Medicare Planning Strategies

While gathering data as part of the financial planning process, some clients are surprised to hear us ask about Medicare and other federal retirement benefits. Beyond the common questions of when to sign up to receive Medicare insurance and Social Security benefits, there are other less commonly considered aspects that you should consider as part of your planning.

The first consideration of Medicare planning is how to pay Medicare premiums. There are two options: deduct from Social Security or pay out-of-pocket. For most Social Security recipients, it is better to have premium costs deducted from their Social Security check.

This is due to the “hold harmless” provision of the Social Security Act, which prevents Social Security payments from going down as a result of Medicare premiums going up. Thus, Medicare premiums cannot be increased more than Social Security is increased. Consequently, people that pay out-of-pocket and are not protected by the “hold harmless” provision end up paying a higher premium over time than those who pay Medicare premiums through Social Security.

The second consideration we want to mention is the Medicare Income-Related Monthly Adjustment Amount or IRMAA. Medicare adjusts people’s premium payments for those with higher incomes who are enrolled in Medicare Part B (doctor visits) or Medicare Part D (prescriptions). In 2019, the basic premium for Part B is $135.50. However, per Medicare, about 5% of the population will pay more than that due to incomes higher than $85,000 or $170,000 based on filing status.

Medicare Part B IRMAA brackets:

2018 Medicare Part B IRMAA Brackets

One important note is that there is no phase-out between income brackets. If a single filer has $85,001 in income, he will pay $189.60 per month instead of $135.50, plus $12.40 more per month for Part D prescription coverage.

We consider IRMAA with distribution planning and strategies like Roth conversions, where income is recognized during conversion of Traditional IRA assets into a Roth IRA. The long-term planning benefit of making a Roth conversion is almost always greater than the short-term cost of higher Medicare premiums, so being mindful of these limits is important to avoid inadvertently pushing someone into the next premium bracket.

Using Qualified Charitable Distributions from IRA’s is also an effective strategy to reduce income recognized for IRMAA purposes. When people are subject to required minimum distributions from IRA’s (whether due to age or for a non-spouse inheritance), they can elect to transfer all or part of their required distribution to a charity. This bypasses their adjusted gross income and may provide a way for people taking the standard deduction to continue to benefit from making charitable contributions.

As your wealth grows, coordination between your wealth manager, tax professional, other subject matter experts, and service providers, becomes more important to maximize your financial planning opportunities. If service providers are unaware of plans outlined by others, conflicting financial strategies can easily emerge.

At Slaughter Associates, we welcome the opportunity to not only work with a team of professionals but to serve as your team’s “financial quarterback,” ensuring the lines of communication remain open between subject matter experts. With a financial team, you can gain peace of mind knowing your financial professionals are on the same page and working together in your best interest.