March 2014

IRAs and 401Ks – Withdrawing Money Too Slowly

Posted on March 27, 2014 by Jim Koewler — No Comments ↓

Last week, I explained that IRAs (and 401Ks, and 403Bs, and, I assume, the new MyRAs) help people time their taxes but not avoid taxes altogether. (IRAs and 401Ks are not for tax avoidance. They are for tax timing.) (Like I did last week, I’ll write about IRAs, but I mean to include 401Ks, 403Bs, etc. I just don’t want to repeat all of the different names for these accounts over and over in my writing.) I tried to explain how to withdraw the assets of the your tax-deferred account over 3 to 10 years (depending on the size of your IRA.) To clarify my advice, I want to consider how keeping too much money in your IRA can cost you or your family more in taxes.

Many people take out the Required Minimum Distribution (“RMD”) and no more. That RMD is calculated to have the IRA last as long as your life expectancy, i.e., the “average” life expectancy for someone 70 1/2 years old. (Roth IRAs do not have the same RMD requirements.) A life expectancy pay-out makes sense because IRAs were created to support retired people during their retirement to the end of their lives. IRAs were not created as a way to pass money to a retiree’s children and grandchildren (assuming that is who most retirees will name as their IRA beneficiaries.) The money in the IRA is supposed to be used up before you die — if you’re the “average” person with an “average” lifespan.

If you have better than average investments that provide more growth or income than “average,” your RMD won’t empty your account before your life expectancy. A well-invested IRA will leave money to your beneficiaries.

Similarly, if you die before your life expectancy (i.e., you’re unhealthier or unluckier than the “average” person,”) your IRA will still have money in it because you didn’t reach your life expectancy. Your beneficiaries will get your left over IRA money.

So, why is it bad if your children or grandchildren get money from your IRA? It’s bad because of taxes, of course. The beneficiaries of your IRA will have to pay the taxes on the IRA money. They can choose to spread out the payments (like an RMD) and, as a result, spread out the taxes the same way that I suggest you spread them out. Even with spread out payments, though, your beneficiaries will probably pay more taxes than you would have paid.

Your beneficiaries will probably pay more in taxes because, after your death, your beneficiaries will probably be in a higher tax bracket than you were before your death. Your children may still be working at the time of your death. Your grandchildren will almost certainly be working at the time of your death. The added income from your IRA will get taxed at your children’s or grandchildren’s top tax rate or maybe even push them into a higher tax bracket.

For example, you might be in the 15% tax bracket during retirement. (I’m not including state taxes in this discussion. There’s too much variation.) One dollar in your IRA is worth 85 cents to you after withdrawal. At the same time, your still-working children and grandchildren could easily be in the 25% tax bracket. Someone in the 25% tax bracket receiving one dollar of your IRA will get only 75 cents after taxes. That’s an extra 10% loss in money because you left untaxed money to someone with a higher income than yours. That extra tax loss will be worse for children and grandchildren in the 28%, 33%, 35%, and 39.6% tax brackets.

Unless your children and grandchildren are in the same or lower tax bracket as you (and stay in that tax bracket for the foreseeable future,) your family will lose more money from your IRA if you leave it behind than you would lose if you withdrew it yourself. And it’s rare for a children and grandchildren to be in lower tax brackets than their retired parents and grandparents.

In addition, tax rates are (from a historical perspective) pretty low right now. It’s likely that the tax rates will be higher in a few years. Money withdrawn now will have the benefit of today’s low tax rates. Money withdrawn (by you or by your children or grandchildren) after rates go up will be taxed at those higher rates.

So, I repeat my advice: Take your money out of your IRA during the first 3 to 10 years after retirement. Don’t leave money in your IRA to your heirs. Leave them money outside your IRA instead. If you manage the withdrawal of your IRA, the whole family will lose less money overall to taxes.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.

IRAs and 401Ks are not for tax avoidance. They are for tax timing.

Posted on March 20, 2014 by Jim Koewler — No Comments ↓

The money in your IRA and 401K hasn’t been taxed yet. (A few special IRAs contain already-taxed money, but those are not the subject of today’s post.) SOMEONE IS GOING TO PAY TAXES ON THAT MONEY. If you come to realize that retirement savings accounts (IRAs, 401Ks, 403Bs, etc.) help you time taxes but do not help avoid taxes, you and your family will lose less of that money to taxes.

(I’ll call them IRAs for the rest of the post so I can save my typing fingers and my sanity. My comments still apply equally to 401Ks, 403Bs, etc.)

The power of an IRA lies in the ability it gives you to choose when you will take the money out and pay the income tax on the withdrawn money. The ideal strategy is to start taking money out when your non-IRA income drops after you stop working. For most people, that time is when they retire. (For people with deferred compensation packages, the ideal time is after the deferred compensation ends.) Except for IRA money that you need during the year to sustain your lifestyle, you should look at your income near the end of each year and then withdraw from your IRA the amount of money that will increase your income up close to the top of the tax bracket. If your IRA has lots of money, you may want to withdraw enough to take you close to the top of the next tax bracket.

Your aim is to take withdrawals over a period of years (somewhere between 3 and 10 years, depending on how big your IRA is when you retire) so that the income is spread out over time, and your annual income in any one year doesn’t jump into a much higher tax bracket. Better to be in a lower tax bracket for several years running than to be in a high tax bracket in even one year.

You don’t want to stretch the payments out over your life expectancy because, as you age, the risk of long term care goes up. When you need long term care, you may be forced to withdraw from your IRA all at once, so you’ll want to have your IRA low or empty before your risk of long term care gets too high. (Remember, I’m in Ohio. If you’re in a state like Florida that doesn’t count IRAs as assets when applying for Medicaid, you may want to keep your IRA intact as long as possible.)

What to choose in “My Care Ohio,” managed care for Medicare/Medicaid “Dual Eligibles”

Posted on March 13, 2014 by Jim Koewler — No Comments ↓

In my prior three posts, I’ve discussed the coming My Care Ohio pilot program for people on both Medicare and Medicaid (people called “dual eligibles.”) On February 21, I tried to provide an overview on how the My Care Ohio program will work (Managed care for Ohio Medicare/Medicaid “Dual Eligibles”.) On February 28, I explained how My Care Ohio is an attempt to cut costs through insurance company command and control methods rather than empowering people to choose lower cost care by making it easier to qualify for in-home care Medicaid through PASSPORT or for the Assisted Living Waiver instead of maintaining the current financial incentive to choose a nursing home, with its higher cost per person (My Care Ohio: A Triumph of the Stick over the Carrot.) On March 7, I described the decisions that dual eligibles must make when My Care Ohio comes to their county: (1) whether to accept managed care for Medicare for this first year; (2) which Managed Care Organization to join; and (3) whether to accept managed care for Medicare for years two and three. (Your Options in “My Care Ohio,” managed care for Medicare/Medicaid “Dual Eligibles”)

When deciding which options to choose among those questions, dual eligibles should consider a number of factors:

My Care Ohio is a pilot program. The dual eligibles that participate are essentially “guinea pigs.” Sorry.

My Care Ohio gives control over treatment decisions to an insurance company as a managed care organization. The insurance companies will be paid a fixed amount per person under their supervision. Treatments approved cut into the insurance company’s profit.

Medicare is the “big dog.” No matter which service providers may be on (or, more importantly, off) a Medicaid MCO’s approved list, if a dual eligible can use the service provider with his or her Medicare coverage, Medicaid (even managed care Medicaid) has to go along. (Note: Many long term care services may not fall under Medicare at all (like in-home non-skilled care.) Medicaid will have full control over those services and providers.)

My Care Ohio will probably result in a smaller number of providers staying on any one insurer’s approved list. At the same time (and unrelated,) the Affordable Care Act will probably prompt insurers to reduce their approved list of providers. So, reliance on a particular insurer may allow the insureds fewer choices of medical service providers and possibly even fewer choices in the next year.

The marketing rules for Medicare “companion” insurance (i.e., supplements and Advantage plans,) could make information from the managed care organizations available only AFTER the deadline to choose a managed care organization.

If I were choosing for myself, with the factors described above in mind, I would try to position myself for maximum flexibility to keep (or find) providers that I like as much as I possibly could.

I suggest that dual eligibles should
(1) Let the Department of Medicaid make the initial choice of the Medicaid Managed Care Organization this year (to avoid wasting time looking for information on the MCOs when that information is limited or not even available;)
(2) After the Managed Care Organizations release their information and provider lists, use the 90-day window at the beginning of year one to determine which MCO is better and change MCOs if appropriate;
(3) Opt out of managed care for Medicare. (Remember, opting out of Medicare is the default choice for year one;)
(4) Drop (don’t renew) Medicare supplements and Advantage plans when the open enrollment period arrives later this year (Remember, for these “dual eligibles,” Medicaid can pay the co-pays and deductibles for Medicare-covered services;) and
(5) Make sure to opt out of managed care for Medicare when the annual renewal of My Care Ohio comes up. (Remember, in years two and three, opting out of Medicare requires notification to the appropriate authorities.)

Good luck!

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.

Your Options in “My Care Ohio,” managed care for Medicare/Medicaid “Dual Eligibles”

Posted on March 7, 2014 by Jim Koewler — No Comments ↓

In my prior two posts, I’ve discussed the coming My Care Ohio pilot program for people on both Medicare and Medicaid (people called “dual eligibles.”) On February 21, I tried to provide an overview on how the My Care Ohio program will work (Managed care for Ohio Medicare/Medicaid “Dual Eligibles”.) On February 28, I explained how My Care Ohio is an attempt to cut costs through insurance company command and control methods rather than empowering people to choose lower cost care by making it easier to qualify for in-home care Medicaid through PASSPORT or for the Assisted Living Waiver rather than maintaining the current financial incentive to choose a nursing home, with its higher cost per person (My Care Ohio: A Triumph of the Stick over the Carrot.)

In the weeks before My Care Ohio is scheduled to start in a particular area, people in that area who are on both Medicare and Medicaid will receive a letter asking them to choose a Managed Care Organization. (The expected start dates are listed in the February 21 post.) This letter is called the “friendly letter. Dual eligibles in Cuyahoga, Geauga, Lake, Lorain, and Medina counties, My Care Ohio should already have received the “friendly letter” asking them to choose a Managed Care Organization by March 16. Unfortunately, because of the Medicare insurance rules, the MCOs can’t advertise their program and can’t disclose the providers on their approved lists, so the “friendly letter” asks people to make a blind choice. (Yes, that’s nuts, but it’s what is happening.)

BACKGROUND

During the first year, dual eligibles will be assumed to opt out of managed care for Medicare. They can’t opt out of Medicaid managed care. People who want managed care for both Medicare and Medicaid during the first year of My Care Ohio will need to actively opt into Medicare managed care. (In other words, in year one, silence equals opting out of Medicare managed care.)

For years two and three (Remember, it’s planned as a three-year program,) dual eligibles will be assumed to opt into managed care for both Medicare and Medicaid. They still won’t be able to opt out of Medicaid managed care. If they want to opt out of Medicare managed care, though, they will have to actively take steps to do so. (Silence equals opting in for year two and three.) It’s not yet determined what action will be necessary to opt out. (The Ohio Department of Medicaid has a year to figure that out.)

Opting into Medicare managed care will get a covered person a single Managed Care Organization that (supposedly) can coordinate their care as well as their Medicare and Medicaid benefits.

These Managed Care Organizations will be insurance companies. The companies will be paid a fixed amount of money for each covered person. The insurance companies will profit by holding expenditures below that amount. (In the insurance industry and in HMOs, this is called “capitation.”) The Managed Care Organizations that will be available in the various districts in the My Care Ohio program are listed in my February 21 post.)

The dual eligible people who opt into Medicare managed care will have the ability to change Managed Care Organizations each month if they wish.

OPTIONS

In this first year of My Care Ohio, dual eligible people must choose:
(1) Whether to accept managed care for Medicare for this first year (when opting in requires positive action;)
(2) Which Managed Care Organization to join for Medicaid (and Medicare if opting in.)

In addition, for years two and three, dual eligible people will have to choose:
(3) Whether to accept managed care for Medicare for years two and three (when opting out requires positive action.)

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.