Thursday, September 29, 2022

An Introduction to IRMAA

Full disclosure: this blog post is written from a place of privilege for older adults with higher-than-average incomes and/or assets. Many are middle income taxpayers who diligently saved and invested for 4-5 decades in tax-advantaged plans. Yes, I am one of approximately 7% of Medicare participants who pay income-related monthly adjustment amounts, a.k.a., IRMAA surcharges.


If your first thought when you hear the word “Irma” is a kindly older relative (the name was popular generations ago) or a powerful category 5 hurricane in 2017, this post will bring you up to speed about the “other IRMAA.” As I wrote in my book Flipping a Switch, some older adults must “plan for higher taxes in the future, especially when required minimum distributions (RMDs) kick in.” The key is to enact strategies to reduce your modified adjusted gross income (MAGI).


Three IRMAA “Need to Knows”


¨    IRMAA is Progressive- Like income taxes, IRMAA surcharges are progressive and rise with income. The rationale for both payments is that people who earn more can afford to pay more for taxes and health care. There is a two-year look-back period so 2022 IRMAA surcharges are based on 2020 modified adjusted gross income (MAGI). There are five MAGI income ranges for IRMAA, with 2022 payments ranging from $238.10 to $573.30 for Medicare Part B and $12.40 to $77.90 for Part D. The 2022 standard Medicare Part B premium for most older adults, for whom IRMAA is a non-issue, is $171.10.


¨    IRMAA Can Change- Medicare recipients’ MAGI from two years prior is reviewed annually and IRMAA surcharges are set accordingly. A letter from the Social Security Administration (SSA) notifies beneficiaries of their expected benefit, including IRMAA deductions, if any. Many events can affect IRMA including marriage, divorce, death of a spouse, taxable pensions, leaving the workforce, capital gains on the sale of assets, and the start of RMDs. For example, the surviving spouse of a couple that escaped IRMAA may pay this surcharge as an individual taxpayer.


¨    IRMAA Can Be Appealed- Older adults who have experienced a significant drop in income from the look-back year (e.g., 2020) to the year that they are paying IRMAA (e.g., 2022) can file an appeal to show that they had a reduction in income due to eight specific life events: marriage, divorce/annulment, death of spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income, and an employer settlement payment. IRMAA appeals are filed using Form SSA-44 and mailing supporting documentation or showing it to SSA office staff.


Three IRMAA Action Steps


¨    Reduce MAGI- MAGI is based on adjusted gross income (AGI) plus tax-exempt interest income and certain deductions that are added back. It is the gateway, not only for IRMAA, but Roth IRA contributions. Strategies to reduce MAGI include: projecting “high income” years for advance planning, avoiding transactions that trigger large capital gains, making Roth IRA conversions in lower income years, tax diversification (having a combination of taxable, tax-free, and tax-deferred accounts vs. only pre-tax accounts), and charitable contributions (see below).


¨    Plan Proactively- Just $1 of MAGI over income thresholds for the five levels of IRMAA can cost hundreds or thousands of dollars in surcharges. The key is to monitor AGI/MAGI and use legal strategies to lower it. Example: I increased my 2021 SEP contribution to reduce AGI and avoid triggering a higher level of IRMAA in 2023.


¨    Consider Philanthropy- As a win-win, older adults can make gifts to charitable organizations that reduce their account balances and taxes. Those age 70 ½ can make a qualified charitable distribution (QCD) from their traditional IRA directly to a qualified charity. The QCD counts as a RMD and isn’t included in income that affects IRMAA.


In Summary


Two final words about IRMAA: anger and gratitude. When taxpayers get caught off-guard by IRMAA, as many do, it is easy to get angry at the government. IRMAA seems very punitive. This is especially true when you “did everything right” and saved money in IRAs, 401(k)s and the like, as financial experts recommended. I am one of those financial educators and “walked my talk.” Also, IRMAA did not start until 2003 when many baby boomers were well into a savings program.


I prefer to focus, however, on gratitude: for the savings I was (and am) able to accumulate and four decades of compound interest that made it grow. Couples who pay IRMAA in 2022 earn over $182,000, making IRMAA a small percentage of their income. 

This does not mean, however, that older adults should just sit back and pay whatever surcharges come their way. On the contrary. You can be grateful and strategic. Consider the proactive strategies to reduce MAGI listed above.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Thursday, September 22, 2022

The Opioid Crisis and Personal Finance

I recently participated in a panel discussion about America’s opioid crisis at a professional conference. My role on the panel was to discuss the financial implications of the opioid crisis on individuals, families, and the country. Other speakers delved into the extent of the opioid epidemic and its impact on relationships and physical and mental health.

Below are my take-aways from the conference presentation:

Staggering numbers- According to various U.S. Department of Health and Human Services reports, 10.1 million people misused prescription opioids during the past year, 1.6 million had an opioid use disorder, and 50,000 used heroin for the first time. In addition, there were 48,006 deaths attributed to overdosing on synthetic opioids and 14,480 deaths attributed to overdosing on heroin.

Risk Factors- Factors associated with opioid misuse and use disorders include a family history of substance abuse, a personal history of substance or tobacco use, a history of preadolescent sexual abuse, mental health issues like depression (opioids may be misused for their mood-altering properties), and demographic factors (e.g., primarily young males).

How Opioids Get Misused- Pathways to substance abuse include prescriptions by doctors, using another person’s prescription, obtaining prescriptions from multiple doctors, stealing drugs from family and friends, and accessing drugs that are not stored in a secure, locked location. Every day, 2,000 teens in the U.S. try prescription drugs for the first time.

Opioid “Rush” Sensation- During an overdose, oxygen supply to the brain is limited due to lowered breathing and a lowered heart rate. Opioid receptors in the brain and body are flooded which causes a euphoric “high” feeling. The opioid user typically gets sleepy due to shallow breathing. Brain damage or death can occur if Narcan (an emergency treatment medicine designed to reverse an opioid overdose) is not administered promptly.

Health Impacts- People with an opioid dependence are 11.2x more likely than others to have had at least one mental health outpatient visit and 12.2x more likely to have had at least one hospital inpatient stay. In addition, they are at greater risk for Hepatitis A, B, or C and for developing a psychiatric illness and for pancreatitis. Opioid use during pregnancy results in exposure of babies to the harmful effects of these drugs.

Psychosocial Impacts- In addition to health impacts such as mental confusion, depression, nausea, and constipation, other impacts include the destruction of families, low educational achievement, unemployment, homelessness, increased crime and fatalities due to motor vehicle accidents, increased transmission of disease (e.g., HIV and hepatitis), and increased healthcare costs.

Global Financial Costs- Opioid abuse is estimated to cost the U.S. $33 billion a year in health care costs and $14.8 billion annually in criminal justice costs. The largest cost, however, is $92 billion in lost productivity and earnings, which includes losses due to premature death of a worker due to an overdose, lost productive hours, and opioid-related incarceration. The costs of opioid addiction affect individuals and families, employers (e.g., absenteeism, presenteeism, labor shortages, disability payments, and costs of errors made by impaired workers), and governments (e.g., criminal justice and incarceration expenses and reduced income tax and FICA tax revenue).

Individual/Family Costs- Listed below are impacts experienced by individuals and families affected by opioid addiction:

        Decreased labor force participation

        Incarceration for opioid-related crimes

        Depleting savings to pay for a drug addiction

        Forgone saving/investment opportunities (e.g., 401(k)s, IRAs)

        Out-of-pocket health care expenses

        Poor credit history due to delayed bill-paying

        Lost lifetime earnings due to unemployment and premature death

        Grandparents raising grandchildren (impact on retirees)


Financial Action Steps- The objective here is to prevent an opioid user’s access to cash with which to buy drugs. Third party monitoring of financial accounts is often recommended, and preparation of estate planning documents is essential. Other suggested financial management strategies include the following: 

        Close joint bank and credit accounts

        Turn over credit and debit cards to a sober family member (i.e., pay for things cash-only)

        Cut off online access to financial accounts

        Direct deposit of paychecks and direct bill payment

        Text alerts (e.g., late payments and account withdrawals) to a sober family member

For additional information about the cost of opioid abuse, review this colorful infographic.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


Friday, September 16, 2022

Highlights from an Estate Planning Seminar

I recently attended a local estate planning seminar geared for- and marketed to- older adults. I decided to go “undercover” to see if there was any evidence of manipulative sales practices masquerading as “financial education.” Sadly, I found some. 

Specifically, a presenter who was not an attorney and had no recognized financial planning designations whatsoever pitching the legal services of a colleague who was not in attendance. The original program publicity contained neither the name of the sponsoring company or the presenter’s name or credentials.


I counted at least 50 times the presenter used the phrase “I’m not an attorney but…”and at least 30 pitches for revocable living trusts as suitable for everyone without considering the specifics of their financial situation. The presenter also threw out many legal terms (e.g., A/B trust) without explaining them, disparaged the probate process repeatedly, and occasionally presented dated information (e.g., incorrect gift tax and estate tax exemptions from 2021).

In addition, he distributed a so-called “Consumer Survey” at the end, ostensibly to solicit feedback on the seminar but primarily to harvest participants’ personal information (e.g., date of birth) and contact information (address, e-mail, and phone number). I took my survey with me and left the seminar shortly thereafter when the presenter started pitching various “combo packages” for legal documents. I don’t know how many participants actually returned this form.

Nevertheless, despite all my misgivings about the content and format of the estate planning seminar and its marketing pitches, there was some helpful information shared. 

Below are eight useful “nuggets” to consider as you make plans for the management and distribution of your assets both during your lifetime and upon your death:

Check Document Reciprocity- Discuss this with an estate planning attorney when you move to another state. Many states have reciprocity with other states. This means that a state (e.g., my home state of Florida) will accept any will as valid if it was valid in the state where it was prepared. However, valid wills from other states may still be difficult to execute due to differences among state statutes and how they are interpreted. An attorney can identify legal landmines.

Get Everything in Writing- Recognize the power of legal documents, such as wills and trusts, that provide documentation and enforcement regarding a person’s wishes regarding the distribution of their property. Oral promises made to someone are non-binding. The speaker recounted a story of a deceased man’s second wife who promised to “take care of” his children (her stepchildren) financially, but kept everything for herself and did not give them any money.

Avoid Document Conflicts- Make sure that there is no conflict between a will and other legal documents relating to the ownership or distribution of assets. The title on assets (e.g., joint ownership with right of survivorship) or beneficiary designations on contracts such as life insurance policies, individual retirement accounts (IRAs), and tax-deferred employer retirement savings plans always take precedence over the terms of a will.

Review Beneficiaries- Periodically review (and revise, if needed) persons named to inherit your assets or manage your financial affairs. These people should always be people that you trust and people who are capable of performing their designated roles. Use this worksheet to list all of your beneficiaries and personal representatives in one place.

Keep Heirs Updated- Communicate ongoing changes to estate plans. The speaker noted that updates to estate planning documents should be shared with trusted family members. He noted that a common reason for estate planning challenges in the court system is when people change their legal documents but never notify their loved ones about the changes. Family members and/or other heirs, who have copies of previous versions of the legal documents, later contest the change.

Expect Probate Expenses- Be aware that there is a cost to settling someone’s estate. Probatable assets are those that are owned by individuals without a named beneficiary or survivorship right. For example, a bank account, a mutual fund held in a taxable account, and an automobile. Probate estate administration costs vary according to the size and complexity of someone’s financial assets. The complexity of the probate process also varies among states. The workshop presenter cited several sources that estimate the cost of probate as between 4% and 7% of the value of the assets being probated.

Retitle Assets Within Trusts- Expect that setting up a trust will take some time and “legwork.” When someone becomes the grantor of a trust, their individually owned assets must be retitled into the name of the trust, which becomes a separate legal entity. Assets that can go into a trust include deeded assets like a home or other real estate, financial assets (e.g., bank and investment accounts), collectibles, and life insurance.

Don’t Procrastinate- Take action to address gaps in estate planning whether it is getting legal documents prepared or updated, making a list of digital asset usernames and passwords, or communicating estate planning wishes with trusted loved ones and/or designated personal representatives. If not today, when? The future is not promised to anyone.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Thursday, September 8, 2022

How to Inventory and Protect Your Digital Assets

Digital assets are any personal information stored electronically on any electronic device (e.g., laptop, tablet, cell phone) or “cloud” server. 

Many people have dozens, even hundreds, of digital assets that can be worth tens, if not hundreds, of thousands of dollars (e.g., bank and brokerage accounts, cryptocurrencies, and retirement savings plans).

The best way to determine how many digital assets you have is to identify them by general category (e.g., online retailer accounts and financial accounts) and then prepare a detailed inventory. 

The best way to determine their value is to prepare a net worth (assets minus debts) statement that includes digital assets with monetary amounts.

A digital assets inventory is a detailed list of digital assets along with their username, password, or other identification information (PIN number, challenge question responses). 

This list should be reviewed and revised periodically and shared with trusted individuals who are named in legal documents to manage your affairs. Also make sure that digital assets are referred to in estate planning documents (e.g., will or trust) with a named digital asset executor.

Below are examples of items that fit in each of 12 digital asset categories:

Electronic Devices- This category includes smart phones, tablets, laptop and desktop computers, flash drives, and external hard drives.

Benefit Accounts- This category includes rewards programs for various airlines and hotels, railroad miles, and retailer rewards or loyalty programs.

E-Mail Accounts- This category includes login information for various e-mail programs including Gmail, Yahoo!, Microsoft Outlook, AOL Mail, ProtonMail, and Zhou Mail.

Financial Accounts- This category includes bank/credit union accounts, brokerage accounts, retirement savings accounts, credit card accounts, employee benefit accounts (e.g., health insurance), insurance company accounts, and peer-to-peer payment apps such as Venmo and Zelle.

Online Merchant Accounts- This category includes online retailers such as Amazon, “brick and mortar” retailers’ online shopping sites, driving services such as Uber, theaters, and grocery delivery services such as Instacart.

Member Organization Accounts- This category includes “member access” features for websites run by professional associations, charitable and religious organizations, sports season ticket providers (e.g., universities and pro teams), gated communities, and other “members only” groups.

Health Care Portals- This category includes access to personal health care information on websites run by doctors, hospitals, radiologists, health insurance companies, and Medicare and Medicaid.

Photography/Music Accounts- The category includes personal photo and music collections stored on websites such as Snapfish, Shutterfly, Google photos, Amazon Prime photos, Apple iCloud, Flickr, Google Drive, and Apple iTunes.

Publication Accounts- This category includes personal login credentials for newspaper and magazine subscribers, blogs, and other online content that requires payment to access.

Social Media Accounts-This category includes login credentials for various social media programs including LinkedIn, Twitter, Facebook, YouTube, Vimeo, Pinterest, Zoom, and Tiktok.

Cryptocurrency Accounts- This category includes account access information for cryptocurrencies and crypto exchanges such as Coinbase and Examples of cryptocurrency assets include Bitcoin, Ethereum, non-fungible tokens (NFTs), and stored value in online games such as Fortnite, Minecraft, and World of Warcraft,

Website Accounts- This category includes personal access to accounts maintained for website domain names and hosting services and cloud storage programs such as Apple iCloud, Dropbox, Box, And Google Drive.

In summary, don’t leave your digital assets to chance. Take the time to prepare a digital assets inventory. Benefits include:

¨    Hassle-free access to online accounts

¨    Saving time (to log into accounts) and money (e.g., legal fees and lost assets)

¨    Less stress for heirs, survivors, and fiduciaries

¨    Protecting private information and avoiding identity theft

¨    Avoiding creepy” situations (e.g., Facebook birthday reminders for dead people)

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.


Looking Ahead to Your 2024 Tax Return

  With the 2023 tax filing deadline in the rear view mirror, now is a good time to look ahead to 2024 taxes that you will owe in April 2025....