With Kim Lankford, “Ask Kim” columnist for Kiplinger’s Personal Finance
Kim Lankford On Signing Up For Medicare At 65
Navigating the maze of rules, deadlines, and options around enrolling in Medicare can be confusing, financially hazardous, and fraught with the potential for costly mistakes. Kim Lankford, Personal Finance writer for the “Ask Kim” column at Kiplinger.com, joins Steve today to talk about Medicare and provide a simplified overview of the signup process and various considerations for both retirees and those working past retirement age.
Steve starts the conversation by quoting the number one question about this topic submitted to “Ask Kim”: “I am going to turn 65 later this year. How far in advance do I need to sign up for Medicare and when will the coverage actually start?” Kim begins by noting that for those who have opted to take Social Security benefits before the age of 65, the process is practically effortless: three months before their 65th birthday, they’ll get their Medicare card in the mail. For most of the rest of us, it’s a little more complicated. If you want to enroll in Medicare when you turn 65—the earliest possible date for eligibility—you’ll have to sign up either 3 months before or 3 months after your 65th birthday. If you submit your application after your birthday, you’ll end up waiting a month or two before you’re enrolled.
Still Employed After 65? The Pros And Cons Of Signing Up For Or Taking A Pass On Medicare
Signing up or deferring enrollment in Medicare if you’re still employed after age 65 is a whole other can of worms. Steve asks Kim what people who have health insurance from their employer do when it comes to Medicare. The short answer is that these folks may not need to sign up.
Understanding Medicare Parts A & B And How They Relate To Your Employment Status
Before we can elaborate any further, Kim says you have to look at the two primary components of Medicare: Part A and Part B. Part A covers hospitalization, which for most people is free. Many people working after age 65 and covered by their employer nonetheless choose to sign up for Part A because it costs nothing. Medicare Part B, on the other hand, does come with a premium. For 2017, that premium is $134 a month. For people with good coverage from their employer, it usually makes more sense to opt out of Part B. There are some further complications, however, one of which hinges on whether your employer has 20 or fewer workers on staff.
If your employer has fewer than 20 employees, then your employer plan may automatically become secondary to Medicare after you turn 65, so you really need to talk to your employer and find out whether you do have to sign up for Medicare or not because, otherwise, you could have some big gaps in coverage. If you work for a large employer, generally, you can just delay signing up for Medicare while you’re still working.
After Retirement, You Have 8 Months To Sign Up For Medicare Or Suffer A Lifelong Penalty
One of the most important things to remember is that when you do finally retire, you have 8 months before you have to sign up for Medicare or face a lifelong penalty. You have to keep track of these deadlines. Another key consideration is that once you’ve signed up for Medicare, you can’t continue to make contributions to the Health Savings Accounts (HSA) set up by your employer in your name. Many people working during their retirement years decline Medicare Parts A & B so that they can carry on funding their HSA.
Social Security Medicare Premiums
Steve moves on to another popular question submitted to “Ask Kim”: “I can’t get my head around Medicare Part B premium. I’ve read that the basic premium is supposed to be $134 for 2017 (but most seniors will pay $109 a month and some will pay more than $400. Can you clear things up?” Kim admits that this is indeed somewhat confusing. Seniors who have been taking Social Security benefits enjoy some protection against rising Medicare costs. A law known as the “Whole Harmless Provision” states that SS benefits cannot go down because of an increase in Medicare premiums. The most recent cost-of-living increase in SS was not large enough to cover bigger Medicare premiums, so those premiums were lowered to offset their increase. Retirees on SS have Medicare premiums automatically paid out of their SS checks. For these folks, if their cost-of-living benefit raises cover the increase in Medicare costs, they will pay up to $134 a month. Steve asks about the people paying $400 a month in premiums. Kim explains that there is a high-income surcharge that kicks in when income meets a certain threshold. For single people, that figure is $85K and above in “adjusted gross income and tax-exempt interest income,” and for couples, it’s $170K. There are four levels of surcharge based on four different income brackets, with premiums ranging from $187 to $428 per month. Medicare Part D has a similar tiered premium system where higher incomes require higher payments.
Medicare Surcharges On High-Income And How To Minimize Them
Steve asks who pays the top premiums based on the upper-most income threshold. For single filers in 2017, Kim answers, it’s $214K and for married filing jointly it’s $428K. She points out that there are methods for lowering one’s surcharges. One of these, for people older than 70.5 years, is to make a direct transfer from your IRA to a charity. You are required to start taking withdrawals (Required Minimum Distributions, or RMDs) from retirement accounts after age 70.5, and this shows up as income when calculating your Medicare premiums and, for 401(k) plans, capital gains taxes. By donating some or all of your RMD money to a charity—up to $100K a year— you lower your income and possibly drop into a less expensive Medicare surcharge bracket and IRS income bracket. Steve speculates that the math might work out to be a net gain to transfer RMD income to charities and, therefore, pay less in Medicare surcharges and taxes. Kim says she talks to people all the time who wonder why they can’t just take their RMD and then write a check to a charity. She clarifies that the only way to keep RMD income out of the Medicare premium/surcharge calculation is to transfer it directly to a charity. Steve has the last word and with it, he advises listeners to check the math with their accountant or financial planner and see what your options are.
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Steve Pomeranz: Medicare can be confusing with all its rules and regulations so I’ve asked Kim Langford to join me today. Kim is the brain behind the “Ask Kim” column for Kiplinger’s Personal Finance where she receives hundreds of personal finance questions from readers every month. Welcome to the show, Kim.
Kim Lankford: Thank you for having me.
Steve Pomeranz: Now, I wanted to ask and have you answer some of the questions that you posted in your column that I thought were pertinent to those who currently are enrolled in or are in the process of signing up for Medicare because it can kind of a confusing path to traverse. Let’s start with question number one, the question is, “I am going to turn 65 later this year, how far in advance do I need to sign up for Medicare and when will the coverage actually start?”
Kim Lankford: And just starting Medicare, in general, is a complicated issue because if you’ve already signed up for early Social Security benefits, and the key thing is your full retirement benefits for Social Security are not until you’re 66 these days and gradually getting higher. If you had already signed up for Social Security benefits, early benefits before age 65, you’ll get your Medicare card through the mail three months before your birthday, and you can start using that the month of your birthday.
It’s really easy in that case. However, for most people, they have to actually make an effort to sign up. You can sign up as early as three months before the month you turn 65 and up to three months after the month you turn 65. As long as you sign up before your birthday month, your eligibility and you will be able to start using your Medicare card starting in that month that you turn 65. If you were born on the first of the month, you get the month beforehand to start. You also have that window of opportunity even after your birthday month to sign up. Your benefits won’t start until the month or two later. So, try to sign up those three months before your 65th birthday, so you can get the coverage as soon as possible.
Steve Pomeranz: What if you’re still working and you have coverage from your current employer? How does that work?
Kim Lankford: Well, in that case, you may not need to sign up for Medicare yet. Medicare has two parts to it; it has Part A, which covers hospitalization and for most people, that is free, that has no premiums. You’ve been paying for that through your paychecks through the years or your spouse has. A lot of people, even if they still are working and have coverage through their employer, they may still sign up for Medicare Part A just because they don’t have to pay anything for it. But Medicare Part B, for new enrollees this year, have to pay $134 per month for Part B. If you’re still working and you have good coverage through your employer, you may not decide to sign up for Part B yet. You may decide just to keep your employer’s coverage.
Now, there’s a few things you need to be really careful about. If your employer has fewer than 20 employees, then your employer plan may automatically become secondary to Medicare after you turn 65, so you really need to talk to your employer and find out whether you do have to sign up for Medicare or not because, otherwise, you could have some big gaps in coverage. If you work for a large employer, generally, you can just delay signing up for Medicare while you’re still working.
The key thing is, also, when you leave your job, you only have eight months after you lose that employer coverage to sign up for Medicare or else you will be stuck with a penalty for the rest of your life. It’s very important to keep track of all those deadlines. Another key exception is if you’re working and you want to contribute to a Health Savings Account, a lot of people have high deductible plans through their employers, their employer may even contribute some money to the Health Savings Account, you can’t make contributions to those accounts after you sign up for Medicare. Some people who are still working decide not to even sign up for Medicare Part A while still working, for Part A or Part B so they can continue making HSA contributions. The key thing is that once you leave that job, you’re going to need to sign up for Medicare within eight months of leaving that job and losing that coverage.
Steve Pomeranz: Wow. Sounds complicated, but it’s really not. Part A is the hospitalization, it doesn’t cost you anything. Part B does. If you’ve got coverage because you work for an employer with more than 20 people then you’re really not going to sign up for Part B. You may want to sign up for Part A because it doesn’t cost you anything except if you want to do an HSA account then you don’t want to sign up for a so you can fund the HSA account. How’s that?
Kim Lankford: That is it. That’s it in a nutshell.
Steve Pomeranz: Did I get it? Okay.
Kim Lankford: That’s perfect!
Steve Pomeranz: Okay, good. All right, here’s another question, “I can’t get my head around Medicare Part B premium. I’ve read that the basic premium is supposed to be $134 for 2017 (you just mentioned that) but most seniors will pay $109 a month and some will pay more than $400. Can you clear things up?”
Kim Lankford: And that is all accurate. There is this giant range of premiums that people may need to pay, depending on their circumstances. Like I said, $134 a month is what new enrollees to Medicare will be paying in 2017. The 109 or around 109 is what people who have already been on Medicare and have their Medicare premiums deducted from their Social Security checks, that’s what they’re paying. This is because the cost of living adjustment for Social Security last year was not enough to actually pay for the entire increase in Medicare premiums. There’s a rule called the Whole Harmless Provision, which prohibits your Social Security benefits from going down because of an increase in Medicare costs.
The key thing is those people have an extra situation where they don’t have to pay quite as much.
Steve Pomeranz: So, if your inflation increase on our Social Security isn’t enough to cover your.. what? Your increase in the Medicare payment or your Medicare payment… then you don’t have to pay the extra amount?
Kim Lankford: That’s right. So, the 109 is the average that people are going to pay who have their premiums deducted from their Social Security benefits but. really what it is, is generally it will be up to your cost of living increase if that doesn’t get you to the full $134 a month.
Steve Pomeranz: Okay, so that’s why.
Kim Lankford: So, you won’t have a decrease in your Social Security benefits and that’s the key thing for those people that are already getting those checks.
Steve Pomeranz: Yeah, so who’s paying $4oo a month? How does that work?
Kim Lankford: So, those people are the people who are subject to the high-income surcharge, and these people are if you are single and your adjusted gross income plus tax-exempt interest income is more than $85,000 or if you’re married filing jointly and it’s more than $170,000, then you have to pay even more. The high-income surcharge, there are four different levels based on ranges of income. You may pay $187 or you may pay up to $428 per month depending on how high your income is.
Steve Pomeranz: Yeah.
Kim Lankford: You also have to pay a surcharge for your Part D, which is your prescription drug coverage as well and that’s from 13.30 a month to an extra $76.20 a month.
Steve Pomeranz:. So, what’s the top end of paying the most? How much filing single or filing jointly, what is the upper threshold? How much do you have to make in order for you to be charged the most?
Kim Lankford: The very top threshold for single filers is $214,000 and for married, filing jointly is $428,000 and those are the people who are paying $428.60 per person, per month in 2017. Now, a key thing to keep in mind is there’s some things you can do if your income, in the future to help avoid some of these surcharges. For example, you can make a direct transfer of money from your IRA to charity if after age 70 and a half that can help keep some of your minimum required distribution out of your income.
Another key thing is that if you have some major life changes that bring your income lower. For example, if you retire or marry or divorce or your spouse passes away, then you can contact the Social Security Administration and have them use your current income if that’s lower. Usually, they look at what your last income taxes that were filed, but you can use the most current income and if that’s lower, that could help reduce or eliminate the high-income surcharge. It’s a huge range depending on your income so you really need to be careful once you’re on Medicare, especially if you’re still earning money or have big required minimum distributions.
Steve Pomeranz: Well, I like this idea of looking at the math if you’re in a high-earning bracket to say, “Well, look I have to take this required minimum distribution from my IRA; why don’t I give that to charity?” Do the math to see how much you’ll save taxes on and also the fact that it will reduce your income to a certain degree to get you below a certain threshold. The math might actually work out better just to give that money away than to take it and to pay all the extra taxes. Right?
Kim Lankford: Well and that’s a key thing because I get a lot of questions from readers about, “Well, why would I make a tax-free transfer to charity of my RMD rather than just withdraw money from my account and then write a check to charity?” The key thing is, after 70 and a half, you can transfer up to $100,000 each year and a lot of people don’t transfer that much but they transfer all or some of their RMD and that really does help them. That keeps the money out of that calculation for the high-income surcharge whereas if they just wrote a check to charity, it wouldn’t. That’s one of the key reason’s that that’s a really good benefit for people, especially if you’re near one of those cut offs.
Steve Pomeranz: Yeah, so discuss that with your accountant or your financial advisor and I think the math might work out on that. My guest, Kim Langford, she is the brain behind the “Ask Kim” column for Kiplinger’s Personal Finance and we’ve been talking about Medicare today. Kim, thank you so much for joining us.
Kim Lankford: Thank you for having me.