With the onset of Baby Boomers starting to retire we are beginning to hear the question from more than a few of them, “why am I paying more for Medicare premiums than others?”
The answer to this question is Income.
If you make too much of it in retirement you will unfortunately, pay more for your healthcare. Thanks to the Medicare Modernization Act of 2007 & the Affordable Care Act (healthcare reform) it paved the way with new legislation that allows Medicare to charge higher premiums for those that earn “too much” income in retirement.
These two acts also allowed Medicare to define income differently than the IRS. Now, Medicare through Social Security will add your adjusted gross income together with your tax-exempt interest income to get an amount called the modified adjusted gross income (MAGI).
In layman terms, everything that hits your tax return is now considered income – yes, that is right, EVERYTHING.
Social Security, wages from work, returns on investments, dividends (even if it’s from a Muni Bond) capital gain payouts, the sale of vacation home, too much return on the sale of a primary residency… EVERYTHING!
With such a broad sweeping issue looming hopefully, enough financial professionals will take notice of this growing concern, adjust their planning accordingly and the problem will be rectified easily but from the latest article from MarketWatch there is room for a lot of worry.
The article titled “Boomers turn home equity into 401k funds” highlights how little is known on Medicare & income.
People who decide to do what is recommended in this article, rip out all their equity from thier home & invest the cash into a 401k vehicle, must realize that when they start to liquidate these monies they will be classified as INCOME.
Is this a problem?
Only if you like paying anywhere from 50% to about 200% more on Medicare premiums so you can “invest” at a tax free rate now of roughly 20%.
As stated previously, Medicare counts everything that hits a tax a return before deductions as INCOME and the penalties are high, which is what Baby Boomers are quickly learning (See article here).
How high can the penalties be?
For a 65 year old who earns under $85,000 throughout retirement and lives to age 85 – they can expect to pay roughly $58,000 in premiums.
If they earn just $1 more over the course of retirement they will pay $80,000
If they earn over $214,000 then they can expect to pay roughly $182,000 FOR THE SAME COVERAGE.
Again, if the financial industry wakes up to this issue it won’t be an issue but from the looks of it a lot of people are going to be in big trouble.