With Medicare signup coming soon, tax bracket management strategies can help clients save

Income levels determine how much clients will pay for Medicare Parts B and D; planning is key

Oct 13, 2014 @ 12:12 pm

By Darla Mercado

+ Zoom

With Medicare enrollment just around the corner, advisers might want to weigh strategies that will allow clients to save a hefty sum on Medicare premiums.

Clients could be on the hook for as much as 80% of the total cost of Medicare Part B coverage, based on their modified adjusted gross income (MAGI). They could also be subject to the highest tier of premiums for prescription drug coverage, also known as Medicare Part D.

Open enrollment for Medicare starts Oct. 15 and runs until Dec. 7, so it's a good time for advisers to brush up on means testing for both Parts B and D.

Advisers should know that Medicare determines how much taxpayers will kick in for premiums based on their MAGI from two years prior.

The threshold for higher premiums could be pretty low, considering advisers' high-net-worth clientele. Married couples who file taxes jointly are subject to higher premiums for Medicare Parts B and D if they have a modified adjusted gross income over $170,000.

Anyone with a filing status other than “married filing jointly” is on the hook for higher premiums if the tax payer reports an MAGI of more than $85,000. The MAGI is the total of the adjusted gross income and tax-exempt interest income. Those at or below those amounts will be paying a standard monthly premium of $104.90 for Part B in 2014 and they will merely pay the premium cost for prescription drug coverage — with no additional fees .

In an example cited in a whitepaper scheduled to be released on Tuesday by HealthView Services, a provider of health care cost data, a 40-year-old who is currently earning $40,000 will end up in the second highest income bracket for Medicare means testing by the time he is retired, assuming a 3% inflation rate. That individual will be subject to a 35% surcharge.

Enter bracket management strategies.

Russ Weiss, an adviser at Marshall Financial Group, counsels high-earners to save more money while they are working on a pretax basis through non-qualified deferred compensation plans, which lower the MAGI for a given client in the years leading up to Medicare eligibility. That means the future retiree can keep himself out of a higher bracket.

“We sock away a lot of money in the plan with the idea that as they get close to Medicare [eligibility], we reduce their income so their premiums start out low,” said Mr. Weiss.

Health savings accounts are another possible pool of dollars to consider, according to Ron Mastrogiovanni, CEO of HealthView Services, a provider of healthcare cost data. HSAs are becoming more prevalent in workplace healthcare plans, and clients can fund them and pull money that doesn't count toward the MAGI to cover healthcare related expenses.

In the years approaching retirement, advisers ought consider alternative sources of income that will keep clients out of the higher brackets. Pools of income that don't count toward MAGI include cash value life insurance, Roth IRAs and Roth 401(k)s, non-qualified annuities and deferred income annuities, according to Mr. Mastrogiovanni.

In the worst case scenario, retirees can find themselves inadvertently bumped into higher brackets when they take required minimum distributions at age 70-1/2, or when a spouse passes away.

Mr. Weiss has a new client who is in her late 60s and newly widowed. The client's husband, who was working right up until death, had a non-qualified deferred compensation plan with a balance of $1 million, all of which was paid out to her immediately. Given that the client came to Mr. Weiss after the windfall, there aren't many options on the table to mitigate the ill effects of having all that additional income.

“She's going to end up with the highest Medicare premiums for the next couple of years,” Mr. Weiss noted.

Hence, when it comes to planning on income streams to mitigate the cost of those premiums, earlier is better.

“The point is that there are a lot of options, and it makes sense to review those options like you would review asset allocation,” Mr. Mastrogiovanni said. “It can increase your disposable income in retirement.”

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

Ed Slott: Tax strategies to help clients take advantage of market declines

When the markets decline or are volatile, it is an opportunity to put a few retirement savings strategies to work, according to Ed Slott, founder of Ed Slott's Elite IRA Advisor Group.

Latest news & opinion

Jay Clayton says SEC, DOL can give market 'clarity' on fiduciary rule

Chief regulator is confident two agencies could reach 'common ground' on an investment advice standard across all accounts.

Vanguard winning at bond inflows, too

But iShares is strong competition.

Sen. Gary Peters brings broker background to work every day on Capitol Hill

Michigan Democrat resists ripping up DOL fiduciary rule but would be open to some changes.

DOL fiduciary rule causing DC-plan record keepers to change business with insurance agents

Principal has communicated that independent agents must change their business models to keep receiving compensation.

DOL fiduciary rule opponents want to push implementation back until 2019

ICI, Chamber of Commerce among groups asking for delay, while Democratic lawmakers call on DOL to keep to its earlier planned schedule of Jan. 1, 2018.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print