MAGI and Medicare

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Beehave
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MAGI and Medicare

Post by Beehave » Sun Jul 23, 2017 2:43 pm

I've combed this site and Google in general and am confused by ambiguities, technical jargon, and seemingly outright contradictions in opinions.

Medicare subsidies vary based on MAGI, which raises the issue of what MAGI actually is. Medicare subsidies are reduced at the $170k MAGI level.
Suppose some hypothetical couple both age 72 filing jointly had the following situation:

Dividends/Interest: 10,000
Pension: 40,000
Soc Sec 1: 32,000
Soc Sec 2: 36,000
Req'd IRA/401k Dist1: 20,000
Req'd IRA/401k Dist 2: 26,000
Part-Time Work Income: 10,000
Part Time Work Mandated 401a state/county worker FICA Alternative 7.5% deduction: <750>

As I understand the MAGI calculation, all of the dividend, pension, required IRA, and the part-time income minus 401a contribution count towards MAGI. In addition, even though for this couple only 85% of Social Sec 1 and 2 go to AGI, the full 100% of the Social Sec benefit for each goes towards MAGI.

If that's correct, then this couple has 173,250 MAGI and would be in the $170K Medicare payment subsidy class.

Here is question 1: Suppose the part time worker increased the 401a contribution by $4,000. Would that reduce MAGI to under $170k?

Here is question 2. Suppose the part-time worker is not allowed by policy to do anything other than contribute the mandatory 10% to the "employer-sponsored" 401a, or does not like the 401a choices. If the part-timer instead contributed $4,000 into an individual (non-employee-sponsored) IRA, would that bring the MAGI down to under $170k ?

It should be mentioned that in the case at hand, the part-time worker could also be contributing to a Roth IRA, and so any IRA or 401a contributions employed to reduce MAGI would also reduce the funds deployable to the Roth.

LSLover
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Re: MAGI and Medicare

Post by LSLover » Sun Jul 23, 2017 3:21 pm

IRA contributions to a traditional IRA reduce the IRA AGI or adjusted gross income because the qualifying contribution is deducted from the AGI. On the other hand, the IRA AGI for a Roth IRA is not reduced, because the contributions are funded with after-tax dollars.

retiredjg
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Re: MAGI and Medicare

Post by retiredjg » Sun Jul 23, 2017 3:36 pm

I'm not sure I can help much, but here's a start. I hope I'm not off in the weeds on this. Here's my source.

https://www.ssa.gov/pubs/EN-05-10536.pdf

Medicare subsidies vary based on MAGI, which raises the issue of what MAGI actually is.
According to the link,
  • To determine if you’ll pay higher premiums, Social Security uses the most recent federal tax return the IRS provides
    to us. If you must pay higher premiums, we use a sliding scale to make the adjustments, based on your modi ed adjusted gross income (MAGI). Your MAGI is your total adjusted gross income and tax-exempt interest income. Medicare subsidies are reduced at the $170k MAGI level.
Your "adjusted gross income" is line 37 - the last line on page 1 of Form 1040. To that number, add any tax-exempt interest income (such as interest from a tax-exempt bond) that was not included in your taxable income and you have the MAGI that applies to this issue.

Note that the $170,000 limit is in reference to your 2015 Tax return (the return that was due 1.5 years ago in April 2016). If your income reported as $173,250 was in 2015, then the couple will be paying $53.50 a month extra for Medicare Part B now, in 2017.

If you are using the $170,000 number to predict what will happen next year, that is probably the wrong number to be using as it may have gone up.



As I understand the MAGI calculation, all of the dividend, pension, required IRA, and the part-time income minus 401a contribution count towards MAGI. In addition, even though for this couple only 85% of Social Sec 1 and 2 go to AGI, the full 100% of the Social Sec benefit for each goes towards MAGI.
It appears to me that the full 100% of SS benefits is NOT included in the AGI (and thus not in the MAGI). Only the 85% that is taxable is included in the AGI (line 37 - the last line on the front page of Form 1040). The 15% that is not taxable got taken out on line 20 of form 1040.

If that's correct, then this couple has 173,250 MAGI and would be in the $170K Medicare payment subsidy class.
I do not believe it is correct. In the example given, the untaxed SS would bring the MAGI well below the $170,000 limit on the 2015 taxes and the couple should not be paying the higher premium now in 2017.

Again, if the income numbers you are quoting represent 2017 income, the $170,000 limit may not apply. A higher limit may apply.

This is the first time I've looked at this issue. I hope someone more familiar with it will confirm If I have it right.

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House Blend
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Re: MAGI and Medicare

Post by House Blend » Sun Jul 23, 2017 3:42 pm

Beehave,

Modified AGI for medicare purposes is simply normal AGI plus tax-exempt interest. See
https://www.ssa.gov/pubs/EN-05-10536.pdf
The SSA wrote:Your MAGI is your total adjusted gross income and tax-exempt interest income.
So your questions boil down to "Does X affect my AGI?"

Deductible IRA contributions--yes.
Non-deductible IRA contributions--no.
Tax-deferred employee contributions to employee retirement plans--yes.
Employer contributions to employee retirement plans--no.
Roth contributions--no.
SS income--only the taxable part.
Pension--only the taxable part.

Note that while employer contributions to a 401(a) don't affect your AGI, if you are required to make contributions out of your paycheck (aka "non-elective" contributions), they will reduce AGI.

cas
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Re: MAGI and Medicare

Post by cas » Sun Jul 23, 2017 3:53 pm

retiredjg wrote: If you are using the $170,000 number to predict what will happen next year, that is probably the wrong number to be using as it may have gone up.[/b]

This is the first time I've looked at this issue. I hope someone more familiar with it will confirm If I have it right.
Since you asked ... the $170,000 number is still correct.
For the first few years that the Medicare Part B income-related premium was in effect (between 2007 and 2010), the income thresholds that determined who paid the higher amounts were set to increase annually with the rate of inflation so that about 5 percent of Part B enrollees would pay the income-related premium. Since 2011, however, the income thresholds that determine who pays the higher Part B premiums have been fixed at their current levels through 2019 (a provision of the ACA); this provision also applies to Part D. ...

In 2020 and subsequent years, the income thresholds will once again be indexed to inflation, based on their levels in 2019 (a provision in MACRA).
From: Kaiser Family Foundation "Medicare’s Income-Related Premiums: A Data Note" http://www.kff.org/medicare/issue-brief ... data-note/

retiredjg
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Re: MAGI and Medicare

Post by retiredjg » Sun Jul 23, 2017 4:05 pm

I didn't know that. Thanks for the info.

I guess more than 5% will be paying the higher premiums for awhile. :D
Last edited by retiredjg on Sun Jul 23, 2017 4:29 pm, edited 1 time in total.

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FIREchief
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Re: MAGI and Medicare

Post by FIREchief » Sun Jul 23, 2017 4:14 pm

This is a good discussion. Thanks OP for the nice illustrative example. I'm not to Medicare yet, but definitely trying to plan accordingly. Those premium "boosts" can effectively raise a person's marginal tax rate (+2.92% minimum for the first "tier", even more for the higher tiers).
cas wrote:
retiredjg wrote: If you are using the $170,000 number to predict what will happen next year, that is probably the wrong number to be using as it may have gone up.[/b]

This is the first time I've looked at this issue. I hope someone more familiar with it will confirm If I have it right.
Since you asked ... the $170,000 number is still correct.
IIRC, the Medicare thresholds are frozen for the next several years (and will also be somewhat compressed in 2018) as part of the ACA.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

The Wizard
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Re: MAGI and Medicare

Post by The Wizard » Sun Jul 23, 2017 6:42 pm

A lot of Bogleheads with decent retirement income are paying more than the base Medicare amount. No biggie.
The issue is to keep your MAGI from being just $500 or $1000 into the next tier threshold.
This matters especially with Roth conversions.
So plan properly...
Attempted new signature...

Beehave
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Re: MAGI and Medicare

Post by Beehave » Sun Jul 23, 2017 7:52 pm

As OP, thanks for the replies. I think retiredjg and House Blend are right - - for Medicare tier pricing it looks as if MAGI = AGI + any untaxed interest.
Untaxed Social Security appears not to count as MAGI.

Also, the comments that current year tier pricing is based on your income from 2 years before are also important. That's because Congress can change the rules between the time that you file your taxes and the time that what you filed determines what you will have to pay for Medicare. That means that fine tuning your taxes to optimize Medicare tier status may be shooting in the dark.

neilpilot
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Re: MAGI and Medicare

Post by neilpilot » Sun Jul 23, 2017 8:09 pm

There is an appeal process that I will need to learn more about later this year, since our TY2016 numbers will exceed the MAGI limit and increase our part B & D premiums in 2018. As I understand the appeal process if you've stopped working and can demonstrate an income reduction, that may be the basis for a successful appeal. Can anyone comment on experience with the appeal process?

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Steelersfan
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Re: MAGI and Medicare

Post by Steelersfan » Sun Jul 23, 2017 8:22 pm

neilpilot wrote:There is an appeal process that I will need to learn more about later this year, since our TY2016 numbers will exceed the MAGI limit and increase our part B & D premiums in 2018. As I understand the appeal process if you've stopped working and can demonstrate an income reduction, that may be the basis for a successful appeal. Can anyone comment on experience with the appeal process?
I did it once when a continuing income stream (post retirement payout from a non-qualified retirement plan) ended. I had complete documentation that the income stream had ended and gave that to SS. I got the lower MAGI rate retroactive to the first of the year.

Visit your local SS office if you plan to do it.

cashmoney
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Re: MAGI and Medicare

Post by cashmoney » Sun Jul 23, 2017 8:32 pm

neilpilot wrote:There is an appeal process that I will need to learn more about later this year, since our TY2016 numbers will exceed the MAGI limit and increase our part B & D premiums in 2018. As I understand the appeal process if you've stopped working and can demonstrate an income reduction, that may be the basis for a successful appeal. Can anyone comment on experience with the appeal process?


I am familiar with the appeal process - not through personal experience but as a health insurance broker giving guidance to my clients.Have helped about 10-15 clients with this over the last few years and never had a client that had a valid reason for an appeal get turned down however you will need to jump through some hoops to file an appeal.First call Social Security most likely you will have to make an appointment at your local SS office where you will bring all supporting documents.A common situation I see is when a retiree take a pension in a lump sum .

neilpilot
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Re: MAGI and Medicare

Post by neilpilot » Sun Jul 23, 2017 8:47 pm

Appreciate the insight on appeals. In my case I retired 2 years ago, but then from June 2016 thru March of this year worked as a full time consultant, making 2-3 times my previous salary. I think my working days are now over, and my appeal will be based on no longer working.

TBillT
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Re: MAGI and Medicare

Post by TBillT » Sun Jul 23, 2017 10:29 pm

I am only 63 but my MAGI from last year 2016 will be used for my 2018 Medicare premium, when I eventually join.
2016 I sold some stocks at Age 62 so that bumped up my MAGI.
I did not realize a mistake by selling stock at Age 62 I was increasing my future Age 65 Medicare Premiums.
I will probably appeal when the time comes to see if I can say 2016 was an atypical year.

I learned this "mistake" I made here on Bogleheads. I probably would have sold the stock anyways but planning ahead is important.

cashmoney
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Re: MAGI and Medicare

Post by cashmoney » Sun Jul 23, 2017 10:40 pm

TBillT wrote:I am only 63 but my MAGI from last year 2016 will be used for my 2018 Medicare premium, when I eventually join.
2016 I sold some stocks at Age 62 so that bumped up my MAGI.
I did not realize selling stock at Age 62 I was increasing my future Age 65 Medicare Premiums.
I will probably appeal when the time comes to see if I can say 2016 was an atypical year.
Only thing that matters is the income you make in the years you are on Medicare.Really nothing you can do about this anomaly until you get the Part B/D IRMAA notice about 3 months before your 65th birthday

kaneohe
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Re: MAGI and Medicare

Post by kaneohe » Sun Jul 23, 2017 10:58 pm

TBillT wrote:I am only 63 but my MAGI from last year 2016 will be used for my 2018 Medicare premium, when I eventually join.
2016 I sold some stocks at Age 62 so that bumped up my MAGI.
I did not realize a mistake by selling stock at Age 62 I was increasing my future Age 65 Medicare Premiums.
I will probably appeal when the time comes to see if I can say 2016 was an atypical year.

I learned this "mistake" I made here on Bogleheads. I probably would have sold the stock anyways but planning ahead is important.
https://www.hhs.gov/about/agencies/omha ... index.html
The list of valid reasons is quite limited so it seems unlikely that an appeal will be successful.

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celia
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Re: MAGI and Medicare

Post by celia » Sun Jul 23, 2017 11:57 pm

Besides the increased Medicare premium that is paid monthly, high income taxpayers may be subject to an Additional Medicare Tax when they file their Form 1040. It is not part of their Income Tax (resulting from the tax brackets), but is collected with their Income Tax. See Form 1040, line 62, which carries over a tax calculated on Form 8959, Additional Medicare Tax.

I do not understand that form as it appears to reference information from Wages (W-2s), Self-Employment Income (Form SE), and Railroad Retirement (RRTA) Compensation on a W-2. When I worked on Small Law Survivor's Roth conversion strategy chart, I noticed this tax showing up on Form 1040, line 62, but the test cases had none of these incomes (just like the data in this thread doesn't-except for small wages). See row 19 in that spreadsheet.

Can someone explain Form 8959 for me?

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celia
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Re: MAGI and Medicare

Post by celia » Mon Jul 24, 2017 12:03 am

TBillT wrote:I am only 63 but my MAGI from last year 2016 will be used for my 2018 Medicare premium, when I eventually join.
2016 I sold some stocks at Age 62 so that bumped up my MAGI.
I did not realize a mistake by selling stock at Age 62 I was increasing my future Age 65 Medicare Premiums.
I will probably appeal when the time comes to see if I can say 2016 was an atypical year.

I learned this "mistake" I made here on Bogleheads. I probably would have sold the stock anyways but planning ahead is important.
I'd say it's a minor "mistake" since you appear to turn 65 in 2018. You won't be on Medicare the whole year, so you'll have a partial year of increased premiums.

TBillT
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Re: MAGI and Medicare

Post by TBillT » Mon Jul 24, 2017 12:17 am

celia wrote:Besides the increased Medicare premium that is paid monthly, high income taxpayers may be subject to an Additional Medicare Tax when they file their Form 1040.
Higher income (MAGI) if high enough gets you 2 ways: there is the (1) Medicare premiums based on income (which I had initially overlooked) and (2) Medicare 3.8% tax surcharge of higher incomes for the Affordable Care Act (Obamacare). Specific amounts will depend on income and filing status (single/married etc).

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celia
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Re: MAGI and Medicare

Post by celia » Mon Jul 24, 2017 1:24 am

I think I get it now. There are two parts to the Obamacare tax:
An additional 0.9 percent payroll tax on earnings and a 3.8 percent tax on net investment income (NII) for individuals with incomes exceeding $200,000 and couples with incomes exceeding $250,000.
http://www.taxpolicycenter.org/briefing ... e-act-make


The 0.9 percent payroll tax is calculated on Form 8959 and the 3.8 percent NII is calculated elsewhere. So investment growth (LTCG, RMDs, Roth conversions) is taxed more heavily than wages and both show up on line 62. That explains most of it, but in Small Law Survivor's chart, it looks like it maxes out at some point that I haven't yet figured out since the (AGI - 250,000) multiplied by 3.8% is more than the line 62 tax when you get to the highest shown incomes. (I was using software for 2015, in case that matters)

kaneohe
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Re: MAGI and Medicare

Post by kaneohe » Mon Jul 24, 2017 8:45 am

celia wrote:..........................................................


............................ the 3.8 percent NII is calculated elsewhere. So investment growth (LTCG, RMDs, Roth conversions) is taxed more heavily than wages and both show up on line 62. ..........................................
The NIIT is calculated on F8960 https://www.irs.gov/pub/irs-pdf/f8960.pdf
I don't see where RMDs/Roth Conversions would be listed on that form.

SuzBanyan
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Re: MAGI and Medicare

Post by SuzBanyan » Mon Jul 24, 2017 9:03 am

neilpilot wrote:Appreciate the insight on appeals. In my case I retired 2 years ago, but then from June 2016 thru March of this year worked as a full time consultant, making 2-3 times my previous salary. I think my working days are now over, and my appeal will be based on no longer working.
My husband is on Medicare. We successfully reduced our Medicare payments when I went to part-time employment this year, as this is considered a "life-changing event."

We set up an appointment with the local Social Security office, but also brought along a completed SSA-44 form. We brought a letter from my employer with respect to my reduced hours and we had to estimate our current year (2017) MAGI. According to the SSA-44 form, for an independent contractor who stops working, "we will accept your signed statement, under penalty of perjury, on this form, that you partially or fully stopped working or accepted a job with reduced compensation."

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House Blend
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Re: MAGI and Medicare

Post by House Blend » Mon Jul 24, 2017 9:44 am

celia wrote:I think I get it now. There are two parts to the Obamacare tax:
An additional 0.9 percent payroll tax on earnings and a 3.8 percent tax on net investment income (NII) for individuals with incomes exceeding $200,000 and couples with incomes exceeding $250,000.
http://www.taxpolicycenter.org/briefing ... e-act-make


The 0.9 percent payroll tax is calculated on Form 8959 and the 3.8 percent NII is calculated elsewhere. So investment growth (LTCG, RMDs, Roth conversions) is taxed more heavily than wages and both show up on line 62. That explains most of it, but in Small Law Survivor's chart, it looks like it maxes out at some point that I haven't yet figured out since the (AGI - 250,000) multiplied by 3.8% is more than the line 62 tax when you get to the highest shown incomes. (I was using software for 2015, in case that matters)
This is dragging the OP's thread further off topic, but it's true that the 3.8% ACA surtax is triggered by modified AGI levels, not Taxable Income. (Similar to medicare premiums.)

(However the definition of "modified" here is not the same as the one used for medicare premiums, and not the same as the one for Roth contributions. I will omit the gory details.)

For MFJ, it kicks in at $250K mAGI, for Singles, $200K mAGI.

And the way it works is that if you stack "investment income" on top of all other income contributing to mAGI, the portion of investment income sticking out above $250K/$200K will be taxed an additional 3.8%. Here, tax-exempt interest and distributions from any flavor of IRA do not count as "investment income", but things like (taxable) dividends, capital gains, rents, and royalties do count.

It is yet another factor to consider when selling, say an investment property at a gain, or exiting from a large but unsuitable taxable portfolio, or doing a big Roth conversion while being supported by (taxable) passive income.

The 0.9% additional medicare tax is a bit different, and even less relevant to the OP's topic. This is a boost to the usual 1.45% Medicare tax that everyone pays on all earned income. It's not triggered by what you do with your investment portfolio or how much you Roth convert. You simply owe an extra 0.9% on all of your "Medicare wages" (Box 5 on your W-2 if not self-employed) above $250K (MFJ) or $200K (Single).

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celia
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Re: MAGI and Medicare

Post by celia » Mon Jul 24, 2017 1:17 pm

kaneohe wrote:
celia wrote:.................. the 3.8 percent NII is calculated elsewhere. So investment growth (LTCG, RMDs, Roth conversions) is taxed more heavily than wages and both show up on line 62. ...............
The NIIT is calculated on F8960 https://www.irs.gov/pub/irs-pdf/f8960.pdf
I don't see where RMDs/Roth Conversions would be listed on that form.
Perfect! This answers the remaining confusion I had. In Small Law Survivor's Roth conversion strategy chart, I noticed that the Additional Medicare Tax maxed out as only applying to dividends and LTCG which were $60K in that example. Although everything above $250K was taxed an additional 3.8% when mAGI went above $250K, as the mAGI grew, that made more of the $60K dividends and LTCG taxed until they were all taxed.

So the RMDs and conversions didn't contribute to the additional tax, but they pushed more dividends and LTCG up into the taxable area.

Even though this is not the same point as the OP's discussion of "2-years later increased Medicare premiums", it is related as it is another tax that is not obvious (not in the calculation related to tax brackets). Early retirees who do Roth conversions need to be aware of it.

jimmd
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Re: MAGI and Medicare

Post by jimmd » Mon Jul 24, 2017 2:39 pm

neilpilot wrote:There is an appeal process that I will need to learn more about later this year, since our TY2016 numbers will exceed the MAGI limit and increase our part B & D premiums in 2018. As I understand the appeal process if you've stopped working and can demonstrate an income reduction, that may be the basis for a successful appeal. Can anyone comment on experience with the appeal process?
We found the process reasonably straightforward. Downloaded appeals form(of course there is a form), per Medicare instructions. Provided documentation of my reirement and "life changing event" of marked decrease in income. Also provided my wife's decreased hours from full to part time. This required some pay records from our employers, a note from the employer that I did in fact retire, projection of my DW income, and a cover lettter explaining all of this.

This was accepted and the premium was set at the less than 170K limit. We also received credits for the overpayment for two months while our data was analyzed in the appeal. They did request my returns for the following spring which I submitted later. I am hoping we do not have to do it again this year when my DW turns 65. ( They really do go back two years to determine your MAGI)

spencer99
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Re: MAGI and Medicare

Post by spencer99 » Mon Jul 24, 2017 5:04 pm

Beehave wrote: If the part-timer instead contributed $4,000 into an individual (non-employee-sponsored) IRA, would that bring the MAGI down to under $170k ?
OP,

I thought (could be wrong) that contribution to a traditional IRA was not permitted >= age 70. Does that ring a bell anyone?

Also, my understanding is that one of the few options to manage Medicare MAGI if you're near a threshold is the Qualified Charitable Distribution.


S

retiredjg
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Re: MAGI and Medicare

Post by retiredjg » Mon Jul 24, 2017 6:43 pm

spencer99 wrote:I thought (could be wrong) that contribution to a traditional IRA was not permitted >= age 70. Does that ring a bell anyone?
Age 70.5 rings a bell with me, but I don't think they are talking about making contributions. I think they are talking about taking RMDs instead.

Beehave
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Re: MAGI and Medicare

Post by Beehave » Mon Jul 24, 2017 7:11 pm

retiredjg wrote:
spencer99 wrote:I thought (could be wrong) that contribution to a traditional IRA was not permitted >= age 70. Does that ring a bell anyone?
Age 70.5 rings a bell with me, but I don't think they are talking about making contributions. I think they are talking about taking RMDs instead.
Thanks for the info. I knew Roth and 401k contributions are allowed after age 70.5 and figured that regular IRA contributions must also be ok - - but they are not. I guess the difference between the 401k and IRA that underlies the rule is that after age 70.5 you must take RMDs from IRAs, but you do not need to take an RMD from a 401k if you are still actively employed by the company with that 401k plan.

I appreciate your answers - - they are accurate and very helpful in understanding options.

ResearchMed
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Re: MAGI and Medicare

Post by ResearchMed » Mon Jul 24, 2017 7:14 pm

Beehave wrote:
retiredjg wrote:
spencer99 wrote:I thought (could be wrong) that contribution to a traditional IRA was not permitted >= age 70. Does that ring a bell anyone?
Age 70.5 rings a bell with me, but I don't think they are talking about making contributions. I think they are talking about taking RMDs instead.
Thanks for the info. I knew Roth and 401k contributions are allowed after age 70.5 and figured that regular IRA contributions must also be ok - - but they are not. I guess the difference between the 401k and IRA that underlies the rule is that after age 70.5 you must take RMDs from IRAs, but you do not need to take an RMD from a 401k if you are still actively employed by the company with that 401k plan.

I appreciate your answers - - they are accurate and very helpful in understanding options.
Aren't SEP IRA contributions allowed after 70.5 if one has self-employment income?

RM
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retiredjg
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Re: MAGI and Medicare

Post by retiredjg » Mon Jul 24, 2017 7:24 pm

ResearchMed wrote:Aren't SEP IRA contributions allowed after 70.5 if one has self-employment income?
Not sure. As I understand it, a SEP is a kind of traditional IRA, but SEP contributions are made by the employer, not the employee. So maybe the rules are different.

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