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Mixing Medicare and IRAs to Build Client Tax Savings

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For most clients, cumulative postretirement medical costs are the highest ticket items to arise later in life—and the problem is intensified for high-income clients because exceeding the Medicare income thresholds can increase premium costs by more than 200% during retirement (see Now You Need Even More Money for Health Care in Retirement: EBRI). The magnitude of the issue highlights the importance of thinking outside the box in planning to avoid or reduce Medicare premium surcharges.

A provision allowing certain clients to reduce income by making qualified charitable distributions from an IRA can provide the solution for clients lacking other sources of tax-free income in retirement—both reducing Medicare premium costs and lowering taxable income so that the client can take advantage of other valuable tax benefits.

(See How to Minimize Pricey Medicare Surcharges, originally published on our sister site Tax Facts Online.)

The Risk of Medicare Income-Based Surcharges

The current Medicare income-based surcharge rules increase the cost of premiums for Medicare Parts B and D for clients with modified adjusted gross income (MAGI) that exceeds certain threshold limits. Importantly, Medicare uses a two-year look-back period so that the wages a client earned in 2015 are used in determining the client’s liability for income-based surcharges today.

Further, the Medicare Access and CHIP Reauthorization Act of 2015 includes a provision that will modify the scale for determining the various levels of income-based surcharges that higher-income Medicare recipients must pay.

Medicare income-based surcharges are determined based on a sliding scale that uses the recipient’s modified adjusted gross income (MAGI) to determine liability for Medicare premium costs. Five tiers of income levels currently exist, and the amount of an individual’s income-based surcharge is determined based upon the tier in which his or her income falls.

Currently, the upper income limit for the highest tier is $214,000 for a single taxpayer and $428,000 for a married couple filing jointly (though income-based surcharges begin to apply once MAGI hits $85,000 for individuals and $170,000 for married clients). Beginning in 2018, however, those income limits (which will actually be based on 2016 income) will be lowered for the fifth tier, which imposes the highest income-based surcharge.

As a result, more high-income clients will find themselves pushed into the highest tiers, which can result in premium increases of over $7,000 per year for a married couple.

IRA QCDs Minimize Medicare Costs

Of course, income received on a tax-free basis in retirement is not included in calculating a client’s MAGI. For clients who do not have access to tax-free sources of income in retirement (Roth accounts, for example), making a qualified charitable distribution (QCD) can help reduce postretirement MAGI to minimize Medicare’s income-based surcharges.

The QCD provision allows clients to take their required minimum distribution (RMD, of up to $100,000 per year, or $200,000 per couple if each spouse has a separate IRA) without increasing their tax burden, as long as the funds are transferred directly to a qualified charity (donor-advised funds and most private foundations do not qualify). The client must have reached age 70 ½ (i.e., he or she must be required to take RMDs) and the account must be a traditional or inherited IRA (not an employer-sponsored retirement plan).

To be clear, the QCD not only reduces the client’s tax liability (as a charitable deduction can), the entire amount of the QCD is excluded from the client’s income—reducing the dollar amount taken into account when determining Medicare premium costs.  The amount does count toward the client’s RMD requirement for the year.


Planning for Medicare income-based premium surcharges can be critical for middle and high-income clients.  If these clients do not have access to tax-free sources of income and anticipate income that will exceed the threshold amounts, the QCD option can help eliminate the extra premium cost liability.

For more blog posts by Professors Bloink and Byrnes, please see:

Buffer Annuities: The Good, the Bad, the Ugly

Single Premium Deferred Annuities: One Size Does Not Fit All

Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.