Mistake #10: Costly Financial Moves when You Retire

In Medicare Mistake #9, we discussed how expensive it can be to go out-of-network in a Medicare Advantage plan and what you can do about it. Similarly, retiring can also be costly with Medicare.

In this tenth and final edition of our Medicare Mistakes Series, we’ll address three things you need to know about Medicare in retirement.
[keytakeaways]

• If you have coverage through an employer with 20 or more employees, you don’t have to sign up for Medicare at 65. But, not remembering to sign up when you stop working can be costly.
• The Social Security Administration uses your most recent IRS return to determine if you will pay an income-related surcharge for your Medicare coverage. The surcharge can be appealed due to retirement.
• Rolling over a traditional IRA to a Roth or making large withdrawals from a tax-deferred retirement account will increase your adjusted gross income and may subject you to surcharges.

[/keytakeaways]

Preparing to retire comes with all sorts of unexpected situations. Retiring is a huge life event that can easily make us feel lost or overwhelmed. In the mix of it all is Medicare, our lifeline to health care in our Golden Years. Getting hit with costly penalties and unexpected surcharges is easier than you might think.

Step 1: Don’t Forget to Enroll in Medicare Part B

In Medicare Mistake #2 we pointed out the various penalties Medicare can impose on you if you do not enroll in certain parts of Medicare on time. If you are retiring from an employer with 20 or more employees and didn’t sign up for Medicare at age 65, you need to signup after you leave your job.[mfn referencenumber=1]Medicare.gov, ”How Medicare works with other insurance”, Accessed January 15, 2022[/mfn]

Medicare’s rules say that when your group health plan coverage ends you have the option to use COBRA to bridge the gap between your employer’s group coverage and Medicare. But, you’ll need to enroll in Medicare Part B within eight months of the earliest of either the end of your employment or the end of your group health coverage.[mfn referencenumber=2]Medicare.gov, ”Working past 65”, Accessed January 15, 2022[/mfn]

In most cases, you are better off not waiting. As soon as you are enrolled in both Medicare Part A and Medicare Part B you can get Medicare supplement insurance or join a Medicare Advantage plan[mfn referencenumber=3]Medicare.gov, ”When can I buy Medigap?”, Accessed January 15, 2022[/mfn][mfn referencenumber=4]Medicare.gov, ”How to join a Medicare Advantage Plan”, Accessed January 15, 2022[/mfn]. For most people retiring this year, Original Medicare and a Medicare Supplement Plan G offer the best major medical coverage possible.

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Step 2: Contest the High-Income Surcharge

Most people pay the same amount for their Medicare premiums. But did you know that people with higher incomes pay more?

IRMAA, or income-related monthly adjustment amount, is a federal government surcharge that high-income individuals and couples pay in addition to their monthly Medicare Part B and Part D premiums[mfn referencenumber=5]Medicare.gov, ”Part B costs”, Accessed January 15, 2022[/mfn][mfn referencenumber=6]Medicare.gov, ”Monthly premium for drug plans”, Accessed January 15, 2022[/mfn].

For [medicare_costs value=”medicare-cost-year”], the standard Medicare Part B premium is [medicare_costs value=”partb-premium-standard”] per month. However, for high-income earners, the premium can go as high as [medicare_costs value=”partb-premium-irmaa-t5″] per month. That’s a big hike.[mfn referencenumber=5]Medicare.gov, ”Part B costs”, Accessed January 15, 2022[/mfn]

The way the government determines how much you’ll pay for your Medicare Part B and D is by looking at your IRS return. They don’t look at current year earnings, they look back two calendar years. For instance, Social Security will use tax returns from 2020 to calculate IRMAA in 2022.

[bigad]

During our working years, many individuals and couples will easily go over the income threshold. As a result, the year we retire the Social Security Administration (SSA) will believe we’re over the limit, make an initial IRMAA determination, and send us a notice. The notice will explain:[mfn referencenumber=7]SSA.gov, ”Initial IRMAA Determination Notices”, Accessed January 15, 2022[/mfn]

• That IRMAA will apply,

• What information was used to compute IRMAA,

• What the beneficiary can do if the tax information provided by IRS is wrong,

• What the beneficiary can do if SSA used PY-3 information and the beneficiary has a copy of his filed PY-2 tax return,

• What the beneficiary can do if the tax filing status of “Married, Filing Separately” for the tax year was used and lived apart from his spouse for the entire year, and

• What the beneficiary can do if there was an LCE with a reduction in income.

Curiously, the notice does not contain information about the beneficiary’s right to appeal but it does tell beneficiaries to contact SSA within 10 days if the beneficiary believes the information is incorrect. After the tenth day, SSA will apply IRMAA.[mfn referencenumber=7]SSA.gov, ”Initial IRMAA Determination Notices”, Accessed January 15, 2022[/mfn]

You can request SSA revisit its initial decision based on a life-changing event that caused an income decrease, or if the income information Social Security used to calculate your IRMAA is incorrect. Here are the life-changing events that Social Security will consider:[mfn referencenumber=8]SSA.gov, ”What are Life-Changing Events?”, Accessed January 15, 2022[/mfn]

• The death of a spouse
• Marriage
• Divorce or annulment
• You or your spouse stopping work or reducing the number of hours you work
• Involuntary loss of income-producing property due to a natural disaster, disease, fraud, or other circumstances
• Loss of pension
• Receipt of a settlement payment from a current or former employer due to the employer’s closure or bankruptcy

You can request a new initial determination by submitting a Medicare IRMAA Life-Changing Event form. You can also schedule an appointment with your local Social Security office. Be prepared to provide documentation showing your correct income.

[bigad]

Step 3: Be Careful of Your Financial Moves

The year we retire it’s easy to explain and prove to Social Security that our income is not as high as their records show. But, after the first year, it’s more difficult.

Let’s say you want to roll over a traditional IRA to a Roth IRA so you can withdraw the money tax-free. These accounts offer big benefits, but the rules for Roth accounts are complex. One of those complexities is the tax event created when you roll over your account. In the year you shift the money, you must pay tax on the full amount shifted. That shift also plays into SSA’s IRMAA determination.

There’s a similar situation with tax-deferred retirement accounts. When you make a large withdrawal from a tax-deferred account, you’re taking income. The money wasn’t taxed going in, so it needs to be taxed coming out. These withdrawals can push you into higher IRMAA surcharges on both your Medicare Part B and Part D.

Concerned about how your income in retirement will impact what you pay for your Medicare? Call at 1-855-728-0510 (TTY 711) and speak with a licensed Medicare insurance agent.

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