takes this into account while advising clients who are making plans to exercise stock options or make withdrawals from 401(k)s or other deferred-compensation retirement accounts. Rebalancing a portfolio is an additional discretionary move that can bump up income and consequently Part B premiums.

One of Ms. Cummings's clients was considering exercising stock options over several years. After he learned that this might result in increased Medicare Part B fees, the buyer decided to exercise the options during a single year, rather than spreading out the actions, therefore he would pay the increased fees over no more than a single year. The savings, assuming he could have taken the cash over three years: $5,834.

Converting a conventional IRA to a Roth IRA furthermore can result in increased Medicare premiums, and the new Roth guidelines make preparation even trickier. This year, the income restriction on conversions was eliminated, and people have the choice of spreading the income from the conversion over 2 years. (In a Roth conversion, the sum converted is subject to income tax, but impending withdrawals will be tax-free.)

Individuals who report Roth revenues on their 2010 return might have elevated Medicare Part B fees in 2012; if the income is spread over 2011 and 2012, the Medicare sting won't be felt until 2013 and 2014.

Even if the individual pays a larger Part B surcharge for a year or two, the conversion could help them avert higher premiums they would pay into the future when they begin taking requisite distributions from their IRAs after age 70½, states Mary Alpers, a Monument, Colo.-based fee-only financial planner and enrolled agent, which means she can speak for purchasers before the Internal Revenue Service.

"Each person has a unique situation," states Ms. Alpers, who is additionally a member of the National Association of Personal Financial Advisors, a fee-only collection, several of whom have expertise with taxes and Social Security. She also will help customers figure out if it is a good suggestion to convert toward a Roth before becoming eligible for Medicare. "Since they look two years back for Medicare rates, prior to age 63 is a perfect time to obtain any Roth conversions or other unexpected income," Ms. Alpers says.

Many retirees additionally do not comprehend that an otherwise reasonable investment decision can erase 1000's of dollars thru taxes on Social Security benefits.

Jim Mansfield, a retired director of admissions for the University of Wyoming, was considering making a withdrawal from his individual retirement savings account to pay off his mortgage. However his financial adviser-Denise D. Smith, a fee-only adviser in Salt Lake City-evaluated the impact on his Social Security benefits and discovered the effort would do more harm than good.

"Even a relatively tiny spike in earnings can virtually double federal income taxes paid on Social Security benefits," Ms. Smith says.

If Mr. Mansfield, 73 years old, withdrew an extra $10,000 from his IRA, it would have driven his earnings high enough that 85% of his Social Security benefits would be taxed. At his 25% marginal fee , that would have cost the Spokane, Wash., resident an extra $2,125 in income tax.

The total federal tax bill for Mr. Mansfield's IRA withdrawal: $4,625, says Ms. Smith.

In most cases, Social Security benefits aren't taxed when income is less than $25,000 for singles and $32,000 for couples, but as much as 85% is assessable when incomes attain $34,000 and $44,000, respectively.

"Consumers doing it on their own or investment advisers not skilled in tax planning possibly will not be aware of the tax implications of Social Security and Medicare Part B," states Kevin Young, a fee-only financial adviser and enrolled agent in Davis, Calif.

But the impact can be mitigated with appropriate preparation, such as offsetting gains with losses. And even if that is not feasible, "it's many times more effective to bite the bullet" and pay the higher Medicare Part B premiums for a year, Mr. Young says.

The Social Security Administration will adjust the premiums down when a recipient's income falls. Persons with unique situations, such as a death, divorce or employment loss, can request that a mid-year adjustment in their rates. The Social Security internet site ( has particulars.

It pays to keep current: Commencing in 2013, there will be a new 3.8% Medicare levy on investment profits that exceeds $200,000 for singles and $250,000 for couples.




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