You’ve done the right thing for years. You’ve diligently saved and accumulated money in your IRA account. But do you know your IRA could increase your Medicare costs? You see, at some point, money in your IRA must come out, and Uncle Sam wants his share. When you reach age 70 ½, you must take a required minimum distribution (RMD) for that year. RMDs continue for every every year thereafter.
You may be unhappy about taking RMDs and think you don’t need the money. There may also be a concern about the tax hit of a RMD. RMDs are included as income for the year taken. In some cases, a bump in income negatively affects the availability of deductions and impacts the taxation of Social Security. Another possible impact that isn’t often given the attention it deserves, is increased Medicare costs.
Higher Medicare Costs
Without careful planning, your RMD can result in much higher healthcare costs. Because the RMD is included in your Modified Adjusted Gross Income (MAGI), it also helps determine your Medicare Part B and Part D costs. You can find the MAGI thresholds for increased costs at https://www.medicare.gov/. You will also notice there are no phase out ranges. If you have a MAGI that is $1 over these limits, you have to pay the full extra amount. This can be significant in some situations.
How can you avoid falling into the trap of higher Medicare costs? Here are two strategies to help you avoid falling into the trap of higher Medicare costs:
If you are in your early sixties you may want to consider a Roth conversion. A conversion can help minimize the impact of RMDs on your Medicare costs. RMDs aren’t a requirement for Roth IRAs. Also, qualified distributions from Roth IRAs aren’t included in MAGI for Medicare purposes.
If you are already taking RMDs, a Qualified Charitable Distribution (QCD) may minimize the impact of RMDs on Medicare. With a QCD, you can transfer up to $100,000 annually from your IRA to a charity tax-free.
A QCD satisfies your RMD for the year and isn’t included in MAGI for determining Medicare costs. Keeping the RMD amount out of MAGI can result in big savings. This isn’t the case when donating your RMD to charity and claiming a charitable deduction. With that approach, the RMD is included in MAGI.
Paying taxes earlier can result in reducing, or. in some instances, eliminating taxes later. You’re paying the taxes anyway. It’s just a matter of when and what future tax rates may be.
So, ask yourself that unmentionable question: “Do I believe tax rates will stay the same or will they go up?” The location of your money is an important factor in the taxation of your retirement income. It also determines how your income affects such things as social security and Medicare. Taxes may be considered a zero sum gain item in that you pay for various items on a federal and state level.
Do the math and see if you can save yourself money by paying upfront and eliminating or at least reducing an ongoing taxable event for perhaps 20-30 years on your retirement income.