Guess what? The government thinks you are rich

Good news! The government thinks you are rich and they are about to tax you accordingly.

Bad news! Your financial advisor doesn’t see the problem they created and you don’t feel rich.

Where the disconnect happens is once you are retired, you will enroll in Medicare and begin taking Social Security.

Within Medicare there is a not so hidden tax on all the income you generate in retirement which tax comes in the form of Medicare’s Income Related Monthly Adjustment Amount (IRMAA) and that will cost you more than anyone has ever told you.

IRMAA is a surcharge on top of your current year’s Medicare Part B and D premiums if you happen to be “rich” and is paid automatically from any Social Security benefits you may receive.

The 2019 IRMAA brackets are as follows:

2019 IRMAA Bracket

Now don’t worry, if you bring this up with your financial professional, they will quickly dismiss it while stating that it only impacts those the federal government has defined as “rich” so keep on investing into that Traditional 401(k) as nothing is askew at all.

The only problem is that this advice you are being given will eventually reach a point where the income you will generate from that Traditional 401(k) along with your Social Security benefit will inflate to a point where it will, in fact, impact you.

How the federal government will define who is rich:

According to Medicare income is defined as your adjusted gross income plus any tax-exempt interest you may have.

Some examples of income are:

Social Security benefits, any wages, Pension and Rental Income, Capital Gains, Dividends and any distribution from any tax-deferred investment you may have – yes, those required minimum distributions from that Traditional 401(K) and IRA you have been told to invest in will be used against you.

An example of who will be considered rich and remember, any distribution from any tax-deferred vehicle you have plus your Social Security benefit will count as income:

A 60-year-old person who is:’
  • Planning on taking Social Security benefits at age 70.
  • Investing $10,000.00 a year into their Traditional 401(k), including that company match.
  • Receiving a 5% rate of return on that Traditional 401(k).
  • Has already saved $90,000.00 in their Traditional 401(k).
  • Earns an income from employment of $60,000.00.

At age 70 that investment in that Traditional 401(k) will have grown to just over $272,000.00 which will continue to receive an interest rate of 5%.

They will also, according to Social Security’s Quick Calculator, receive $36,888 in benefits at retirement. The expected cost of living adjustment (COLA) for this benefit is projected to be 2.0% as the Social Security Board of Trustees has projected it to be no higher that 2.6% for the foreseeable future.

By the time they reach 84 they will be considered to be rich by the federal government and enter into the first Medicare IRMAA bracket.

And what do you get for this?

Well, your Medicare Part B and D premiums will increase by at least 40% and the other added joy, this cost will come directly out of your Social Security benefit.

Can you say getting taxed 3 times later for a tax savings today? Hope so because that is exactly what you are doing if you follow this advice.

The even better news for those who are 55-years old today, the federal government considers those who are rich to be a person who is:

  • Planning on retiring at age 70.
  • Investing $8,000.00 in that Traditional 401(k) including the company match.
  • Receiving a 5% rate of return on that Traditional 401(k).
  • Has already saved $50,000.00 in that Traditional 401(k).
  • Earns an income of $55,000.00.

By age 83 they will enter into the first Medicare IRMAA bracket.

How is this possible?

Simple. By age 70 that Traditional 401(k) will grow to roughly $276,000.00 which you will have to disburse about $11,000 in RMD’s that count as income.

At age 70 the Social Security benefit is projected to be $41,112 which, again, will receive a COLA of about 2%.

Yes, in the first decade of retirement there is nothing to worry about, but if the financial plan stays status quo then their income will be above the first IRMAA bracket at, again, age 83.

Now, this may not be a significant deal to your financial professional, but please consider that Medicare premiums are projected to inflate by at least 5.5% annually for the next 8 years according to the Medicare Board of Trustees.

That other little tidbit that will never be mentioned: these IRMAA surcharges along with the bulk of your Medicare premiums will be deducted directly from any Social Security benefit you may receive. That’s in both, so please give it another read.

Yes, please expect to see your Social Security benefit to decrease once you enter IRMAA, but then again this will not be a problem for your financial professional as they will never mention it to you…ever.

How does it feel to be considered rich?

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