Medicare Premiums and a Surviving Spouse
April 2016 Newsletter
Your client has lost their spouse. Part of modifying their retirement income plans involves the adjustment to collecting only one Social Security Benefit. That Social Security benefit may be significantly smaller than expected.
Retirees who begin receiving their Social Security benefit quickly become aware of two reductions from their benefit: Medicare Parts B and D. Many also learn that these Medicare Premiums are means tested, meaning that upper income households pay a higher amount for this Medicare coverage. Medicare calls this an Income Related Monthly Adjustment Amount (IRMAA) and is detailed in the chart below.
The unexpected surprise that hits the widow is triggered by changing her joint filing status to a single filing status. This results in higher Medicare B and D costs. These added costs result in a smaller than expected Social Security Benefit.
An illustration will be helpful. Suppose your clients are married, in their 70’s each receive their Social Security Benefit from which Medicare B and D are deducted. Their overall retirement income also includes required minimum distributions from their qualified plans, and investment income. Their joint modified adjusted gross income is $150,000. A look at the chart tells us that with their joint filing status, they are in the lowest Medicare IRMAA income bracket. This means a $20,000 annual Social Security Benefit will be reduced by $1,258 for Medicare Part B and $409 for Part D (using a national average Medicare Part D premium) resulting in an $18,333 Social Security Benefit. For simplicity, assume that the husband and wife are each receiving this same benefit amount.
Upon the death of the husband, the widow will now file her taxes as a single filer. Her Social Security income now includes just her Benefit. Note that the income from the investment portfolio and required minimum distributions is largely the same. At a $130,000 income level, filing as a single, she is now well into the third income bracket for Medicare B and D premiums. Her $20,000 Social Security Benefit will now be reduced by a $2,923 Part B premium and $802 Part D premium ($409 national average plus $393 IRMAA). This equals a net $16,275 Social Security Benefit. That’s right, your widowed client’s $18,333 Social Security Benefit has been reduced by 11%! When you factor in the loss of the husband’s $18,333 Social Security Benefit, a reassessment of the master retirement income plan is in order.
Recognizing this all too common scenario will allow you to prevent this unpleasant surprise to your clients. Planning ahead to prepare for Medicare IRMAA suddenly looks more important than ever. Incorporating annuities, Health Savings Accounts, Roth IRA and Roth 401(k)’s which all create sources of tax free retirement income can be of great value when building a comprehensive retirement income plan.
The information in this presentation is provided as a general overview. It is derived from the Internal Revenue Code, Medicare.gov and other government publications, all subject matter sources reasonably believed to be reliable. Tax law and the laws governing Medicare/Medicaid are complex and subject to change. Clients should consult with their attorney and/or qualified tax advisor when making decisions regarding these matters.