Transcript:
Easan Arulanantham:
Do my Required Minimum Distributions affect my Medicare premiums?
Tom Vaughan:
Yeah, yeah, it’s really interesting. So here’s some scenarios that I’m running across. And I think this is a really important future looking concept is that people have saved all of this money in their retirement plans, mostly 401k. Ks, we see very large 401k is here in the valley, right? Because great matches, people make good money. So putting away you know, money is easier when they have high salaries. And so we’re seeing a lot of million dollar plus 401k is just kind of littered all over the valley here. And the problem is that eventually, you have to start taking money out at 72. There’s a requirement of distribution. And so that requirement distribution starts off fairly small, you know, four and a half percent give or take that first year, it grows as a percentage every year, probably your account would grow over time also. So all of a sudden, you’re older, 80, or what have you, and you’re having to pull a lot of money out of these plans, we call it the tax time bomb. And one of the casualties of that is Medicare. Because Medicare is means tested, which just means the more you make, and you trip these certain levels, then you have to pay that higher cost for Medicare, it is potentially temporary, they look back for two years, so it could come back down.
But if you have a high Required Minimum Distribution is probably not coming back down, it’s going to continue to get even more more onerous as far as that goes. So have a have clients in this situation. And I’ll tell those people that are not that deep into their retirement, this is a really big area to look at. In my opinion, this is where the Roth conversion has a real powerful component. Because you know, at some point in your late career, or right after retirement, you start to convert assets to Roth IRA accounts, which you can do, that’s taxable, that could affect your Medicare, but what you’re doing is you’re getting rid of a future liability, because as you move it into this Roth IRA, it’s growing tax free, and there’s no requirement for distribution. And so that’s a way to try to control mostly the tax time bomb, but also this potential for having a higher income than you really need, causing a higher, and it can be quite a bit higher two to five times more for Medicare, just because of the requirement of distributions, you know, it’s a good problem to have, that means you have money. I don’t want to complain about that. But there are some strategies that, you know, that can be employed here, if we think about it, and this is something you and I work on quite often with, with clients. It’s really trying to help out with this particular area. So it’s really it’s a good question.
Easan Arulanantham:
Yeah. And usually, there’s that two year lag period, sir, for your 2022 premiums are based on your 2020 on tax returns. So you won’t see these, when you initially start your RMDs. You’ll see this probably at 74. And then they’ll start to escalate from there on.
Tom Vaughan:
Yeah, it makes some argument and you have to do the calculations to make some of your Roth conversions earlier, before you get into that two year window. So theoretically, if somebody retired at 55, and they weren’t taking, you know, Medicare, obviously, till 65, they’ve got eight years that they can try to do a lot of conversion work doesn’t impact their Medicare, maybe they lower their conversions, or they’re done by that two year window prior to 65. If you’re retiring at 65, you know, it’s there’s different things that you can do, but this is a big part of the planning process for tax planning. And it impacts Medicare too. So I think this is huge. I wish more people would pay attention to these things.