Required Minimum Distributions RMDs and Health Care Costs
September 2016 Newsletter
June 1, 2016 marked an important day in our nation that largely went unnoticed. Kathleen Casey-Kirschling, America’s first baby boomer, turned age 70½. That means that each day for the next 18 years, close to 10,000 individuals will follow in her footsteps and begin to consider when and how to take the required minimum distribution from their qualified account. Not only are the baby boomers the largest segment of the US population but their holdings in 401(k), 403(b), 457, and IRA assets represents trillions of dollars. RMD distributions are fully taxable as ordinary income.
The intersection of taxable RMDs and retirement health care costs can create a significant impact on retirement income. Medicare Part B and Part D premiums are based on modified adjusted gross income. Higher taxable incomes create higher premiums. Since these premiums are typically deducted from one’s Social Security Benefit, the result of higher Medicare Premiums is a reduction in retirement income.
RMDs must be taken by April 15 of the year following the year in which you turn age 70½. Medicare premiums are based on income from two years prior. This means if Kathleen takes her RMD in 2017, any potential increase in her Medicare premiums will happen in 2019.
There are a few financial planning considerations that should be considered as your clients approach RMD age. Each has the potential to lower the taxable RMD, protecting against slipping into a higher Medicare premium tax bracket.
- Qualified Charitable Distribution
This popular strategy allows you to make a direct transfer of up to $100,000 from your IRA to an IRS approved charity. The distribution, therefore, is not taxable. The tax benefit of gifting a highly appreciated security will usually be superior to the RMD gifting, but other than that, it can be well worthwhile.
- Qualified Longevity Annuity Contract
If you are considering ways to guard against outliving assets, especially for clients with particularly long life expectancies, a QLAC can provide a guaranteed lifetime income and a reduction in your RMD. Up to $125,000 can be transferred from the IRA into the QLAC. Under this scenario, the RMD is calculated on the smaller amount remaining in the IRA. The QLAC pays taxable income, guaranteed for life, at a future point in time.
- Continue Working
For those who continue to work beyond age 70 ½ the RMD is not required from their qualified plan (such as a 401(k)). This relief is not available if you are a 5% or greater owner of a business and does not apply to anyone’s individual IRA accounts.
- Plan Ahead with the Roth IRA and 401(k)
Since distributions from Roth accounts are tax-free, considering accumulating a portion of your retirement nest egg, during your working years, in these accounts. Most employers offering a traditional 401(k) make a Roth 401(k) available but very few employees take advantage of them.
Each idea has its’ pros and cons so make sure to discuss them with your tax advisor.
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.