Navigating Medicare Premiums and Retirement Plan Withdrawals
At 71 years old, Joyce found herself facing an unexpected tax burden after withdrawing $60,000 from her Thrift Savings Plan (TSP). The withdrawal not only increased her federal and state taxes but also boosted her Medicare premium. Joyce is now concerned about the permanence of the Medicare premium increase and is seeking a strategy to reduce her taxes.
Understanding Medicare Premiums
Most people receive Medicare Part A without paying a monthly premium. However, Parts B and D require premiums, which can be higher for individuals with incomes exceeding certain limits. In 2024, the income-related monthly adjustment amount (IRMAA) kicks in for single filers with incomes above $103,000 and couples with incomes above $206,000. IRMAA can increase Medicare Part B premiums up to $594 per month.
The Impact of Income on Medicare Premiums
The government calculates IRMAA based on income from two years prior. Therefore, Joyce’s 2024 income will determine her IRMAA adjustment in 2026. If her income barely exceeds the IRMAA threshold, inflation may push the limit higher by 2026, leaving her unaffected by the surcharge.
Distinguishing Between Taxable Income and Modified Adjusted Gross Income (MAGI)
When determining what you pay in taxes and Medicare premiums, it’s essential to understand the difference between taxable income and MAGI. Taxable income is calculated by subtracting deductions from adjusted gross income (AGI). MAGI, on the other hand, is used to determine Medicare premiums and is calculated by adding tax-exempt interest to AGI.
Reducing Taxes and Medicare Premiums
To minimize taxes and Medicare premiums, consider the following strategies:
- Reduce your income by taking advantage of available deductions and credits.
- Keep your MAGI under the IRMAA threshold amounts.
- Consider converting portions of tax-deferred accounts to Roth IRAs before required minimum distributions (RMDs) begin at age 73.
- Roll funds into an IRA to incorporate qualified charitable distributions (QCDs) into your withdrawal strategy.
Retirement Income Planning
Retirement income planning can be complex, but working with a financial advisor can help you build a plan tailored to your assets and income needs. They can assist you in creating a tax-efficient withdrawal strategy and provide guidance on navigating Medicare premiums.
Emergency Funding
Maintain an emergency fund in a liquid account to cover unexpected expenses. This fund should be easily accessible and not subject to significant market fluctuations. A high-interest savings account can help you earn compound interest while keeping your funds liquid.
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