In our current political climate politicians and pundits are advocating that a new tax on the rich to fund healthcare be implemented. The problem with this request is that there is already a tax in place that hits the rich and funds healthcare, no one seems to talk about it or even know it.
The more shocking part is the fact that this tax has been on the books for years.
Believe or not, when you are 65 years old or older and retire from work you must accept Medicare in order to receive your Social Security benefit, it’s the law.
On the surface this may not seem like a big deal, but what you are, most likely, not being told is that Medicare is based on your income through Medicare’s Income Related Monthly Adjustment Amount (IRMAA).
When you enroll into Medicare the IRS will contact the Centers of Medicare Services (CMS) every two to three years to inform them of the income you generate. If it is too much you will be assessed a surcharge on top of your current Medicare Part B and Part D premiums – thus a tax.
Where this becomes a problem is how income is defined.
According CMS income is defined as “adjusted gross income plus any tax-exempt interest you may have” or, in 2019, income is everything on line 7 and 2a of the IRS form 1040.
Some examples of what counts as income:
Social Security benefits, Wages, Interest, Pension and Rental Income, most Capital Gains, all Dividends and any distribution from any tax deferred investment account like a Traditional IRA or 401(k).
This matters simply because most people are being encouraged to do to 2 things to prepare for retirement:
- Save as much as possible in an employer’s retirement account tax deferred – your Traditional 401(k).
- Delay taking your Social Security benefit in order to get the maximum amount.
The consequence of this encouragement and the definition of income is that over time with the Required Minimum Distribution (RMD) forcing retirees to take money out of their Traditional IRA or 410(k) coupled with their Social Security benefit their income will place them into a Medicare IRMAA bracket – thus another tax.
The current Medicare IRMAA brackets are as follows:
Who will be affected by this?
Well, thankfully, only the rich, and below is an example of who will be defined as rich:
A person who is 55 years old today and is currently earning an income of $75,000.00 through employment. They are saving $10,000.00 a year in a Traditional 401(k) through their company’s retirement including the match. Their investment is receiving a 6% rate of return and they will retire at age 70.
The shocking part – they have already saved $50,000.00 in their Traditional 401(k).
The income result in retirement:
For the person in this example Social Security projects that their future inflated benefit will be just over $55,500.00 a year at age 70. Social Security also projects that the maximum cost of living adjustment (COLA) for the foreseeable future will be 2.6%.
At age 70 their RMD’s are expected to be just under $13,000.00 as their Traditional 401(k) grew to over $350,000.00 by retirement.
With compounding interest on their Traditional 401(k) and Social Security’s COLA adjustment each year, by age 78 they will be in the first IRMAA surcharge bracket with an income of over $85,000.00 – thus starting a new era for a tax.
By age 85, if they don’t adjust their retirement savings correctly, they will generate over $107,000.00 in income which will lead to them being in the 2nd Medicare IRMAA surcharge bracket – thus being taxed more.
Think about who is wealthy: A 55-year-old person, earning $75,000 a year in wages, saving $10,000 a year for their retirement and earning 6% on their investment.
The other caveat, which is also a law: the bulk of their Medicare premium plus these IRMAA surcharges will be deducted automatically from their Social Security benefit monthly.
Again, there is a plan to tax the rich in order to fund healthcare. All that is needed is an understanding of federal law, but it would appear there are 2 major issues we as a nation face today:
- Our current politicians and political pundits have no idea which laws are already in place.
- The financial industry, including Accounts/CPA’s, as well as employers who offer Traditional 401(k)’s are encouraging us to inadvertently be taxed more while they all benefit.
For those who happen to understand federal law they will quickly realize that we have already placed a tax on the rich to fund for healthcare. It would just be nice if certain groups would understand this too.