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Medicare Enrollment Periods

Oct 22nd, 2018
by jblankenship.
4 comments

enrollment periodsIf you’re eligible (or soon to be eligible) for Medicare, you may have noticed that there are specific times when you can enroll, add, change or drop coverage. These enrollment periods can be confusing! There are so many different enrollment periods and each has different rules. In this article we’ll attempt to make the enrollment periods a bit less confusing.

Initial Enrollment Period

When you first reach age 65 and become eligible for Medicare benefits, there is a set period of time when you can enroll. The initial enrollment period actually begins before your 65th birthday, and is a total of seven months. This includes the three months before your month of birth, the month that you reach age 65, and the three months after your birth month. So if your 65th birthday is in July, your initial enrollment period starts on April 1 and lasts until October 31.

During this period you can enroll in Medicare Part A and Part B. You can then choose other additions to your Medicare coverage, including prescription drug coverage, a Medicare supplement policy (Medigap), or maybe a Medicare Advantage plan.

The month in which you enroll determines when your Medicare Part B coverage will begin. If you enroll in Medicare during the any of the 3 months prior to your 65th birthday, your coverage will begin during the month of your birthday. If you enroll during your birthday month, coverage begins on the first of the following month. If you enroll in the month after your 65th birthday, coverage is delayed until the first of the month that is two months after your birthday. If you wait to enroll during any of the remaining 2 months in your initial enrollment period, there will be a three-month lag before your benefits will begin. For example, if your birth month is July and you wait until August to enroll for Medicare, your Part B coverage will not commence until October 1. If you enrolled in September, the coverage would not begin until December 1.

Medicare Part A is different. Your coverage begins on the first of the month when you reach age 65, even if you enroll up to 6 months after your birthday. Beyond 6 months after your birthday, Medicare coverage always begins retroactively 6 months before the date that you enroll.

Delaying enrollment in Medicare Part A until some time after your initial enrollment period carries no penalty (unless you’re not eligible for “free” Part A). However, delaying Medicare Part B enrollment until after the initial enrollment period can result in premium penalties.

Medigap Initial Enrollment Period

Once you have enrolled in Medicare Part B, you have a 6-month period when you can enroll in Medigap. Generally, if you do not purchase a Medigap plan during this period, you may be required to provide evidence of insurability to the insurance provider if you attempt to purchase a policy later. This may result in higher premiums or denial of coverage altogether, if there is a pre-existing condition.

During the 6 months after Medicare Part B enrollment, insurers are required to accept you as an enrollee in whatever Medigap Plan you choose, as long as you can pay the premiums.

You can also make changes to your Medigap plan on an annual basis, however, as noted elsewhere, making changes to your Medigap plan may require additional information about your medical history, especially if changing to a more comprehensive plan. Choosing a less comprehensive plan typically does not cause any issues.

Annual Enrollment Periods

There are several annual enrollment periods that you need to be aware of. There is the General Enrollment Period, the Open Enrollment Period, and the Medicare Advantage Open Enrollment Period. These are explained briefly below:

General Enrollment Periods – This is from January 1 to March 31 each year. During this period you are allowed to enroll in Medicare Part B if: 1) you didn’t sign up when you were first eligible during your initial enrollment period; and 2) you aren’t eligible for a Special Enrollment Period. You can always sign up for Medicare Part A at any time, with no penalty.

When you sign up for Medicare Part B during the General Enrollment Period, most often you will pay a penalty on your premiums for Medicare Part B. There is no penalty for signing up for Medicare Part A late if you’re eligible for the “free” coverage. If less than a year has passed since your initial enrollment period, you may not have a penalty for your late enrollment.

Your Medicare Part B coverage will not begin until July 1 of the year that you sign up during the General Enrollment Period. Medicare Part A coverage is back-dated to six months prior to your enrollment date, or the month of your 65th birthday if you enroll less than six months after that date.

If your enrollment in Medicare Part B is completed during the General Enrollment Period, you will then have an opportunity to acquire a Medicare Advantage plan or add a Medicare Part D plan to your coverage during the period between April 1 and June 30 of that same year. If you do not add these items during that period, you must wait until the following fall’s Open Enrollment Period (see below) if you want to add or make changes to your plan(s).

Medicare Advantage Open Enrollment Periods – In addition, during this same period from January 1 through March 31 each year, you can change from one Medicare Advantage plan to another. You can only make this change during this period if you are currently have a Medicare Advantage plan. You can also make the switch from Medicare Advantage to original Medicare (Part A and Part B, with or without Part D and/or Medigap) during this period.

You cannot switch from original Medicare to a Medicare Advantage plan during this period. That is only allowed during the fall Open Enrollment Period (covered next).

Open Enrollment Periods – this period is also known as the “fall open enrollment period”, because it’s the only period that occurs during the fall (all others are in the first part of the year). From October 15 to December 7 each year, you are allowed to make several changes to your healthcare coverage. This is the period that allows the most flexibility in changing up your overall Medicare coverage landscape.

During this period, you can switch from original Medicare (Part A and Part B) to a Medicare Advantage plan. You can also do the reverse – switching from a Medicare Advantage plan back to original Medicare (Part A and Part B).

You may also switch your coverage from one Medicare Advantage plan to another Medicare Advantage plan. The plan you choose may or may not have prescription drug coverage. So you may also add a Medicare Part D (prescription drug coverage) plan to your coverage at this time. You can switch from one Part D plan to another during this period, or you can drop your Part D coverage.

If dropping Medicare Part D coverage, you can either choose to go without prescription drug coverage, or you can add a Medicare Advantage plan that includes prescription drug coverage.

Special Enrollment Periods

Medicare Part B Enrollment Period – If you (or your spouse, or other family member if you’re disabled) are working and you’re covered by a group health plan through your, your spouse’s or family member’s employer or union based on that work, you may have a Special Enrollment Period when that coverage ends. This special enrollment period is available when there has been a change to your situation regarding the creditable coverage.

Your Special Enrollment Period includes the entire time from your 65th birthday and are employed and covered by a creditable health plan, plus 8 months after your coverage ends. The 8 months begins the month after the employment ends, or the month after the group health plan based on the employment ends. These are the two changes that typically occur that allow for a special enrollment period. Another situation that provides a special enrollment period is divorce from or death of a spouse or family member whose employment was providing creditable coverage.

Additionally, a Special Enrollment Period may be available to you if you discontinued Medicare Part B because you started being covered by an employer plan (either your own or your spouse’s). When that coverage comes to an end, you have 8 months to enroll again in Medicare during the Special Enrollment Period. Otherwise you’ll have to wait until an annual enrollment period and likely be assessed a penalty for late enrollment.

You will not be assessed the late enrollment penalty for either paid Medicare Part A or Medicare Part B if you’re eligible for a special enrollment period and you enroll during the applicable period. Delay past the end of the special enrollment period will cause the same kinds of penalties to apply as if you delayed enrollment until some time after your initial enrollment period.

It is important to note that COBRA and retiree health insurance are not considered as creditable coverage that would allow you to utilize a Special Enrollment Period. Only active employee health insurance is allowed to provide for this special treatment. Furthermore, COBRA coverage coming to an end (COBRA provides coverage for up to 18 months after employment has ceased) is NOT an event that starts a Special Enrollment Period. Only the original plan coming to an end or the end of employment will trigger the Special Enrollment Period.

If you sign up for Medicare Part B while you are still covered by the employer plan, or during the first full month that you no longer have coverage from your employer, Medicare Part B coverage begins on the first day of the month that you enroll. You can choose to delay this coverage to begin with any of the succeeding three months after enrollment.

If you wait until any of the remaining 7 months of your Special Enrollment Period to enroll in Medicare Part B, coverage will begin on the first day of the month after you’ve enrolled.

The coverage delays when signing up during a Special Enrollment Period are much less than the 6-month delay with the Annual Enrollment Period, because the AEP signifies a period of time when you did not have creditable coverage but were eligible for Medicare coverage. Any time there has been a gap in coverage, insurers require a delay before coverage to allow for any adverse conditions that may have commenced.

Special Enrollment Period for Medicare Advantage and Part D – For a Medicare Advantage plan and Medicare Part D, the Special Enrollment Period lasts only two months after your employer or group health plan has ended. Your coverage begins on the first of the following month after you enroll.

In addition to the Special Enrollment Period that is available when you have left your employer or your employer health plan has terminated, there are several other conditions that may provide for a Special Enrollment Period. Many of these conditions only apply to either Medicare Part D and/or Medicare Advantage plans. This is a reflection on how fluid the prescription drug coverage landscape can be.

Below is a list of the circumstances that Medicare has developed that may provide you with a Special Enrollment Period. For more details on the periods, please go to Medicare’s website (www.Medicare.gov) and search for “special enrollment period”.

  1. You have creditable drug coverage or lose creditable coverage through no fault of your own
  2. You choose to change employer/union coverage (through either current or past employment)
  3. You are institutionalized
  4. You are enrolled in a State Pharmaceutical Assistance Program (SPAP)
  5. You have Extra Help, Medicaid, or a Medicare Savings Program (MSP)
  6. You gain, lose, or have a change in your Medicaid, MSP, or Extra Help eligibility status
  7. You want to disenroll from your first Medicare Advantage Plan
  8. You enroll in/disenroll from PACE (Program of All-Inclusive Care for the Elderly)
  9. You move (permanently change your home address)
  10. You have had Medicare eligibility issues
  11. You are eligible for a Special Needs Plan (SNP) or lose eligibility for your SNP
  12. You are passively enrolled into a Part D plan or Dual-eligible SNP (D-SNP)
  13. You experience contract violations or enrollment errors
  14. Your plan no longer offers coverage
  15. You disenroll from your Medicare Advantage Plan during the Medicare Advantage Open Enrollment Period
  16. You qualify for a new Part D Initial Enrollment Period when you turn 65
  17. You want to enroll in a five-star Medicare Advantage Plan or Part D plan
  18. You have been in a consistently low-performing Medicare Advantage or Part D plan
  19. Your Medicare Advantage Plan terminates a significant amount of its network providers
  20. You experience an “exceptional circumstance”

As noted above, the Special Enrollment Period for Medicare Advantage plans and Medicare Part D plans only lasts for two months after your employer-provided or group insurance plan has ended. This one can pass by in a hurry, you need to pay close attention if you need this coverage during a Special Enrollment Period.

Posted on Oct 22nd, 2018
by author: jblankenship.

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Posted in: health plans, Medicare, Medicare Advantage, Medigap.
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IRA Options for a Surviving Spouse Under Age 59 1/2

Oct 17th, 2018
by jblankenship.
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surviving spouseAs a follow-up to an earlier article on Options For a Spousal Inherited IRA, I wanted to address the specific situation that occurs if you, as a surviving spouse, have inherited an IRA from your spouse and you’re under age 59½. There are a couple of choices available to you – which can pose a dilemma.  As we have discussed in other articles, you have the option of leaving the funds in the original IRA (owned by your late spouse), which will allow you, as a spouse, to withdraw from the account at any time without penalty.  There is no 10% penalty for the withdrawal in this situation, as there would be with most other withdrawals before age 59½.  The downside to leaving these funds in the name of your deceased spouse is that, upon your death, the distribution options are usually unfavorable for that situation, and since you are not the original owner you can’t make changes.

On the other hand, as a surviving spouse you also have the option of moving the funds from the original account into an account in your own name – which will give you the flexibility to make changes to the distribution choices.  The problem with this move is that once you have moved the funds into your own account, the exception to the 10% penalty for early withdrawal no longer applies.  So, unless one of the other 72(t) exceptions applies you can not access the funds in the new, rollover account until you reach age 59½.

How to Deal With the Dilemma as a Surviving Spouse

How should you deal with the dilemma?  It depends completely on your specific situation, but below are some strategies you might consider:

If you would be in dire financial straits without access to funds from the IRA, leave it in your late spouse’s account, at least until you reach age 59½. Then later you can rollover the funds into your own account.  Since there is no deadline for this rollover, you have the flexibility to treat the account in this fashion.  If the event of your untimely death before rolling over the account would produce undesirable distribution of the remainder, you can address this by purchasing term life insurance with account proceeds, timing the insurance to expire upon your rollover.

If you’re well-to-do and don’t need funds from the IRA (okay, at least comfortable), or in ill health, you should not delay in rolling over the funds into your own account. This is because when you’ve made this move, you can be in control of the disposition of the account upon your death.  If for some reason you later need to access the funds in the account and you’re still under age 59½, you can either set up a Series of Substantially Equal Periodic Payments (SOSEPP) or use one of the other 72(t) exceptions if available.

What If the Account Requires Lump-Sum Distribution?

If there is a reason to leave the funds in the deceased spouse’s account but the account provisions require that you take a lump sum distribution immediately, you can roll over the account to an Inherited IRA, maintaining the original owner’s name, essentially acting as if you are a non-spouse beneficiary. This third option will give you the freedom to begin taking distributions (at least the Required Minimum Distributions, RMDs, but you can take more if needed) from the account, without penalty.  Then you can later rollover the funds into your own account at a later date when you no longer need the distributions or you reach age 59½.  This later rollover provides you with the option of receiving distributions in smaller amounts (no more RMD until 70½) and protecting the tax-deferred status as long as possible – in spite of the provision from the original account that required lump-sum distribution.

Posted on Oct 17th, 2018
by author: jblankenship.

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Posted in: 72t, Early Distribution, financial planning, IRA, retirement plan.
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Tax-Efficient Charitable Giving from your IRA

Oct 15th, 2018
by jblankenship.
2 comments

charitable givingYou may have noticed with the new tax law that was passed for 2018, there was a significant change to the standard deduction. At first glance, even the topic of standard deductions seems very tax-tech-y, and something that many folks don’t pay attention to at all. But hidden in the details is something that may be of interest: a better, more tax-efficient way of charitable giving, using your IRA.

Granted, this is not going to apply to everyone. There are some restrictive rules in place. Specifically, you must have an IRA, and you must be at least 70½ years old, subject to Required Minimum Distributions (RMDs). And, you must be in a position where you are inclined to make charitable contributions. You may have made such contributions in the past, but probably not in the manner I’m talking about. Chances are, you probably made out a check to your chosen charity, and then when you did your income taxes you itemized the amount for deduction from your income. This is usually done with a form called Schedule A, which is attached to your standard Form 1040 tax return.

Everything worked just fine in the past with that process. However, some of you may have noticed that, over time, you may have switched from itemizing your deductions (with Schedule A) to using the standard deduction. This occurs when the standard deduction is larger than the total of your itemized (Schedule A) deductions.

I suspect this will be more common starting with your 2018 tax return, because the standard deduction has increased significantly. In 2017, the standard deduction for a married couple filing jointly was $12,700. And if they were both over age 65, the standard deduction was increased to $15,200. For many folks, that’s a lot of charitable contributions! Of course, charitable contributions are only a part of what makes up Schedule A itemized deductions – you’d include your real estate taxes, state and local income tax, sales tax, and medical expenses above a certain amount.

So, with those items added together with your charitable contributions, it’s quite possible for many taxpayers to breach the standard deduction amount and qualify to itemize.

But for 2018, the standard deduction for the same married couple, over age 65, will be $26,600 – an increase of more than $11,000 over the 2017 amount. (There are many other changes to the tax laws including the elimination of personal exemptions that makes this increase less valuable, but that’s a topic for another time.) Because of the new amount, along with some limitations that have been put in place on certain itemized deductions, many if not most taxpayers will be using the standard deduction for the first time in 2018.

With this in mind – you might wonder about whether it’s worthwhile to make those charitable contributions any more… after all, if you can’t itemize, those contributions won’t help your tax situation out, so why bother? (Many charities are looking at this as well and are quite concerned!) Hopefully, you were planning your usual support of the charity, just not getting the tax benefit from it like you have in the past.

But what if there was a way to be tax-efficient with your charitable giving? If you meet the restrictions I mentioned above (at least 70½ years old, and subject to RMDs from your IRA), you have exclusive access to a very tax-efficient way of charitable giving from your IRA. It’s called a Qualified Charitable Distribution (QCD), and it’s been around for quite a while – but I suspect it will become more popular with the changes in the tax law.

Charitable Giving from Your IRA

Below is a partly-fictitious interaction that I had with my father. You need to know that he’s far better looking in real life than I can make him look with my writing, for example. We had a similar discussion but I’ve fleshed this out much more and included purely made up figures to simplify the example.

Me: So, have you noticed the changes to the standard deduction from the new tax law? Probably won’t have to itemize your deductions this time around…

Dad: Yeah, we’ll still make the same charitable contributions we have in the past – but losing that deduction along with all the other changes will be hard to swallow. (See, I couldn’t make him look as dignified in writing as he really is. Try to cope with it.)

Me: Well, did you know there’s another way you can make those contributions, and still get benefit on your tax return? It’s called a Qualified Charitable Distribution (QCD).

Dad: I’ve heard of that, but never bothered to look into it. Seems like a lot of paperwork to do pretty much the same thing as we’ve always done.

Me: Au contraire! (We hardly ever speak in french, that was only for dramatic purposes.)

I’ll show you how it works:

Your income is $65,000* before any deductions. In the past, your itemized deductions came up to $20,000, and your personal exemptions were $8,100 so your taxable income was $36,900. Your itemized deductions included $10,000 that you send to various charities through the year, and the rest is real estate tax and medical expenses. Your annual RMD from your IRA is $5,000. (*All of these figures are completely made up, nice round figures to help with the example.)

In 2018, since your itemized deductions are less than the standard deduction, you’d just use the standard deduction. So your $65,000 income minus $26,600 equals $38,400 (remember there are no personal exemptions in 2018). That’s a higher taxable income than you had in 2017, because of the changes to the law. The lowered tax brackets would mean a lower overall tax bill, but you’re paying tax on a higher amount of income – and you didn’t change anything!

Now, if you used a QCD for your RMD of $5,000, your taxes would look a bit different. The QCD amount is not included in your income, so the income figure is reduced off the start to $60,000. Then then new standard deduction of $26,600 is subtracted, for a taxable income of $33,400. That’s $3,500 less than last year, and you didn’t have to itemize. How about that?

Dad: Well, that’s pretty amazing. So I only have to use this QCD and I can reduce my taxable income by $5,000?

Me: It gets better. Since you make a total of $10,000 in charitable contributions every year, you could use the QCD to distribute that full $10,000 to your chosen charities, and reduce your taxable income by that full amount.

If you send the full $10,000 to your chosen charities using QCD, your overall taxable income would be reduced even further, down to $28,400. That works out to a $1,200 reduction in taxes!

Dad: Well – I bet it’s really a hassle to do these QCDs. I don’t like hassles. (True statement. He doesn’t like hassles.)

Me: Not at all. You already have to notify your IRA custodian annually to have your RMD withdrawn. All you need to do is tell them to send the specified amounts to your chosen charities as Qualified Charitable Distributions. Then they take care of the rest of it. You’ll need to make sure you keep record of the QCD so that you can properly prepare your taxes – currently the 1099R forms don’t reflect whether your distribution was a QCD – so this is really important!

And so it went (fictitiously).

So if you fit into the parameters outlined above, you too could use this method to have more tax-efficient charitable giving. If you need more details, just reach out to me.

* Astute reader BB pointed out that you must actually be 70½ years old to use the QCD. This could represent a challenge in timing if your 70½ age occurs very late in the year. BB also pointed out a problem with the earlier version of this article in that currently, Form 1099R does not have a provision or code to indicate that the distribution (or part of it) was a QCD. You’ll need to maintain your own records and make this notation in your tax return. 

Posted on Oct 15th, 2018
by author: jblankenship.

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Posted in: income tax, QCD, qualified charitable distribution.
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Don’t Dismiss That “Small” Pension

Oct 12th, 2018
by sraskie.
2 comments

loanFrequently, I’ll meet with clients to go over a retirement plan. As is typical, we look at current investments, account balances, Social Security, etc. Often these conversations revolve around distributions from retirement plans and cash flow planning to reduce the probability of portfolio failure, and ensuring an income stream that is congruent with the clients’ retirement goals.

Sometimes clients will also have small pensions from their current or former employer and they will tell me that they are small, trivial, or not worth considering.

Whenever I hear those words or something similar, I try to explain to the clients that however small or trivial, it’s still a guaranteed income stream that will last the rest of their lives in many cases.

For example, I have seen clients think that a $150 monthly pension wasn’t a big deal. But when I present to them that there’s an amount for a “date night” once a month, they can visualize using that money for the date night. A similar expense would be cable TV, funding a grandchild’s 529 plan, etc.

In another example, some clients had roughly $350 in monthly pension money coming from two different sources. They were concerned about having a travel fund in retirement. Their travel budget in retirement was approximately $8,000. When I mentioned they could allocate the pension money to fund half of their annual travel budget, they could visualize the pension money being used, and were almost relieved that they didn’t have to worry about where (half) of their travel budget would come from.

In other words, half of their travel budget was guaranteed by the “small” pension money that was almost an afterthought of our conversation.

The point is, with a pension, that amount can be allocated to cover a specific retirement expense and individuals can know that a certain expense or expenses are going to be met by the pension. It means one less expense to worry about where the money is going to come from, and it can reduce stress knowing that no matter what, the client is always guaranteed to meet that expense.

Put another way, per the examples above, clients can guarantee they will have a travel fund, fund a grandchild’s education, or a monthly date night in retirement.

Posted on Oct 12th, 2018
by author: sraskie.

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Posted in: pension, retirement plan, retirement savings.
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I’m delaying my Social Security. Here’s why

Oct 8th, 2018
by jblankenship.
4 comments

delaying my social securityIf you’ve been reading here very long (or pretty much anywhere else for that matter), you’ve probably seen a lot of opinions on Social Security claiming strategies. It’s a very personal choice, because the only way to really be “right” is to know how long you (and perhaps your spouse) will live. In my own case, I’m delaying my Social Security benefits to the latest possible age. This article will show you why.

Delaying my Social Security

I intend on delaying my Social Security filing to age 70. At the same time, we intend for my wife to begin her Social Security at age 62. We’ve chosen this strategy for three primary reasons:

  1. By delaying, I am maximizing an income stream that is truly unique – no other stream of income that I know of has these three factors:
    1. has inflation protection (annual cost of living increases) built in;
    2. has no upper limit (no matter how long I or my spouse live, the benefit continues); and
    3. is tax-preferential (at max, 85% is included as taxable income).
  2. By delaying and maximizing my benefit, I am also maximizing the survivor benefit that will be available to my wife if I pre-decease her.
  3. By starting my wife’s benefit early, we will receive that benefit for the longest possible time.

By using these two strategies, we are maximizing the timeline of receipt of my wife’s benefit, even though it will be reduced. Her benefit amount will be a bit less than mine, but not so low that she will be eligible for a spousal benefit. This way we’ll receive her benefit for 8 years before we begin receiving my benefit. At the same time we’ll maximize the amount of the benefit that potentially will last the longest – assuming one or the other (or both of us!) live past approximately 82 years old. This maximized benefit amount will have the three factors (inflation protection, no upper limit, and tax preferential) built-in to the highest amount we can get.

I have no doubt that the system will be adjusted to deal with the coming trust fund shortfall and have faith that current beneficiaries will continue to be paid. It’s happened before, and will happen again. Nonetheless, the filing strategy that I’ve outlined above does take this factor into account. The possible shortfall of the system is yet another reason to start one benefit earlier, in order to receive it for a longer period of time.

Comparing to other sources

The three factors listed above (why I’m delaying Social Security item #1) are truly unique. Let’s look at other income sources to compare (using the a, b, and c factors from above):

IRA/401k account –
a) has potential inflation protection built in, but only to the extent that the market performs well during the period. By comparison, Social Security’s COLAs are built-in to the system and apply according to economic changes.
b) It could be argued that an IRA/401k, if you only take sustainable withdrawals (using, for example 4% as your rate), that the fund could last for your entire life. But the point is that your 401k or IRA is a finite amount – and it can be drained completely if you had to have the money. Then you’re done. This is not so with Social Security benefits, at least under today’s rules. You’ll have another check coming the following month, as long as you live.
c) IRA/401k funds, if they are completely tax-deferred, are included 100% as taxable income. By comparison, Social Security benefits can be excluded from tax altogether, or included at a 50% rate, or at maximum an 85% rate. This item is eliminated if your IRA or 401k is Roth-type, but the tax being paid up front on contributions offsets some of this benefit.

Pension –
a) some pensions have inflation protection built in, but the majority do not.
b) typically pensions are payable over your entire lifetime, and may also be provide income for your spouse’s lifetime if you’ve chosen that option. But choosing a 100% joint-and-survivor option results in a reduction of your pension benefit in order to provide the spousal lifetime option, unlike Social Security benefits. Your spouse’s survivor benefit does not reduce your own benefit by providing it to him or her. It is true that the spouse’s own benefit will go away if he or she becomes eligible for the survivor benefit.
c) most pensions are 100% included in income. Some pensions include a provision for pro-rata return of your own participation in the plan (contributions you’ve made) tax-free, but this is less common than the 100% variety.

 Annuity –
a) depending on the type of annuity, some inflation protection is built in, but often only to the extent of market returns (as with the IRA/401k).
b) as with pensions, depending on the type of annuity and the payment plan, there may be income for your life and your spouse’s life. These options are not without downsides, as the available income will be reduced to provide your spouse with lifetime benefits as well.
c) like pensions, there may be a provision for tax-free return of contributions (depends on your annuity), but otherwise are generally 100% included as taxable income.

So, you can see, there’s no silver bullet. The factors listed above are enough for me to choose delaying my Social Security benefit to age 70, while starting my wife’s benefit earlier. And as mentioned before, this is a personal decision, bound to be different for everyone. What are the driving factors behind your choice of Social Security filing strategies? Share in the comments, I’m interested in knowing what you’re thinking!

Posted on Oct 8th, 2018
by author: jblankenship.

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Posted in: Delayed Retirement Credit, Social Security, social security benefits, social security survivor benefits.
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Maintaining Your Resolve During Time of Uncertainty

Oct 5th, 2018
by sraskie.
1 comment

7cdfzmllwom-william-boutLife is full of uncertainty and sometime unexpected events can cause us to overreact, make impulse decisions, and behave in a way that would otherwise run counter to our long-term goals, dreams, and habits.

Surprise events such as a market crash, loss of a job, a spouse, divorce, or other traumatizing events can have the effect of instilling apathy towards our goals and bring the temptation to deviate from our plans.

The following are some ways to maintain resolve when life happens – and the urge to give up on goals is high.

  1. Review your plan and goals. Whatever the plan or goal, be it financial, life, occupational, etc., take a moment to review the goal you’ve created. If not yet in writing, write the goal down, quantify it, visualize it and remind yourself why it’s a goal in the first place. Picture yourself having achieved the goal. How do you feel? What did you overcome to get there?
  2. Grit, or sometimes called perseverance, drive, or dedication means continuing to do something even when you don’t feel like it. There’s a saying that nothing good comes easy. Sometimes this is true. If everything came easy, life would be full of mediocrity. Choosing to push through and having grit to stick to your plans will keep you focused and on the right path, despite wanting to give up.
  3. Take some time to reflect and think about your plans, goals and aspirations. Can they be improved? If so, how? The answer might not come right away, but often when we think and reflect on our plan we can generate new ideas to make achievement come faster, more efficient, or both.
  4. Having perspective means being able to look at your situation from another point of view. This alternate point of view may arise while reflecting, or it may come because of putting yourself in another individual’s shoes and looking at your situation from the outside.
  5. Talk to a professional. Whether it’s life, financial, business, or personal, talking to a professional who has expertise can help keep you focused. A professional may present some additional ideas, perspective, and guidance on how to handle a situation. Additionally, it may also help you if you’re feeling anxious (say, about market volatility) to talk to a professional and review your goals, plans, and why you may be having feelings of doubt. Bouncing your feelings off another individual can help keep you relaxed and focused on what you can control, and what you cannot.

Be grateful. Having an attitude of gratitude can help boost your mood, keep you focused, and clear your thinking. Think about what you have accomplished with your goals or plans, what you overcame in the past, and what life has given you. Being grateful directs our attention to the positives in life, while removing focus on the negatives.

Posted on Oct 5th, 2018
by author: sraskie.

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Posted in: financial planning.

Social Security Retirement Benefits – For Your Child?

Oct 1st, 2018
by jblankenship.
1 comment

tangible and intangible benefits for a childIt may not be all that common, but if you’re eligible for and drawing Social Security retirement benefits and you have a child (or children) under age 18 – did you realize that your child (or children) is eligible to receive a benefit from Social Security as well?  This is in addition to the “child in care” benefit that your spouse is also eligible to receive upon your filing for benefits – subject to a Maximum Family Benefit, which is usually between 150% and 180% of the Primary Insurance Amount or PIA that you, the primary beneficiary have earned.

The same holds true for the child of a parent who is receiving Social Security disability benefits.

It’s true.  When you begin receiving Social Security retirement benefits (even if it’s early and therefore reduced), your child (or children) under age 18 is eligible for a monthly benefit equal to 50% of your PIA (not the reduced benefit).  This benefit is payable until the month the child reaches age 18.

In a much more common situation, the same may hold true for grandchildren under the care of their grandparent, in the case where the grandparent is providing the household’s income (or a majority of the household’s income) and is receiving Social Security retirement benefits.  According to recent statistics, this is a sizable and growing group – apparently around 4.5 million children are living in homes headed by grandparents.  These children may be entitled to Social Security benefits if their grandparents are receiving benefits.

A couple of things to note:

  • A child is always deemed dependent on his parent (mother or father).  The fact that the parent and child do not live in the same home is not a factor unless the child has been adopted by another person.
  • The parent’s status with regard to contributing to the child’s support is not a factor.
  • Length of time that the parents were married, if ever, is not a factor.
  • The child is considered dependent on a stepparent if 1) the stepparent is providing more than 50% of the child’s support; or 2) the child lives with the stepparent.
  • A child is entitled to benefits on a parent’s or stepparent’s record even if the marriage between his or her parents or his parent and stepparent ends.
  • The child’s benefit can be lost (at least partly) if the child works and earns more than $17,040 (in 2018).
  • The benefit ends at the child’s age 18, or if the child marries.  This may be extended to age 19 if the child is still in elementary or high school.  The benefit extends further if the child is disabled, and does not stop if the child marries. The child’s disability must have begun before the child’s age 22.
Posted on Oct 1st, 2018
by author: jblankenship.

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Posted in: 2010 Tax year, 2011 tax year, care benefit, family benefit, parent mother, security retirement benefits, Social Security, social security benefits, social security disability benefits.
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Withholding and Social Security Benefits

Sep 26th, 2018
by jblankenship.
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spewing out fire by SudhamshuMany folks find, upon filing their income tax return, that a portion (often a significant portion¹, up to 85%) of their Social Security benefits are taxable.  Upon discovering this, it’s also often a surprise that, since the benefit is taxable, there hasn’t been enough tax withheld throughout the year. This not only requires you to pay up come April 15, but it can also cause a penalty for underpayment of tax to be applied.  This underpayment penalty is likely if the amount of underpayment is $1,000 or more. You need to adjust withholding.

There are many ways to deal with this situation – it’s not required that you withhold tax from each and every source of income, as long as you have the tax withheld or timely estimated payments are made, it doesn’t matter the source of the funds.  Listed below are four withholding methods to help make sure you don’t have an underpayment penalty.

Withholding Methods

Estimated Tax Payments. This method isn’t actually withholding, but it achieves the same purpose.  On April 15, June 15, September 15 and January 15, payments are made to the IRS, often in equal amounts.  In addition, any overpayments that you made in the previous year can be applied in place of any portion of the estimated payments you’ve calculated (more on that later).  It’s important that the estimated payments are made in relatively equal portions throughout the year, otherwise you may still be subject to an underpayment (or late payment) penalty based on the timeliness of your estimated payments. IRS expects you to have made payments throughout the year (if using estimated payment vouchers) that match up with your income. So in other words, it’s not enough to make one big estimated tax payment at the end of the year, you’ve got to spread it out.

Unless you use the next method, that is…

Withholding From an IRA Distribution. This method is a little-known way to deal with meeting the withholding requirements. Essentially, when you take a distribution from your IRA (or Qualified Retirement Plan such as a 401(k) plan), you have the option to have the custodian withhold taxes and report them to the IRS.  No matter if you take a single distribution or quarterly or monthly distributions, the withholding is counted as evenly distributed throughout the year – taking timeliness of the distribution and withholding out of the picture.  For more details on this method, read “IRA Trick – Eliminate Quarterly Estimated Tax Payments”.

Withholding From Your Other Income. You probably already know this, but you can have tax withheld from many other sources of income.  Pensions, annuities, part-time work, and the like, can all be set up with tax being withheld throughout the year.  This is accomplished by filling out a Form W-4 (Form W-4P for pensions). You can set the amount of withholding to literally any amount that makes sense for your situation.

Withholding From Your Social Security Benefit. Much the same as all of your other income, you can set up your Social Security payments to have tax withheld.  This is accomplished by filling out a Form W-4V, and selecting the percentage of your monthly benefit that you’d like to have withheld. You can choose from 7%, 10%, 15% or 25% to be withheld.  You can find Form W-4V at the IRS website or by calling 800-829-3676.

How much should you have withheld?  Of course, that answer is going to be different for each person.  It’s determined by how much tax you are assessed, how much withholding you have from other sources, and the shortfall in withheld (or estimated payment) tax.  You can get the details on how to calculate the proper amount of withholding or estimated tax payments in the article “Understanding the Underpayment Penalty and How to Avoid It”.

¹ For more information on how much of your Social Security Benefit will be taxable, read “Taxation of Social Security Benefits”.

Posted on Sep 26th, 2018
by author: jblankenship.

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Posted in: IRA, retirement plan, Social Security, tax.
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IRMAA for Medicare

Sep 19th, 2018
by jblankenship.
6 comments

I know only one person named Irma, and I think she’s a wonderful lady. Unfortunately, a namesake of hers (with a slightly different spelling) isn’t quite so wonderful. Most folks who’ve been introduced to this other IRMAA would agree.

IRMAA stands for Income Related Monthly Adjustment Amount. And if you’ve spent much time looking around at the various provisions related to Medicare, the word “adjustment” raises your “bet I’ve gotta pay more” antenna. Which is exactly right, you’re gonna pay more.

What is IRMAA?

money for irmaaWhen the Medicare Modernization Act was passed in 2003, one of the provisions in that law was to require a sort of means-testing to the premiums paid for Medicare Part B (physicians) and Part D (prescription drugs). It was determined that the subsidization of Medicare costs by the government should be in part borne by folks who have income above certain levels. The income used to determine your IRMAA adjustment is from your tax return 2 years prior to the current year. So ancient history can come back to surprise you when you least expect it.

In today’s world, the 2018 premium for Medicare Part B is $134. However, due to a provision in the law, many enrollees pay only $130 for this benefit. The provision that reduced this group’s premium is all about the annual cost of living adjustments (COLAs) that are added to Social Security benefits. Effectively, the provision says that the annual adjustment to the Medicare Part B premium cannot be more than the rate of the COLA for that year.

In some years, there is no COLA – specifically, in 2010, 2011 and again in 2016. When that happens, the Medicare Part B premium for folks who are collecting Social Security cannot increase. Also, if the COLA is very low (as we sometimes see as well as the zero years), the Medicare Part B premium can only increase by the COLA amount and no more. This is known as the “hold harmless” rule. Click the link for an excellent technical explanation of the hold harmless rule.

The people who were actively collecting Social Security and enrolled in Medicare Part B in the previous year are the ones who are potentially protected by the hold harmless rule. IRMAA then is also applied, such that if the individual’s income is above a certain limit, hold harmless does not protect them. So we have 3 groups that are not protected by the hold harmless rule:

  • those who start Medicare Part B in the current year
  • those who were enrolled in Medicare Part B but not collecting Social Security
  • those with incomes above the IRMAA limits

Part of the law requires that 25% of the projected cost of Medicare Part B is paid for by premiums paid by enrollees. Since the hold harmless rule limits participation by roughly 70% of all Part B enrollees, the remainder of the cost must be picked up by the 30% who fit into the groups above.

All of the unprotected groups start out with the standard $134 per month premium (for 2018). Then the IRMAA earnings limits apply. To make things progressive (such that the more money you make, the higher percentage of the overall cost you bear), there are five levels of adjustment that IRMAA can make:

Single Married Filing Jointly Married Filing Separately Medicare Part B Premium
$85,000 or less $170,000 or less $85,000 or less Standard $134 unless held harmless
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $187.50
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $267.90
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $348.30
$160,001 and up $320,001 and up $85,001 and up $428.60

These levels of adjustment are adjusted for cost of living every year, and often are adjusted more than a standard COLA in order to keep the costs covered. The expectation is that the levels of income will cover expenses at the following rates:

Income level (from above) Rate of payment of Medicare Part B costs Multiplier
1 25% 1.0
2 35% 1.4
3 50% 2.0
4 65% 2.6
5 80% 3.2

To calculate these premiums in future years, given what we know about the rates are expected to cover and the fact that the “standard” Medicare Part B premium covers approximately 25%, you can multiply the standard Part B premium by the multiplier in the table to come up with the rate.

IRMAA for Part D

The IRMAA adjustment for Medicare Part D is a bit different, in that you only know how much additional premium you’ll have to pay if IRMAA impacts you.

The rules are the same, so we have the same group of roughly 70% of all enrollees who are held harmless for increased Medicare Part D premiums. And the income levels are the same as well (at least that part is kept the same!). Since Medicare Part D premiums vary by the plan you’ve chosen from independent insurers (and not a prescibed amount like Medicare Part B), at each IRMAA income level there is an increase, or surcharge, applied to whatever your monthly Part D premium is.

Single Married Filing Jointly Married Filing Separately Medicare Part D Premium Increase
$85,000 or less $170,000 or less $85,000 or less $0.00
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $13.00
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $33.60
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $54.20
$160,001 and up $320,001 and up $85,001 and up $74.80

Appeal of IRMAA

If you have had certain changes to your income over the succeeding two years (since the IRMAA income level used for this year’s adjustments), you may have a case for reconsideration of the IRMAA adjusment. Specifically, if you have had one of these change of life factors:

– spouse death
– marriage
– divorce
– income reduction
– work stoppage (includes retirement)
– loss or reduction of other types of income such as rental income or royalties
– loss or reduction of a pension income

Other than those factors, although it is your right to appeal an IRMAA determination (read that “increase”), there’s not a lot of hope that you’ll be able to fight IRMAA. Unless there’s an error of some type, such as an incorrect tax return, most other IRMAA determinations are upheld.

Keep in mind that these IRMAA adjustments are on top of any adjustments you’re subjected to because of late enrollment in either your Medicare Part B or Part D plan.

Posted on Sep 19th, 2018
by author: jblankenship.

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Posted in: IRMAA, Medicare, medicare part b premiums, Medicare Part D.
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Your IRA and Your Spouse – Or Maybe Not

Sep 17th, 2018
by jblankenship.
1 comment

IRAFor anyone who has ever had a 401(k), 403(b), or a deferred compensation (457) retirement plan, (which is a high percentage of you, I assume) – there’s a major difference to an IRA that you might find interesting and/or useful. The difference is in the legal requirements for beneficiary designation.

ERISA

The Employee Retirement Income Security Act (ERISA), passed back in 1974, set several rules in place with regard to retirement plans – known as qualified retirement plans or QRPs. QRPs include the 401(k), the 403(b), and any other CODA (Cash Or Deferred Arrangement) sort of account provided by your employer. One of those provisions is primarily to protect your spouse. When filling out your paperwork to open the account, you might have noticed on the beneficiary designation page that, in order to designate someone other than your spouse, you are required to get your spouse’s signoff. In this way, your spouse cannot be disinherited from your QRP without his or her specific consent.

I don’t know for sure of any circumstances where this has caused a major problem, but it is a restrictive provision nonetheless. The primary time that this could be a problem is if the spouses are estranged but still legally married, or when a spouse has gone AWOL and cannot be found. Nonetheless, this provision is in place for the protection of the spouse of the account holder.

Upon the death of the account holder, regardless of who is designated as the beneficiary, the spouse automatically is entitled to 50% of the QRP. If someone other than the spouse is named as a beneficiary, the spouse will receive 50% of the account. The spouse can sign a waiver of his or her 50% of the account, but generally these are only accepted if the spouse who signs the waiver is at least 35 years of age, depending on the plan.

IRA

On the other hand, an IRA account is not covered by ERISA – and as such does not carry the spousal consent provision. You are free to designate anyone you choose, including a trust or charitable entity, without the knowledge or consent of your spouse. Although this could cause a surprise for your spouse if the first time he or she learns of your beneficiary designation is after your passing – this can provide the IRA owner with a great deal of flexibility in making personal beneficiary decisions.

Don’t get me wrong, I do not advocate keeping secrets with regard to your beneficiary designations. On the contrary, I recommend that you and your spouse talk things over and agree on all things financial, IRAs and other retirement accounts especially. But this provision, or rather lack of a rule, might provide you with some additional leeway that you’re looking for in your unique circumstances.

Posted on Sep 17th, 2018
by author: jblankenship.

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Posted in: IRA, retirement plan.
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Does It Really Cost More to Eat Healthy?

Sep 14th, 2018
by sraskie.
4 comments

From time to time I will hear the argument that it’s expensive to eat healthy to lose weight or maintain a healthy lifestyle. What I want to do is provide some information based on my own experience that may help give a counter argument to this belief.

While I am not disagreeing entirely that eating healthy is more expensive than not, I am saying that if done carefully, it is possible to eat healthy for less than what it would cost for less heathy alternatives.

One of the arguments I hear is that individuals may be overweight due to relying on fast food menu items – especially those on dollar or value menus. And the reason these menus are relied on is because shopping for a healthy alternative is pricier.

Let’s take a look.

Consider a few value menu items from a well-known fast food provider.

Cheeseburger – $1 – 300 calories.

Small fries – $1 – 230 calories.

Small soft drink – $1 – 150 calories.

Total cost for the meal is $3. Total calories are 680.

This may be a bit extreme, but I am going to calculate this for three meals per day, for 7 days a week. This totals to $9 per day, or $63 for the week. Total calories are 2,040 for the day, or 14,280 for the week. Remember, this is off the dollar menu. Dine-in restaurants are likely much pricier.

In comparison, the local grocery store sells whole grain tortilla wraps for $4.96 a package, containing 16 wraps. This amounts to $0.31 per wrap.

One dozen eggs is about $1.99 or roughly $0.17 per egg (full disclosure: I have my own chickens, so I don’t pay for my eggs).

Simply cook two eggs, season with salt and pepper and put in the wrap. Voila!

Assuming this meal was eaten every meal, every day for a week (boring and dull, but doable) this amounts to:

Wrap – $0.31 – 100 calories.

2 eggs – $0.34 – 160 calories.

Glass of water – Free – 0 calories.

The total for each meal is $0.65, or $1.95 daily. This is $13.65 weekly. Total daily calories are 780, which is 5,460 weekly. Some readers may need to eat more, so doubling this (six small meals per day) would be 1,560 daily and 10,920 weekly calories respectively. If more is needed, simply have two wraps and four eggs (my usual breakfast).

At three meals per day, this is a weekly savings of just over $49. At six meals, it’s just over $35 saved.

Am I arguing that one should live just on wraps and eggs alone? No. The point is that with some planning and education, it can be possible to eat healthy, for less than what an unhealthy alternative would be.

Substitutions can be made for the wrap such as whole grain bread ($1.75 a loaf), lettuce ($1.99 for a pound bag) and other types of protein for the egg such as chicken, beef, venison, etc.

Don’t be afraid to experiment on your own and see what you can come up with! Let me know what you find!

Posted on Sep 14th, 2018
by author: sraskie.

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Posted in: budgeting, saving.
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Social Security Benefit Suspension

Sep 12th, 2018
by jblankenship.
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It used to be that you could suspend your benefits and collect another benefit. But this has changed. Nowadays, voluntary benefit suspension results in not only suspending all benefits you’re receiving, but also any auxiliary benefits being paid on the same numberholder’s record.

Benefit suspension

pants and benefit suspensionPreviously there could be an enhancement to the overall benefits being received by suspension of benefits. In many cases this was known as “file and suspend”. In the days before the change to the rules, one spouse would file for his or her own benefit and then immediately suspend benefits. Then the other spouse would be allowed to file for spousal benefits, while the first spouse (with the benefit suspension) could delay receipt of benefits until a later age. This was only allowed when the suspending spouse was at least Full Retirement Age.

In the same way, the individual with suspended benefits could allow for his or her children to receive child’s benefits while his or her own benefit is accruing delay credits.

Now, since the change to the rules, benefit suspension results in all available benefits based on the same record (including spousal or other auxiliary benefits).

While the obvious change is that the old school file and suspend is no longer useful. But the other change is that any other benefits that you might be eligible for would also be suspended upon voluntary suspension of benefits.

For example, Jane, age 66, was collecting her own retirement benefit in the amount of $750 per month (reduced from her FRA amount of $1,000). Her husband Michael died. Michael had been collecting a benefit of $800 per month at the time of his death.

Jane wonders if benefit suspension could apply in her case. If she suspends her own benefit, she’d be able to accrue delay credits on her own benefit, which by age 70 would increase her benefit to $990. In the meantime, she could collect the survivor benefit ($800) which Michael had been receiving… right?

Unfortunately, with the new rules, although Jane could use benefit suspension to accrue the delay credits, she cannot at the same time collect the survivor benefit.

The one type of benefit that is not impacted by benefit suspension is an ex-spouse’s spousal benefit. So in other words, if you’re divorced you cannot suspend your benefits to control the amount of spousal benefits your ex-spouse is eligible to receive.

Posted on Sep 12th, 2018
by author: jblankenship.

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Posted in: delayed retirement credit, file and suspend, Social Security.
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Deductible and Coinsurance for Medicare Part B

Sep 10th, 2018
by jblankenship.
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coinsurance and deductibleWhen you have Medicare Part B, your insurance pays for doctors, outpatient care and medical equipment not covered by Part A. But Medicare Part B doesn’t cover all the costs for this care. There is a deductible and coinsurance that you have to cover. If you have a Medigap policy or Medicare Advantage (Part C), some or all of these deductibles and coinsurance may be covered as part of that policy.

Part B Deductible and Coinsurance

With Medicare Part B, the deductible much less complicated as compared to deductibles for Part A. The deductible for Part B is based on the calendar year, and it is adjusted annually. For 2018, the annual Part B deductible is $183. So you pay the first $183 of applicable, covered, doctor services, outpatient care and medical equipment expenses.

Once your annual deductible is met, you are responsible for the coinsurance payment on your additional costs. The coinsurance for Medicare Part B is 20%. There is no upper limit to the total amount that you’ll pay. That means if you have $50,000 worth of Medicare Part B covered expenses, you’ll be on the hook for $10,000 worth of coinsurance – and Medicare Part B pays the remaining $40,000.

This is 20% of the cost of most doctor services, including doctor services received while you’re an inpatient at a hospital. Outpatient therapy is also included, as is durable medical equipment.

If you’ve had any of these items (or someone you know has), you know that the costs can be astronomical, and can build up quickly. For this reason, it’s important to consider a Medigap policy – which in most cases will cover 100% of your Medicare Part B coinsurance.

Posted on Sep 10th, 2018
by author: jblankenship.

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Posted in: coinsurance, deductible, Medicare, medicare part b.
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Deductible and Coinsurance for Medicare Part A

Sep 4th, 2018
by jblankenship.
1 comment

deductible and coinsurance play a large part in medicare part aWhen you have Medicare Part A, this insurance pays for hospital care, including skilled nursing facilities and other institutional settings. But Medicare Part A doesn’t pay for everything – you must pay a deductible and coinsurance when you have a claim. If you have a Medigap policy or Medicare Advantage (Part C), some or all of the deductible and coinsurance may be covered as part of that policy.

The figures listed below are for 2018 – the deductible and coinsurance amounts change annually.

Part A Deductible

With Medicare Part A, the deductible is complicated. It’s based on each benefit period, not each calendar year, as most deductibles are. For 2018, the Part A deductible is $1,340 per benefit period. It is very possible (and common) to have more than one benefit period deductible payment in a calendar year. This means that, for each time (with some limits) that you are hospitalized or in a skilled nursing facility, you are subject to this deductible.

A benefit period begins with the first day that you enter the hospital or skilled nursing facility, and ends when you have not received inpatient services from a hospital or skilled nursing facility for 60 days in a row.

As you can imagine, it’s very common to have more than one benefit period for the Part A deductible in a year.

Part A Coinsurance

The coinsurance payment varies depending upon where you are in terms of the duration of each benefit period (2018 figures):
• Days 1-60: $0 coinsurance
• Days 61-90: $335 per day
• Days 91 and beyond: $670 per day until lifetime reserve days are used*
• Beyond lifetime reserve days: 100% of all costs

The third level of coinsurance refers to lifetime reserve days. Each Medicare Part A enrollee has 60 lifetime reserve days to use over their lifetime. These are used when a benefit period (hospitalized or in a skilled nursing facility) extends beyond the 90th day. These lifetime reserve days allow for a limited coinsurance for these extended days. Otherwise, after the reserve days are used up, the enrollee is responsible for all costs during that benefit period.

Of course, Medigap policies or Medicare Advantage (Medicare Part C) will provide coverage for part or all of the deductibles and coinsurance when these policies are purchased alongside your Medicare Part A.

Posted on Sep 4th, 2018
by author: jblankenship.

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Posted in: coinsurance, deductible, medical insurance policy, Medicare, medicare costs, Medicare Part A.
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Alimony and Taxes, 2019 style

Aug 27th, 2018
by jblankenship.
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certificate of alimonyThe recently-passed Tax Cuts and Jobs Act (TCJA) made some changes to the way alimony is handled, tax-wise, for divorces finalized in 2019 and thereafter. Essentially the change is to eliminate the deduction of alimony paid out by the paying party, while at the same time eliminating the inclusion of alimony received as ordinary income.

So, as the paying spouse in a divorce finalized in 2019 or later, you are not allowed to deduct alimony paid to your ex-spouse. This can result in a requirement to pay additional tax on money that you don’t get to use. The good news is that this new rule doesn’t change existing alimony provisions. If you are divorced as late as December 2018, your paid-out alimony is still deductible from your income, and will remain so as long as you are paying it.

As the receiving spouse, you will not have to include as taxable income any alimony paid to you from your ex-spouse. This means that you won’t have to pay tax on alimony received if your divorce is finalized in 2019 or later.

If you’ve been following this, you might have noticed that it’s a bit unfair, when compared to the current situation. After all, the way alimony has been handled up to this point has put the tax burden on the person who receives the economic benefit of the money. With this change, the person receiving the alimony owes no tax, while the person paying it out must pay tax on that money as if they had it to spend.

Under today’s rules, the payor of the alimony agrees to the arrangement (and amount) in part because of the deduction. The recipient is agreeable to the arrangements because he or she has received the money and can use it. Often the recipient is in a lower tax bracket than the payor spouse, as well. This is likely to make changes to alimony arrangements – because both the payor and the recipient are likely to feel the pinch.

This is because, since the payor can no longer deduct alimony paid out, he or she is likely to want to pay less in order to compensate for the tax that must be paid. As a result, the recipient will then receive a lower alimony payment.

So – you’re probably wondering… is there a way around this? Turns out, there is. It’s not a panacea, but it could help.

Paying alimony, 2019 style

One way around this issue is to include retirement funds in your settlement process, rather than or along with traditional alimony.

For example, if part of the divorce agreement requires you to transfer funds from an IRA to your ex-spouse’s IRA (in lieu of alimony), you would no longer have to pay tax on money withdrawn from the IRA, but your ex-spouse would. The transfer of funds to your ex’s IRA would be a one-time event, rather than a regular payment from the IRA. This would only work when the recipient is at or near age 59 1/2, since withdrawals from the IRA prior to that age would be subject to the additional 10% early withdrawal penalty.

This sort of arrangement could be used to partly or completely offset alimony paid in the traditional sense – and would revert the tax burden to the recipient.

(You should also note that this is not the same thing as a QDRO. The rules for QDROs, which only apply to 401k and other employment retirement plans and NOT IRAs, did not change with TCJA.)

If you’re facing a divorce in 2019 or later, you will want to consult a financial planner to help make sure you’re making the right moves, no matter which side of this you find yourself in.

On the other hand, since alimony received is no longer considered earned income to the recipient, he or she will no longer be allowed to make IRA contributions based on the alimony received. If the recipient is not otherwise employed, IRA contributions will not be possible. This could be another reason that the IRA transfer process would be beneficial to the recipient ex-spouse.

Posted on Aug 27th, 2018
by author: jblankenship.

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Posted in: alimony, divorce, tax.
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Social Security Survivor Benefits

Aug 20th, 2018
by jblankenship.
2 comments

survivor by tipiroThe Social Security system has provisions for taking care of surviving spouses of workers who have earned credits under the system.  There are two particular benefits that you should be aware of – a small death benefit of $255, and  Survivor Benefits based upon the worker’s Primary Insurance Amount.  It is the latter benefit that we are discussing today.

Social Security Survivor Benefits

When a primary wage earner dies, the Social Security system has a way to help care for the surviving spouse.  Survivor Benefits are generally equal to the primary wage earner’s retirement benefit – this benefit replaces other spousal retirement benefit (the one that is equal to 50% of the primary wage earner’s benefit, available while the primary wage earner is living – see here for more detail).

The mechanics of the Social Security Survivor Benefit can apply to widows or widowers at various ages, depending upon the circumstances, as well as to the children and/or parents of the primary worker.  We’ll cover each sort of individual in turn…

Widows and Widowers

When the primary wage earner dies, the surviving spouse is entitled to receive a retirement benefit based on the primary wage earner’s retirement benefit.  Of course, if the surviving spouse’s retirement benefit based upon his or her own record is equal to or more than the deceased spouse’s benefit, the surviving spouse will continue to receive only his or her own retirement benefit.

If the surviving spouse elects to begin receiving survivor benefits before Full Retirement Age (FRA), the benefit is subject to actuarial reduction.  Since a surviving spouse is eligible to begin receiving early benefits at age 60 (instead of age 62 for regular or spousal benefits), the “usual” age table is adjusted by 2 years.  Whereas FRA for regular or spousal benefits for those born between 1943 and 1954 is age 66, FRA for a survivor benefit is 66 for those born between 1945 and 1956.  (See this article for the FRA ages for retirement benefits and this article actuarial adjustments.  Adjust the ages and years by 2 for Survivor Benefit.)  If the surviving spouse is disabled, early benefits may be received any time after age 50, with the actuarial reduction assuming benefits begin at age 60 (no further reduction, in other words).

In addition to the benefit mentioned above, there is a Survivor Benefit available to a younger spouse if there are children under age 16 that the surviving spouse is caring for, or a child of any age who has become disabled before age 22.  This Survivor Benefit is equal to 75% of the FRA benefit (the PIA, Primary Insurance Amount) of the deceased spouse – and only lasts until the child reaches age 16.  At the same time, each child under age 18 is eligible for a Survivor Benefit (more on this later) until age 18.

There is no increase from delaying receipt of the survivor benefit after FRA, so a widow or widower should begin receiving Survivor Benefits at FRA if eligible. It should also be noted that divorced spouses who survive a deceased worker are also eligible for the Survivor Benefit, as long as the marriage lasted at least 10 years before the divorce.

Children

Any child under age 18 (19 if attending high school) who survives a deceased eligible worker is eligible to receive a Survivor Benefit equal based on the PIA of the deceased parent.  This amount is 75% of the PIA of the surviving child’s parent, and this benefit will be payable until the child reaches age 18 (or 19). If the surviving child is disabled and the disability onset before age 22, there is no upper age limit for receipt of the child’s survivor benefit.

In addition to the offspring of the deceased worker, this benefit can be available to step-children, grandchildren, step-grandchildren, or adopted children of the deceased worker, if the deceased worker provided 1/2 or more support to the child.

Surviving Parents Over Age 62

In the event that the deceased worker had provided more than 1/2 of the support of one or more older parents (over age 62), the surviving parents are eligible to receive a Survivor Benefit as well.  This Survivor Benefit is based on the age of the surviving parent, and actuarial reductions apply to these benefits if received before FRA of the survivor.

Family Maximum

For the whole family of the deceased wage earner, that is, surviving children under 18, spouse and parents, there is a maximum benefit amount that applies – equal to between 150% and 180% of the deceased worker’s PIA (the calculation is complicated, using the bend point formulas).  The Social Security website has a calculator to help you understand this amount.

Bear in mind that any Survivor Benefit received by a surviving divorced spouse to not count toward this family maximum.

Posted on Aug 20th, 2018
by author: jblankenship.

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Posted in: Social Security, social security survivor benefits, survivor benefits.
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Time for your paycheck checkup!

Aug 13th, 2018
by jblankenship.
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this lady did a paycheck checkup and look how happy she isEarlier this year I wrote about checking your withholding and estimated payments in light of the changes to the tax laws. When I wrote that, many of you were in the middle of finishing up your tax returns, so I imagine it probably went by the wayside. Now, since we’re 2/3 of the way through the year, is a perfect time for a paycheck checkup! Plus, if you’re retired, it’s a good time for a review of your estimated taxes as well. Since you have 4+ months left in the year, you can make adjustments if needed.

The IRS recently issued a Media Advisory urging folks do to a paycheck checkup – and I’ve included their advice and links to tools below. They also highlight those taxpayers that are especially encouraged to do the paycheck checkup, those that have a better than average chance to need to make adjustments. You can also review the earlier articles from Financial Ducks In A Row on doing your own Mid-Year Withholding Checkup or Mid-Year Estimated Payments Checkup as well.

Below is the actual text from the IRS Media Advisory:

IRS urges taxpayers to check withholding now to avoid tax surprises later; Spotlights special tools during week of Aug. 13 to help people overlooking major changes

With the year more than halfway over, the Internal Revenue Service urges taxpayers who haven’t yet done a “Paycheck Checkup” to take a few minutes to see if they are having the right amount of tax withholding following major changes in the tax law.

A summertime check on tax withholding is critical for millions of taxpayers who haven’t reviewed their tax situation. Recent reports note that many taxpayers could see their refund amounts change when they file their 2018 taxes in early 2019.

To help raise awareness for these taxpayers, the IRS is conducting a second “Paycheck Checkup” effort beginning the week of Aug. 13. During this week, the IRS is spotlighting a variety of tools – including the online Withholding Calculator – to help taxpayers learn if they need to make changes soon to avoid an unwelcome surprise come tax time.

The IRS is also encouraging partner groups inside and outside the tax community to share this important information with their members and employees. The IRS will also be holding special sessions on withholding for tax professionals and industry partners Aug. 15-16 in English and Spanish.

The Tax Cuts and Jobs Act, passed in December 2017, made significant changes, which will affect 2018 tax returns that people file in 2019. These changes make checking withholding amounts even more important. These tax law changes include:

  • Increased standard deduction
  • Eliminated personal exemptions
  • Increased Child Tax Credit
  • Limited or discontinued certain deductions
  • Changed the tax rates and brackets

Checking and adjusting withholding now can prevent an unexpected tax bill and penalties next year at tax time. It can also help taxpayers avoid a large refund if they’d prefer to have their money in their paychecks throughout the year. The IRS Withholding Calculator and Publication 505, Tax Withholding and Estimated Tax, can help.

Special Alert: Taxpayers who should check their withholding include those who:

  • Are a two-income family.
  • Have two or more jobs at the same time or only work part of the year.
  • Claim credits like the Child Tax Credit.
  • Have dependents age 17 or older.
  • Itemized deductions in 2017.
  • Have high income or a complex tax return.
  • Had a large tax refund or tax bill for 2017.
Posted on Aug 13th, 2018
by author: jblankenship.

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Posted in: income tax, irs, withholding.
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Financial Counseling and Marriage

Aug 10th, 2018
by sraskie.
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Many individuals who are dating and growing closer together learn more and more about the other person. Habits (good and bad) likes, dislikes, and traits all make themselves known at some point in the relationship.

Before getting married, many individuals choose to seek counseling. This can help answer questions about whether they are doing the right thing, religious reasons, etc. Some couples choose to continue this counseling into marriage to further strengthen the relationship.

Couples may consider seeking financial counseling before marriage as well. Many couples can be reluctant to talk about money or worse, think that the money problems will solve themselves once the marriage starts.

Issues such as debt, poor credit, spending habits (both extreme frugality and frivolous spending) are just some of the many items that should be discussed before entering marriage. They are also good discussion points if they are occurring during marriage.

As many readers know, one of the biggest stressors on marriage is finances. By getting financial matters out in the open, discussed earlier on can help both partners understand how they tick financially. This may lead to a better, smoother relationship both emotionally and financially.

Some individuals need to be prepared for some difficult conversations, and potentially, the relationship to end. However, it may be better for the relationship to end before marriage, then to deal with the emotional and financial fallout from divorce.

Couples that are currently married may also consider financial counseling. This is especially important if there are disagreements that cannot be resolved, or if the couple (one or both) feels resentment starting to build.

And if there’s nothing wrong? Consider going anyway. Why? It’s no different than maintaining your car, house, etc. Nothing may be wrong, but we still maintain and take care of the things that are important to us. Finances in marriage should be no different.

There are several books designed to help couples in need. Also, taking to a qualified professional may be beneficial (not a product pusher). Couples may not know what questions to ask, but a professional may pose questions not thought of, designed to open the lines of communication between a couple.

Good luck!

Posted on Aug 10th, 2018
by author: sraskie.

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Posted in: financial planning.
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Eligible Rollover Distributions (ERDs)

Aug 8th, 2018
by jblankenship.
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beethoven by HitchsterSo, what funds can be rolled over from your qualified retirement plan (not an IRA) into another retirement plan or IRA?  Interestingly, the IRS doesn’t specifically tell you what can be rolled over – but rather, what cannot be rolled over. So the definition of eligible rollover distributions includes any monies from a qualified account that are not specifically disallowed.

Let’s look at the definition from the IRS…

Definition of Eligible Rollover Distributions

Only Eligible Rollover Distributions, or ERDs, can be rolled over, according to the IRS.  The definition that is given is really an anti-definition, explaining that any normally taxable distribution is eligible for rollover unless it fits the exceptions listed.

An ERD is defined as – a distribution that is eligible to be rolled over to an eligible retirement plan. Eligible rollover distributions include a participant’s balance in a qualified plan, 401k, 403b or 457 plan, except for certain amounts that include the following:

  • Any of a series of substantially equal periodic payments (SOSEPP) paid at least once a year over:
    • The participant’s  lifetime or life expectancy,
    • The joint lives or life expectancies of the participant and his/her beneficiary, or
    • A period of 10 years or more
  • A required minimum distribution
  • Hardship distributions
  • Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains
  • A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant’s accrued benefits are reduced (offset) to repay the loan
  • Dividends on employer securities
  • The cost of life insurance coverage

So, as long as the distribution that you take from a 401k, 403b or 457 plan doesn’t fit any of the requirements above and has a payout period of 10 years or less, your distributions can be considered ERDs, and therefore rolled over into an IRA or other retirement plan.

Understand that these distributions will be subject to mandatory 20% withholding if paid out to you, and not transferred directly to the new plan or IRA.  Plus, you must complete the rollover within 60 days when it’s not done by trustee-to-trustee (or direct) rollover.

Whenever possible, you would want to set up a rollover as a direct rollover into your IRA (or other QRP) to avoid this withholding requirement and 60-day limit.  If this can’t be done, you should make up the 20% withheld difference from other savings as you rollover the distributions in order to avoid tax and penalties. Otherwise you’ll get a tax bill for the portion that was withheld and not properly rolled over – see The Heartbreak of Withholding From Indirect Rollover for more details on the 20% withholding.

Posted on Aug 8th, 2018
by author: jblankenship.

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Posted in: Early Distribution, IRA, retirement plan, tax.
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Report pension changes to SSA

Aug 6th, 2018
by jblankenship.
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When you have a non-SS-covered pension and you are receiving Social Security benefits, either WEP (Windfall Elimination Provision) or GPO (Government Pension Offset) may impact your benefits. It’s important to keep the Social Security Administration (SSA) up-to-date on your pension. You must report pension changes to SSA when there is an increase due to a COLA or any other change to the previously-reported amount. This requirement is in place so that when your pension changes, your WEP and/or GPO impact can be recalculated.

This is only required if the pension changes are for a pension that is based on your own non-Social Security-covered earnings. If you’re receiving a pension based on SS-covered earnings, or a pension from any source that is based on someone else’s earnings (such as a survivor pension), there is no need to report pension changes to SSA.

This reporting can be accomplished by sending a letter to the Social Security Administration. The letter should detail the name, address, birthdate and Social Security number of the pension recipient, as well as the change in the pension amount and the effective date of the change. This letter can be delivered to your local Social Security Administration office.

Most commonly, GPO is the calculation that is affected by a change to the pension amount. WEP is only dependent on the amount of the pension when the pension amount is relatively small – which we’ll review a bit more later. Let’s take a look at an example of the impact of a change to pension on GPO.

How pension changes impact GPO calculation

For example, Gloria is receiving a pension due to her work for the local health department, in the amount of $1,800 per month. Her husband, Edward, died this year. Before Edward died, he was receiving Social Security benefits in the amount of $2,000 per month. When Gloria filed for the survivor benefit based on Edward’s record, she was informed that GPO would reduce the survivor benefit. This is because of her pension from the local government.

The reduction is 2/3 of the amount of Gloria’s pension – which calculates to $1,200 per month. The pension is $1,800, multiplied by 2/3 equals $1,200. So the resulting GPO-reduced Social Security survivor benefit is $800.

Gloria’s pension increases by 3% each year. So in January, her pension increases to $1,854 per month. Gloria must report this increase to Social Security. When she does so, her GPO impact will be recalculated. The result is that the GPO impact is now $1,236 per month. The survivor benefit increased 2% for the year (annual COLA), bringing the unreduced benefit to $2,040. When the GPO reduction is applied, the final resulting benefit is $804.

How a change to pension impacts WEP calculation

WEP is different from GPO, in that it is only based on the amount of the pension when the pension itself is relatively small. In order for the amount of the pension to be important, the pension itself must be less than the maximum WEP impact – 50% of the first bend point, or 50% of the PIA if the PIA is less than the first bend point.

Jeff has had a limited working career due to debilitating illnesses throughout his life. Part of his career included teaching for several years before his illness took hold. This work as a teacher was not covered by Social Security, but it has generated a pension in the amount of $400 per month. In addition to the teaching time, Jeff had several part-time jobs off and on throughout his life, which has generated a Social Security retirement benefit in the amount of $800 per month.

Since WEP reduction is calculated as the smaller of either 50% of the first bend point, 50% of the unreduced Social Security retirement benefit, or 50% of the amount of the non-covered pension. In Jeff’s case, $816 is amount of the first bend point, since he reached 62 in 2014. So the smallest figure of the three is 50% of Jeff’s pension – which makes his WEP reduction $200, for a resulting Social Security benefit of $600 per month.

When Jeff’s teacher’s pension receives an increase of 4% due to pension fund experience, he must report it to SSA. This will increase his WEP impact to $208, since his pension was increased to $416. After the annual Social Security COLA increase of 2% (to $816 per month), his resulting WEP-reduced benefit will now be $608.

If Jeff’s pension was larger than one of the other WEP-reduction factor limits, it wouldn’t make any difference to the WEP calculation to reduce his Social Security benefit.

Posted on Aug 6th, 2018
by author: jblankenship.

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Posted in: government pension offset, GPO, Social Security, wep, windfall elimination provision.
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