How I cost my Dad over $2000 in Medicare benefits

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It’s been a few months since I posted about Dad. He’s still happy and healthy in the care facility, and he’s a little deeper into mid-stage Alzheimer’s. (In his mind, he’s consulting on-site about their electrical engineering needs– just as he did in his career for nearly 30 years. He says he’s happy that they let him stay there on weekends because he can’t remember how to drive home.) As near as I can tell from his files, he’s been coping with Alzheimer’s for at least five years.

Financially, 2012 and 2013 were busy years. When I was appointed as his conservator I spent quite a few hours tweaking his asset allocation. He lived extremely frugally on his small pension and had over 80% of his investments in equities. (He’d held some shares for over 20 years and had a very low cost basis.) By the end of 2012 I reduced his equity allocation to 25%. After paying the taxes, the remaining capital gains are now invested in a CD ladder with one maturing every few months to pay the care facility bills.

After nearly three years, Dad’s finances have finally settled into a routine again. Dad’s long-term care insurance policy has paid most of the facility’s bills for the last two years and will reach its limit in late 2014. Medicare (and his supplemental insurance policy) take care of the doctor’s visits and therapy, and his pension’s prescription insurance handles most of the medication expenses. I’ve projected a 10-year spreadsheet (including inflation), and financially I think he’ll be all right. This year I’ve spent an hour per week updating spreadsheets, answering e-mails, and moving money.

Then I received the Social Security letter announcing his 2014 benefits and Medicare premiums.

The annual letter says that his 2014 Social Security benefit is rising by 1.5%. He’ll continue paying the standard Medicare B monthly insurance premium of $104.90. That was all expected, and I’ve seen similar numbers in his 2013 and 2012 benefits letters.

However this letter also says that he’s now going to pay an additional $167.80/month in Medicare premiums for “the income-related monthly adjustment amount based on your 2012 income tax return”. (That’s abbreviated “Part B IRMAA”.) Dad’s 2012 gross income was much higher than usual due to the one-time long-term capital gains that I incurred when I reduced his equity asset allocation.

I’d never heard of IRMAA before, so I started searching. I found an excellent IRMAA summary by CFP Michael Kitces about the situations which can trigger the higher premiums. Essentially if you have a high retirement income then the government asks you to pay more of the cost of Medicare.

When I rebalanced Dad’s assets in 2012 I was ignorant of IRMAA, let alone this particular tax implication of harvesting capital gains. I was more interested in reducing principal risk. I saw no reason to spread out the rebalancing because low tax rates on capital gains were expiring at the end of 2012. (These low rates were later extended by Congress.) I was ready to pay the long-term capital gains taxes, of course, but my actions effectively incurred an additional $2000 “IRMAA tax” on those gains.

In retrospect I still would have rebalanced Dad’s accounts and generated most of those capital gains. He was heavily overweighted in equities (to put it mildly) and the risks greatly outweighed the limited rewards. However if I’d held back on a little bit of that rebalancing until 2013 then I would have avoided breaking into the higher income bracket, and I probably could have completed the rebalancing in 2013 without triggering IRMAA. (See page 8 of that Social Security PDF for the brackets.) Carefully navigating those IRMAA brackets would have avoided $750 of the $2000 expense.

This 2014 IRMAA is a one-year event. Next year (when Social Security reviews Dad’s 2013 tax returns) he’ll be back under the income threshold where IRMAA kicks in, and his Medicare premiums will drop back down in 2015.

The Social Security letter goes on to describe some special situations that may merit an exception to the IRMAA. Dad doesn’t meet any of those exceptions, which are mainly bad things like divorce or death of a spouse, or unemployment, or loss of a pension.

(Side note: one of the exceptions is a change of work status. That didn’t apply to Dad, either, but it did apply to a neighbor who’s just retired from her career. She showed me her version of the IRMAA letter a week before I got Dad’s letter, so when I finally understood the situation I was able to suggest that she file an appeal with Social Security. She visited the local office last week and they’ve removed the IRMAA from her records.)

I asked Michael Kitces about filing an appeal for Dad’s one-time capital gains event, but Social Security won’t approve that exception. (This one is all on me.) I’m actually a bit relieved that I’m not going to file an appeal, because frankly a conservator’s court appointment is not the magic wand that the probate court thinks it is. I could see myself ending up having to answer a whole bunch of other questions with a Social Security bureaucrat, and I’d prefer to stay off their radar. I’ve done my fiduciary duty, but I’m not going to volunteer for an SS inspection of my performance.

It’s “lucky” that Dad doesn’t have an IRA or a 401(k). (He cashed out his IRA in the 1990s after he reached his 60s, but I don’t know why. He also has a “traditional” defined-benefits pension instead of a defined-contribution plan.) Conventional IRAs and 401(k)s start required minimum distributions at age 70½, but many retirees begin withdrawals as early as age 59½. Social Security benefits reach their maximum amount if deferred to age 70, but they can be started as early as age 62. In other words an affluent (or extremely frugal) Medicare retiree can have enough retirement income to be close to the limits where IRMAA kicks in. A large Roth IRA conversion, or the sale of a home for downsizing, or a significant rebalancing of an investment portfolio will trigger the IRMAA without warning.

If you’re a military retiree who also earns a civil-service pension or a civilian pension, then you’ll be pushing the IRMAA limits. If you have a 30-year career (and the military pension to match) then you’ll be close to the IRMAA limits. If you’re part of a dual-military couple with two military pensions, it’s highly likely that you’ll be bumping into IRMAA when you start your “free” Tricare For Life.

In other words, if you can “afford” to pay more for Medicare, then you probably will.

So how does this cautionary tale apply to you?

  • If you’re a conservator, you now know how to navigate this minefield for your ward’s behalf.
  • If you’re converting your Thrift Savings Plan and your conventional IRA to a Roth IRA, then you might want to finish that conversion strategy before age 65.
  • If you’re planning to incur any major taxable gains after age 65 then you might want to accelerate that event too.
  • If you’re planning to work after age 65, be aware that you could be paying IRMAA.

Finally, keep reading. (Start with Michael’s “Nerd’s Eye View” link.) This legislation was passed in 2007 and I didn’t realize it existed until it was too late. Even if you have a professional take care of your tax returns, the more you learn about your taxes then the more questions you can ask.

 

 

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Related articles:
Geriatric financial management update
Geriatric financial lessons learned
Financial lessons learned from caring for an elderly parent
More on caring for an elder’s finances
Interview: what’s wrong with long-term care insurance?
Military long term care insurance
Get Rich Slowly: Are you involved in your parent’s finances?

 

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WHAT I DO: I help you reach financial independence. For free. I retired in 2002 after 20 years in the Navy's submarine force. I wrote "The Military Guide to Financial Independence and Retirement" to share the stories of over 50 other financially independent servicemembers, veterans, and families. All of my writing revenue is donated to military-friendly charities.

7 Comments
  1. […] was living very frugally on his Social Security and his pension, so his investments were concentrated over 80% in equities. I’m relieved that he didn’t own real estate or a business, and that he wasn’t a […]

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  3. Reply
    Kate Horrell January 30, 2014 at 6:10 AM

    Doug, thanks for explaining yet another important but relatively quiet rule. My husband will be delighted that there is something that looks like means testing on Medicare. Me, not so much. We’ve got a few more years until we need this information but you never know when a friend or relative will be in this situation.

    • Reply
      Doug @ The-Military-Guide January 31, 2014 at 6:17 AM

      You’re welcome, Kate!

      “Means testing” is right. I’ve never seen any information on IRMAA in any of the Medicare guides that I’ve read…

  4. Reply
    Mel M. January 3, 2014 at 1:33 PM

    Doug,
    Another informative piece. While my wife and I are about 15-20 years away from having to deal with Medicare/Tricare for Life and Social Security (and being dual military, would more than likely be subject to IRMAA anyway), I have plans on converting my traditional TSP and Roth TSP (Roth TSP still has RMDs as opposed to Roth IRAs from what I’ve read) to Roth IRAs before we hit 65 years of age. I don’t know if we would be able to do so in a way that optimizes tax efficiency (i.e. only convert up to the maximum threshold of taxable income for whatever tax rate we fall in by then – possibly 25% but more than likely 28%), but I plan on getting the conversion done slowly and methodically. Is there a rule of thumb as to when the optimal time it would be to do conversion of TSPs? Should I start as soon as my wife retires next year?

    • Reply
      Doug @ The-Military-Guide January 4, 2014 at 3:35 AM

      Mel, you’re absolutely right about the Roth TSP RMDs, so you’ll want to convert that balance to a Roth IRA as well.

      I’ve concluded that it’s all too easy for dual-military couples to end up in the 28% tax bracket– it just takes some dividend income on top of the 1099 interest statement and perhaps some rental income (or part-time income, or blogger AdSense income). You’ll have to forecast your income when you’re a dual-pension couple, but it might be worth doing your conversions up to the top of the 25% bracket instead of the 15% bracket.

      The most straightforward method would be to divide the TSP balances into the number of years before age 65, and maybe accelerate it by a year or so to account for investment gains during that period.

  5. Reply
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