Delay Social Security, Pay Higher Medicare?

[Zantastic]

Delaying my Social Security to age 70 will put my total income over $85,000. As I understand it, income over that mark, incurs higher Medicare payments. There must be something to mitigate this, right? If there is I can't find it. If I take SS at 62, I'll definitely be under $85,000, but my preference has always been to wait as long as possible to use SS as longevity insurance.

Am I missing something?:

 

[youbet]

No. Higher income usually leads to higher tax rates and penalties such as higher Part B and D premiums. IRA RMDs come into play too.

 

[pb4uski]

I'm certainly no expert on this but just some thoughts.

Will the $85k hurdle increase over time? IOW, it might increase to $90k or 95k over the next 10 years. Also, if RMDs are driving the increase, those can be mitigated by Roth conversions prior to age 70.

Even if you do end up paying higher Part B and D premiums, the question then becomes whether the benefit of higher SS exceeds the detriment of higher Part B and D premiums? IOW, even after the higher taxes, and premiums you still might be ahead so don't look a gift horse in the mouth.

 

[pb4uski]

The extra cost is ~$650 a year as long as your income is under $107,000 (for a single person). Don't sweat the small stuff.

http://www.ssa.gov/pubs/EN-05-10536.pdf

 

[W2R]

When we hit 70, we have both RMD's and SS to consider.

1) RMD's: We have no way of knowing how much our investments may increase by age 70 1/2, raising the RMD amount, possibly over the threshold and resulting in higher Medicare costs even with lower SS payments.

2) SS: We have no way of knowing what the cost of living increases may be in SS by age 70, possibly meaning that even SS claimed at a younger age might still push income over the threshold and resulting in higher Medicare costs.

To me allowing this to drive the decision of when to claim SS is overly fine tuning, based on a lot of unknowns and possibly wishful thinking. Right now I am paying $104.90/month in Medicare, Part B. That is the lowest amount. Even if that was raised due to exceeding the $85K threshold, the amount of increase could be pretty trivial compared with the above unknowns as pb4uski points out. And, as pb4uski also points out, the $85K threshold may change later on.

 

[braumeister]

the $85K threshold may change later on.

The current thresholds are supposedly guaranteed until 2019, but after that it's anyone's guess.

 

[W2R]

The current thresholds are supposedly guaranteed until 2019, but after that it's anyone's guess.

Exactly! Who knows if they will ever be changed, and to what?

 

[FIRE'd@51]

Exactly! Who knows if they will ever be changed, and to what?

Since they're not indexed to inflation, they have the potential to become the next AMT.

 

[Independent]

Delaying my Social Security to age 70 will put my total income over $85,000. As I understand it, income over that mark, incurs higher Medicare payments. There must be something to mitigate this, right? If there is I can't find it. If I take SS at 62, I'll definitely be under $85,000, but my preference has always been to wait as long as possible to use SS as longevity insurance.

Am I missing something?:

Presumably, your problem is RMDs. That's the usual reason that retirees find themselves with more income than spending.

Note that if you defer SS, you will probably spend down more of your IRA between 62 and 70. That means lower RMDs after 70.

If RMDs seem particularly onerous, you may plan to do Roth conversions.

The tax implications of deferring SS are pretty complex. The interaction of the non-COLA'd SS tax factors, RMDs, Roth vs. traditional, unknown future investment income, ratio of SS to other income, unknown future inflation, and unknown future tax law changes can be pretty daunting.

OTOH, most of us can rule out some of the complexities (for example it appears you're single so you don't need to worry about rules for couples).

I'd build a multi-year model with variables for the unknowns. Include the extra Medicare Part B premium as if it were a stepped tax on gross income. Run the model with a variety of different assumptions and see if any patterns emerge.

When I did that for our situation, I decided the unkowns overwhelmed everything except that trad to Roth conversions made sense as long as we were in the 15% marginal bracket. W2R's comment is correct, I just couldn't do this level of fine tuning given the range of unkowns.

That was when I was 60. Now that I'm 66, I'll probably look at those Roth conversions again. Maybe they make sense even at higher marginal tax rates.

 

[calmloki]

I'm not seeing that Medicare premiums adjust automatically each year based on the MAGI from two years prior. Any one know if it gets set when you apply for Medicare and then goes up and down with income, or is it set till the taxpayer appeals? Our incomes are quite bouncy as we try and sell places... I anticipate paying a bit extra, but would hate to pay two bits...

Thanks for the link pb4uski - just haven't found the answer yet, though I have a call in.

 

[Zantastic]

RMDs are less of an issue than my non-cola'd pension. I'm still deciding when to take it but am leaning toward this August when I turn 57.

The president's 2015 budget calls for the 85k level to be frozen past 2019 until 25% of beneficiaries are paying the higher amount. If that gets approved a lot of us will be paying higher Medicare premiums down the road.

I admit that I do tend to sweat the small stuff. A deep breath is frequently in order.

 

[Brett_Cameron]

calmloki "I'm not seeing that Medicare premiums adjust automatically each year based on the MAGI from two years prior. Any one know if it gets set when you apply for Medicare and then goes up and down with income, or is it set till the taxpayer appeals? Our incomes are quite bouncy as we try and sell places... I anticipate paying a bit extra, but would hate to pay two bits..."

Yes they change automatically. DW's Part Premium went up this year due to 2012 income and I had to file the SSA-4 form with income tax documents to get it reduced.

 

[pb4uski]

I've concluded in my case that I am best off to defer my non-COLA pension and SS as much as possible and lock in secure higher income for the rest of my life should I live long. Deferring has additional benefits in that I can maximize current Roth conversions while I am in a low tax bracket and reduce future RMDs and higher taxes.

To be honest, the modest potential increase in Medicare premiums is a nit that I wouldn't even bother to include in the model. If I end up having to pay higher Medicare premiums as a result of high income I would be thankful.

 

[memejipakid]

I was just doing some research regarding federal tax rates after 2019. Looks like because of my annual pension I will fall into the 25% tax rate in the forseeable future. I am considering doing an annual roth conversion in each of the following years which hopefully will offset the payment of higher federal taxes when I am required to do the RMD. In your opinion, do you see federal tax rates increasing from 25% bracket for income that now falls within the current 25% bracket?

 

[FIRE'd@51]

To be honest, the modest potential increase in Medicare premiums is a nit that I wouldn't even bother to include in the model. If I end up having to pay higher Medicare premiums as a result of high income I would be thankful.

If a spouse dies, one may be exposed to these higher thresholds with the same (or lower) income. From your link, a married taxpayer who files jointly with MAGI of 160-170K doesn't pay the extra tax. If his/her spouse dies and the remaining spouse has to file as an individual, the extra premium is $218 per month. In addition, the tax brackets kick in at lower levels so the additonal SS is taxed at a higher marginal rate.

 

[calmloki]

Wow. Just had an extended conversation with a SS employee who refused to understand my question. She kept wanting to talk about life changing events like divorce (not married), death of a spouse (still not married), pension (don't have one).... Still not clear to me whether a person applying for medicare this year with a low 2012 income will pay low medicare premiums forever or whether Medicare monitors annual income and adjusts premium surcharges as required. I do see that one can appeal based on a life changing event to reduce the surcharge, but what if one's income keeps going up after first getting Medicare?

Another example: Joan has a 2012 MAGI of $165,000 in 2012 because she sold a rental property. When she applies for Medicare this year, her premium will be standard + $104.90. The next year, her income drops to $90,000. She would like to appeal for a lower surcharge, but form SSA-44 doesn't look like she will prevail: her "loss of income producing property" was due to a sale at her direction. Is Joan stuck paying that surcharge till she croaks?

First world problems and all that, but I really wish my first contact with a Medicare employee had impressed me more.

 

[pb4uski]

If a spouse dies, one may be exposed to these higher thresholds with the same (or lower) income. From your link, a married taxpayer who files jointly with MAGI of 160-170K doesn't pay the extra tax. If his/her spouse dies and the remaining spouse has to file as an individual, the extra premium is $218 per month. In addition, the tax brackets kick in at lower levels so the additonal SS is taxed at a higher marginal rate.

True, but what do you propose doing about it?

For a retired single person to have a MAGI of $160-170k in my mind that is a nice problem to have. Sign me up for that any day, I'll gladly pay the higher Medicare premiums and taxes.

 

[pb4uski]

Wow. Just had an extended conversation with a SS employee who refused to understand my question. She kept wanting to talk about life changing events like divorce (not married), death of a spouse (still not married), pension (don't have one).... Still not clear to me whether a person applying for medicare this year with a low 2012 income will pay low medicare premiums forever or whether Medicare monitors annual income and adjusts premium surcharges as required. I do see that one can appeal based on a life changing event to reduce the surcharge, but what if one's income keeps going up after first getting Medicare?

Another example: Joan has a 2012 MAGI of $165,000 in 2012 because she sold a rental property. When she applies for Medicare this year, her premium will be standard + $104.90. The next year, her income drops to $90,000. She would like to appeal for a lower surcharge, but form SSA-44 doesn't look like she will prevail: her "loss of income producing property" was due to a sale at her direction. Is Joan stuck paying that surcharge till she croaks?

First world problems and all that, but I really wish my first contact with a Medicare employee had impressed me more.

Look at the link on post #4. I read it as the surcharge is readjusted each year as new information becomes available.

 

[FIRE'd@51]

Another example: Joan has a 2012 MAGI of $165,000 in 2012 because she sold a rental property. When she applies for Medicare this year, her premium will be standard + $104.90. The next year, her income drops to $90,000. She would like to appeal for a lower surcharge, but form SSA-44 doesn't look like she will prevail: her "loss of income producing property" was due to a sale at her direction. Is Joan stuck paying that surcharge till she croaks?

As I understand it, Joan would only pay the extra premium for the year she sold the rental property two years later. The next year it would be based on a lower income so the extra premium would drop.

My MIL sold her house a few years after her husband died. Thus, she only got a 250K exclusion instead of 500K. She ended up with a one-time capital gain that triggered the extra premium for one year.

 

[FIRE'd@51]

True, but what do you propose doing about it?

The Roth is probably the best option as of now. Of course, in the future they may well include Roth withdrawals in MAGI and allow a deduction later (similar to LT gains and qualified dividends).

I'm just saying the analysis isn't as trivial as you make it sound.

 

[Chuckanut]

For a retired single person to have a MAGI of $160-170k in my mind that is a nice problem to have. Sign me up for that any day, I'll gladly pay the higher Medicare premiums and taxes.

+1

Truly a 1% problem. Or maybe a 5% problem at worst?

 

[pb4uski]

The Roth is probably the best option as of now. Of course, in the future they may well include Roth withdrawals in MAGI and allow a deduction later (similar to LT gains and qualified dividends).

I'm just saying the analysis isn't as trivial as you make it sound.

I guess I'll just agree to disagree with you on this one. At worst for an individual, the surcharge is ~1.7% of MAGI.

Do you really think that an individual who in retirement has a MAGI of $214,000 and is likely paying federal income taxes at the 33% marginal rate is going to be bothered by having to pay a $3,600 Medicare surcharge? Annoyed, yes; but if it were me I wouldn't view it as a big deal. I would be much more annoyed at the 33% marginal tax rate.

 

[braumeister]

do you see federal tax rates increasing from 25% bracket for income that now falls within the current 25% bracket?

That will be up to our elected Congresscritters. Nobody knows.

 

[youbet]

Still not clear to me whether a person applying for medicare this year with a low 2012 income will pay low medicare premiums forever or whether Medicare monitors annual income and adjusts premium surcharges as required.

Your annual premium is based on your income two years prior. It is checked each and every year so if your income is varying, your Part B and Part D premium will change as well.

 

[braumeister]

Social Security bases the IRMAA on your tax return, which is why there is a delay, usually two years.