You’ve worked hard all your life, saving for those golden years of retirement. Yet, many don’t realize that the financial decisions you make during retirement, particularly regarding your retirement plan distributions, can have unexpected ramifications on your Medicare costs.
Here, we look at how these distributions can impact your Medicare premiums, plus financial planning strategies to effectively manage and mitigate these impacts.
What Are Required Minimum Distributions?
Required minimum distributions, commonly referred to as RMDs, are the minimum amounts you must withdraw annually from qualified retirement plans, starting when you reach 72 years of age. The amount of each RMD is calculated by dividing the previous year’s account balance by a life expectancy factor determined by the Internal Revenue Service (IRS). It’s important to note that because these funds have grown tax-deferred in your retirement accounts, RMDs are subject to income taxes and will impact the overall amount you owe in income tax for a given year.
Understanding the Connection to Medicare
As retirees begin to withdraw money from their retirement accounts, these distributions can directly influence the premiums they pay for Medicare Part B and Part D, which cover medical services and prescription drugs. Medicare premiums are based on your modified adjusted gross income (MAGI), and qualified distributions from most retirement accounts are counted as taxable income. The more you withdraw, the greater your chances of paying a Medicare surcharge, also known as the Income-Related Monthly Adjustment Amount, or IRMAA.
IRMAA is an extra charge added to your Medicare Part B and Part D premiums if your MAGI exceeds certain thresholds. If you’re already subject to the IRMAA (or are approaching the first threshold), you must be particularly mindful of how distributions impact your Medicare. Taking large distributions may inadvertently push you into a higher bracket, increasing your IRMAA surcharge. Complicating things further, this impact is not immediate as Medicare calculates IRMAA based on tax returns from two years prior.
Minimizing the Impacts: Strategies for Taking RMDs
To minimize the impact of retirement plan distributions on Medicare costs, careful planning is essential.
Consider your accounts
One strategy is to consider the type of retirement accounts you have. Withdrawals from Roth IRAs, for example, are not included in your MAGI and have no impact on your Medicare premiums. In fact, Roth accounts don’t have any RMDs during the owner’s lifetime. Converting traditional IRAs to Roth IRAs, however, comes with its own tax implications that should be carefully evaluated.
Don’t delay your first withdrawal
Once you reach the age of 72, you must start taking RMDs from your traditional IRA or 401(k) plans. Although you can delay withdrawing funds the first year and take two distributions the following year, it’s wise not to delay that withdrawal if taking two distributions could trigger a Medicare surcharge.
Take a charitable distribution
If an RMD looks like it’ll push you into a higher bracket, consider using a Qualified Charitable Distribution (QCD). A QCD allows you to transfer up to $100,000 annually directly from your IRA to a qualified charity. This move satisfies your RMD without increasing your taxable income.
Take early distributions
Though potentially subject to certain penalties and taxes, early distributions from your retirement accounts can be a strategic move under the right circumstances. For instance, while you should avoid taking RMDs too early to avoid early withdrawal penalties, taking distributions after you reach age 59 ½ can help manage your MAGI in later years. This strategy requires careful consideration of the potential taxes and penalties involved and should be discussed with a financial advisor.
Consider an annuity
Qualified longevity annuity contracts can be structured to provide payments that align with your financial needs while minimizing your RMDs — and the risk of pushing your income into a higher bracket that could affect your Medicare premiums.
Navigating the financial impact of retirement and Medicare is a complex journey. Let our expert financial planners guide you with tailored strategies designed to protect and grow your wealth, even when you’ve stopped working. Contact us today to get started.
