Working with an experienced tax professional for tax preparation and tax planning can often result in reducing one’s tax bills or avoiding unnecessary surcharges. How often does an individual decide to retire without first consulting with their CPA? Far too often. There are many decisions that need to be considered when retiring, such as when to begin receiving social security benefits, is it best to live off of retirement funds or non-qualified investment accounts, estate planning, and how to minimize the Medicare surcharge premium. Another important consideration is that retirement planning needs to be done before the year of retirement to maximize the benefits.
When you go onto Medicare at age 65, you will be subject to a MONTHLY MEDICARE PREMIUM SURCHARGE if your Modified Adjusted Gross Income (MAGI) is above $85,000 for a single person or $170,000 for a married couple per your MAGI from the return filed with the IRS two years ago. MAGI for Medicare is defined as the taxpayer’s adjusted gross income (AGI) plus tax exempt interest. This could raise your Medicare Premium from the 2013 standard premium of $104.90 per month to as high as $335.70 if your MAGI is above $214,000 (single person) or $418,000 (married couples). In addition, there would be an additional MONTHLY MEDICARE D PREMIUM SURCHARGE of $11.60 to $66.60.
Are there ways to minimize this Medicare premium surcharge? Yes, there are various ways to reduce this surcharge.
One consideration is to use Roth IRAs for your retirement accounts during your working career. While you lose the tax deduction afforded by a traditional IRA contribution when the contribution is made, all future earnings and appreciation of the Roth IRA will grow tax-free and never be taxed to you or your spouse and perhaps your heirs when withdrawals are made.
Another approach to use during your working years is to invest in permanent life insurance. Again there is no tax deduction when the premiums are paid, but all future earnings and appreciation of the life insurance policy will grow tax-free and never be taxed to you if the withdrawals are made as a loan. Furthermore, you may be able to withdraw funds from the policy at any time for any reason without penalty.
An analysis of converting your regular IRA to a Roth IRA should be done periodically before reaching your retirement age. While income taxes are due on the conversion, Roth IRAs have no required minimum distributions (RMDs). Thus, a Roth IRA provides greater flexibility as to when (or if) to tap into those retirement funds.
If you plan to continue to work after reaching 65 and will be covered by a medical plan, you could register for and then withdraw/suspend your Medicare coverage while you continue working. In addition, you could make could make 401(k) and 403(b) contributions of up to $22,500 to reduce your MAGI.
If you do not plan to continue to work, then you can wait until age 70 1/2 to start to take your RMDs from IRAs and Retirement Plans. You also need to consider the optimal age for starting to receive your Social Security Benefits. Rather than begin receiving these benefits at age 62/65/67, perhaps waiting until age 70 would be the optimal age.
It is never too early to begin to think about retirement planning!
Note: Because each individual’s tax situation is different, if you want to learn more about retirement planning, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation.
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