Money Matters Episode 348-The Widow's Medicare Penalty: What Every Couple Needs to Plan For W/ Mark Annese

EP348 - Final With Bumper

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Christopher Hensley RICP, CES: [00:01:00] One of the most expensive retirement planning mistakes can begin with a decision that looks completely reasonable. You complete a Roth conversion, you sell an appreciated investment, you take a larger IRA distribution. Then two years later, you discover that the income from that decision has increased what you pay for Medicare Part B and Part D. That additional cost is called IRMAA, the income related monthly adjustment amount, and it remains one of the biggest blind spots in retirement planning. Because IRMAA operates with a two-year look back and a series of income cliffs, even a small planning mistake can create a much larger Medicare bill.

Christopher Hensley RICP, CES: My guest today, Mark Annese, an IRMAA certified planner, advisor coach, and solutions architect with Retirement Advisor Pro. Mark specializes in the intersection of Medicare cost, Social Security timing, and retirement tax strategy. He also develops planning tools that help financial advisors model how Roth [00:02:00] conversions, filing decisions, and income timing can affect Medicare premiums and lifetime taxes. Today, we're going to explain how IRMAA works, which financial decisions can trigger it, when it may be reduced or appealed, and how retirees and their advisors can plan ahead instead of being blindsided. Mark, let's begin with the basics. What exactly is IRMAA, and why do so many otherwise well-prepared retirees discover it only after that surcharge appears?

Mark Annese: Yeah. So as you mentioned, uh, IRMA is- stands for the, uh, income related monthly adjustment amount. And basically what that is, it's means testing for Medicare based on how much money you make in retirement. So you have your Medicare-based premiums, which everybody knows and everybody sees coming out of their Social Security benefit or they're paying out of their pocket.

Mark Annese: However, the little, uh, the lesser-known, uh, gremlin, I guess, that's really popped its head up over the past couple years is IRMA, and that is based [00:03:00] on your modified adjusted gross income. So if you make over a certain amount of money, this year being $109,000 for someone single, you're gonna start hitting those IRMA brackets, which increase your monthly, uh, Medicare costs simply because you're making money over those brackets.

Mark Annese: So basically what we do or what they do is you have two different parts of Medicare, your, your main parts of Medicare. You have Medicare Part B and you have your Medicare Part D. Both of them have IRMAA brackets or, uh, IRMAA surcharges that are associated with them, and they both grow at the same amount, but they are different depending on, you know, Part B is a little bit higher and Part D is a little, uh, Part D is a little bit lower.

Christopher Hensley RICP, CES: Well then, Mark, I, the, the intro that I did, it was very like, uh, um, felt formulaic, so I'm gonna do another one real quick here and just welcome you to the show. So give me just a second here Mark, thank you so much for joining me this morning. Uh, glad to have you on the show. Uh, thank you so much for being here

Mark Annese: Oh, thank you for having me on. I appreciate, uh, being able to kind of talk about what we're doing and what I'm doing and, and really educating people on IRMA

Christopher Hensley RICP, CES: And for, for advisors, we know you. Uh, for listeners who may not have heard about you before, can you share a little bit about yourself with, with us?

Mark Annese: Absolutely. So I started doing this about 12 years ago, really kind of beating the IRMAA drum before it was really a big thing. We use-- We [00:04:00] like to, uh, use the joke that it's like trying to sell a fax machine in 1978. Like, no one knew about it and no one cared. So we, you know, we kind of over the years really built up the, the education.

Mark Annese: We created something called the IRMAA Certified Planner, which was the only FINRA-recognized designation for teaching this, and this is where I came to be in terms of teaching this to advisors, talking to clients, as well as creating software and education around it

Christopher Hensley RICP, CES: I work in this space. Most of my clients are 55 and up or on the other side of retirement, so I run into this quite a bit, uh, wi- with my clients. Walk us through the timing problem. How can income from an earlier tax year affect a retiree's Medicare costs later?

Mark Annese: Yeah, that's a great question. So most people think that, um, an IRMAA would work like taxes, right? It's based on what just happened, but it's actually based on a two-year look back. So what ends up happening is Soc- Social Security Administration as well as CMS look [00:05:00] back two years in your tax returns to find out what happened with your modified adjusted gross income two years ago.

Mark Annese: So one of the cliffs that we see, uh, is someone that's retiring, we're just gonna choose 65. When they retire at 65, let's say they're doing really well at the end of their career, 63 years old, they're single making, you know, 150,000, 200,000, and then once they retire, their income goes down. The problem is IRMAA is actually looking back two years at that 150 to $200,000 modified adjusted gross income to then go in and decide how much you're going to be paying those years or that year for the IRMAA surcharges

Christopher Hensley RICP, CES: A- and they don't, uh, I'm being facetious here, but they don't proactively reach out to us and let us know, "Hey, your income's changed and y- we're gonna adjust it for you." Are, is there actions that people should be taking?

Mark Annese: So you want to keep an eye on it. At, you know, as a [00:06:00] consumer, you want to keep an eye on what those brackets are, as well as talk to your financial advisor about it. You know, the, the CMS, Medicare, Social Security, they have notification systems which do send out notifications on, "Hey, you may or may not hit this."

Mark Annese: Uh, so you do get a, a, a look into it here and there. But again, it's really becoming like, like the healthcare system, right? You really want to be your own advocate on this and work with your advisor that knows what they're doing to really put these things in place. You know, you have stuff like once you retire, that's called a change of life event, and in working with IRMAA, you can do, uh, something called an SSA-44, uh, f- uh, filing, and that says, "Listen, I did have a change of life event, which means I shouldn't be subject these, to these IRMAA surcharges this year."

Mark Annese: So there's things like that. And again, working with someone like yourself, uh, a client can actually do some things like that. It doesn't always happen, but you do have those outs here and there

Christopher Hensley RICP, CES: Love that. And Mark, before we got on [00:07:00] here, we talked a little bit about something called the widow's penalty.

Mark Annese: Right.

Christopher Hensley RICP, CES: sure if we would have

Mark Annese: Right

Christopher Hensley RICP, CES: into it, but I think I wanna go ahead and dive into it. Um, tell us what that is and what that's about

Mark Annese: Yeah, so the widow's penalty is something that, uh, it's getting a lot of press lately, uh, around the industry from advisors to clients. And what, what it basically means is, you know, when you have your typical traditional, uh, relationship, uh, maybe the husband's a little bit older than the wife, uh, they make a good living, but maybe they're making a living that is just under, like, those IRMAA brackets.

Mark Annese: We're just gonna use the IRMAA brackets. You can roll in taxes later if we wish. Um, let's say, you know, right now it's 218,000 as a couple to hit the first IRMAA bracket. Maybe they're making 200,000, right? And the husband passes away, and the wife is now left with all of that income. When that happens, her tax brackets change, her tax status changes, as well as her IRMAA status changes.

Mark Annese: So now, instead of being taxed at a joint rate or [00:08:00] looking at, uh, IRMAA brackets as a couple, she's now looking at it as someone who's single. So that $200,000 income, which was made for a couple, is now on a single tax status and single IRMAA status, which rockets that person through a lot of, uh, tax brackets as well as IRMAA brackets.

Mark Annese: So they could be going from paying $202 per month all the way up to five... $500 per month simply because they're single now, and they're still retaining the same amount of, uh, modified adjusted gross income. So that's where that widow's, widow's penalty comes in. It's like, you know, you not only did you lose a spouse, now you're paying more for, for being single

Christopher Hensley RICP, CES: Wow. I mean, I, I, I think nobody really knows about this, and the emotional side of this is you,

Mark Annese: Yeah.

Christopher Hensley RICP, CES: lost your spouse.

Mark Annese: Absolutely

Christopher Hensley RICP, CES: aren't focused on... If anything, they're just starting to touch the, the, um, the estate and that kind of stuff, and trying to work through the [00:09:00] estate planning side of that.

Christopher Hensley RICP, CES: To have that in the back of their head that, um, they've now r- they're now a single status, and so their taxes are in a different way than they were prior to that. Um, this thing called the widow's penalty where it's kind of a double-edged sword where we're seeing the IRMAA stuff jump up and their, their taxable, um, rates on their, on some of their appreciation on their investments.

Christopher Hensley RICP, CES: All of this stuff happening at once. Uh, very, very good information for, for listeners. Thank you, Mark, for sharing that. Let's, let's pivot and go back to IRMAA a bit, because you mentioned something called brackets, brackets or cliffs. How should advisors monitor modified adjusted gross income before year-end?

Mark Annese: So yeah, de- depending on what, uh, solution you're using, you know, there's a myriad of soft planning- software planning tools out there that can measure your modified adjusted gross, and you wanna take a look at every single year what that modified adjusted gross looks like, as well as when you're creating that retirement report moving forward.[00:10:00]

Mark Annese: Just as, uh, a lot of advisors do tax bracket planning, you know, bringing someone right up to the end of that tax bracket so they don't go over, you can do the same thing with IRMAA, and making sure that your plan is in place. You know, everybody knows, you know, that things always happen to the plan, and it can blow up.

Mark Annese: But as long as you're looking at it going, "Listen, I know my modified adjusted as a single person is at 107 right now, and two years down the road, I know that I'm gonna be under that bracket." And that, that's one of the biggest things. You know, you have some issues that happen where-- I'm just gonna deviate back to the widow's penalty.

Mark Annese: When something like that happens, and let's say that, you know, the, the person who's the survivor now wants to downsize their home. When they do that, you know, they're selling a home. They're probably getting the $250,000 deduction, not the $500,000 deduction, which means they have more modified adjusted gross.

Mark Annese: So that's one of those things that actually throws a wrench into the planning. But it really is taking a look, and [00:11:00] looking year by year is, "Okay, what's my exposure going to be in these brackets two years prior? What can I do to, uh, hopefully mitigate that? In retirement, are there ways we can do maybe Roth conversions to bring down, you know, some of that modified adjusted gross or something like that?"

Mark Annese: But really keeping an eye on it year by year to see what's going on. Again, it's just tacking that on top of your taxes and looking at how you're doing your tax mitigation and tax planning throughout retirement.

Christopher Hensley RICP, CES: I love that. I love that. And now as an advisor, when I got my advisor hat on, I'm thinking that, uh, two different types of listeners I've got. I've got your, uh, advisor who's also doing what I'm doing, and then you've got your, uh, your clients and, and retirees, and so it's kind of two different, uh, lenses that we're looking through.

Christopher Hensley RICP, CES: From an advisor's perspective, I always have to say, you know, I'm not a CPA, right? That's our big

Mark Annese: Right.

Christopher Hensley RICP, CES: asterisk we put on there.

Mark Annese: Yep

Christopher Hensley RICP, CES: the other hand, we're using tools like Holistiplan. We are, uh, doing some savvy strategies when it comes to taxes and, and Roth [00:12:00] conversions. But I think a lot of times they're just barely hitting the surface because it can get really complex for these retirees when you have deaths in the family and you have, um, you're still trying to do something like a Roth conversion.

Christopher Hensley RICP, CES: How do you balance a strategically valuable Roth conversion against the possibility of higher Medicare premiums?

Mark Annese: Yeah. So that's a great question. You know, a-again, it goes back to really taking the same heuristic you apply to a tax strategy and apply that to an RMA strategy because they really are kind of hand in hand. So when you look at what's gonna end up happening down the road, you ev- you know, you have these conversations back and forth.

Mark Annese: Is it better to pay taxes later on a, uh, on a 401or pay them now on a Roth, right? And that's the balance you need to do with this, this as well. If you take that Roth conversion earlier, you spike up your modified adjusted gross for a year, then does that help you down the road using your modeling software, whatever you're using, you know, a [00:13:00] HolistiPlan, a Retirement Advisor Pro, whatever you're using, does that mitigate more of that modified adjusted gross down the line?

Mark Annese: And does it give you more wiggle room? Because I think one of the things we do in life with everybody is giving each other as many options as we possibly can, right? So doing some type of mitigation, again, with a Roth, for example, is just opening doors for options later on down the road, and that's, you know, what most people actually want.

Christopher Hensley RICP, CES: I love it. I love it. Yeah, the, and the idea of this getting more complex as you... Sometimes the strategy works, sometimes it doesn't,

Mark Annese: Right

Christopher Hensley RICP, CES: being able to see it, uh, uh, before you do it and, and having the options to see if it's a good option. Uh, I wanted to go back to kind of the beginning here where, where one of the things that when somebody contacts Social Security about that IRMAA adjustment, what documents and estimates should someone gather before contacting Social Security about an IRMAA adjustment?

Mark Annese: [00:14:00] Yeah. So basically we'll go back to the form, it's called the SSA-44, and when you're going through that, that's gonna ask for all the in- pertinent information for the particular year that you're looking for the adjustment for. You know, what type of, um, uh, life-changing event was it? Uh, you know, what are you looking for?

Mark Annese: What's the reason? And that really lays out what that documentation would be. Uh, a lot of times it will also ask for, uh, tax returns and stuff like that. Um, the thing that happens that we've found with those particular things is you are working with an agent from the, uh, Social Security Administration or, uh, office, and a lot of these things really depend on the person you're, you're working with, right?

Mark Annese: And it depends on the amount of, um, information they have, the knowledge they have, and what they can actually do. So I would say if you're looking to do this, typically don't make the call. Um, I would say go into the office and actually talk with someone and have them work through it. That's-- we've seen the most success with that as opposed to just making the call to [00:15:00] the office.

Christopher Hensley RICP, CES: I love that, Mark. I'm gonna try to put that in plain language for people as well, for somebody who's doing this for many years. Um, you don't always get the right answer when you, when

Mark Annese: Thank you. Yeah, yeah

Christopher Hensley RICP, CES: Y- you know? After, after the Paperwork Reduction Act, there was massive, uh, layoffs of Social Security.

Christopher Hensley RICP, CES: A lot of the people who had been there for 20 years or more, uh, had, uh, were gone. And so, um, if it... If you get that feeling in the back of your head, like maybe the answer's wrong,

Mark Annese: Ja

Christopher Hensley RICP, CES: if you could g- get somebody who's a little bit more, uh, um, knowledgeable about it. And, and g- the Mark's thing, going into the office, you're probably gonna have a better chance of getting some really good assistance versus just luck of the draw when you call somebody there.

Christopher Hensley RICP, CES: So

Mark Annese: Absolutely

Christopher Hensley RICP, CES: I love that. We talked a little bit about the widow's penalty. For a married couple, what coordination mistakes arise when one spouse retires, dies or changes Medicare status before the other?

Mark Annese: I think the biggest mistake is not knowing [00:16:00] that it's, it's a thing. Like, not knowing it's actually there and can happen. You know, again, a lot of people, when they're doing, uh, uh... Step back. It's a hard conversation to have anyway, right? No one wants to have that conversation. So if you're tiptoeing into that conversation for tax reasons or, you know, survivor benefits or s- with survivor estate, what happens there?

Mark Annese: W- when you get into that conversation and have those difficult conversations with couples, and then not realizing there's another dimension that you didn't even look at. You know, it's really, like you said, making sure that you have this checklist of survivorship. You know, a checklist of what happens when one, uh, one spouse passes away before the other, and making sure it's not a surprise, and that's one of the things that we find a lot.

Mark Annese: Again, um, this, this topic has really kind of come out full force, I'd say, over the past five years, right? Because the, uh, [00:17:00] the IRMAA brackets and the IRMAA, uh, surcharges are getting higher. So now people are actually starting to see the impact of the, uh... I'm not gonna say improper planning. I'm going to say, uh, people just didn't know it was there.

Mark Annese: And now that surprise on, we just- we mentioned it earlier, Chris, that they just lost their spouse. They're in a place where they're not in, you know, the happiest part of their life, and then they get hit with something that they didn't even know existed before. And when you look at some of the training out there, and this is, uh, you know, and this is not casting any shade on any training, it just hasn't been implemented.

Mark Annese: The advisors, a lot of them don't know it's a, a thing that's going to happen, right? And it's not on them. It's just a very difficul- a very difficult thing to learn. So now I would say it really is making sure getting all those ducks in a row and knowing that this thing's gonna happen so the surprise doesn't come down the, doesn't come down the line.

Mark Annese: To add on to that, one of the things that we do see, especially now with [00:18:00] a lot of, um, the conversations that advisors are having with clients is, "Oh, we're now gonna do your 65 to 90, um, retirement plan." And then they look at that, "Well, what is that number? What's that IRMAA number that you're saying? We never talked about that.

Mark Annese: You know, how am I-- Why am I gonna get a $3,000 gross Social Security benefit, but I'm only walking away with $2,000 now? No one told me about this." So it's all that whole part and parcel now of making sure that you're having the conversation at the beginning to make sure it's a, a known item, and then when there is that planning at end of life planning, that everybody knows that's a thing, and it's gonna be worse when those tax brackets and those IRMAA brackets change status.

Christopher Hensley RICP, CES: And I'm just gonna piggyback on top of Mark here because the, the IRMAA certification, so important. This topic is, is extremely important. When people pass away, you know, as an advisor, you think do- getting through the estate planning and helping them settle [00:19:00] and rest- style accounts and stuff, "Okay, my job's done here."

Christopher Hensley RICP, CES: No. This is, this is a big piece of it, and a lot of times it's just being left off of the, uh, the conversation altogether.

Mark Annese: Right

Christopher Hensley RICP, CES: it may be difficult to have that conversation. When they pass, if they've... They're pretty concise, they've got specific questions about this, and it may not be in the back of their h- head, and so you're, you're kind of competing with their time, their mourning.

Christopher Hensley RICP, CES: But it's an important conversation you want to get them in. You've got a window of time to help them with these strategies. And so super-duper important what Mark is saying here. Mark, I'm gonna pivot just one more time here and go back to income events. Um, which income events most often push someone into a higher IRMAA tier? Roth conversion, capital gains, RMDs, pension income, property sales, or something else that we haven't thought about?

Mark Annese: Yeah. So, you know, we can start with the bracket, right? The bracket is retirement and end of life. So those two are the largest income events, right? In between [00:20:00] those, now depending on, uh, what you have for assets, we look at, you know, your, your IRA r- millionaires. You know, they're gonna get hammered with IRMAA because once those RMDs start kicking in, that's typically when we see the IRMAA impact, is right around that, you know, 73, 75 years old when it has those two-year look back because you're not controlling that.

Mark Annese: You know, you can take out more than your RMDs, but you don't wanna do that. Um, you're gonna just... You're basically at the will of whatever the government says you're gonna be taking out of that. So that's one of those big income events. Another big income event is, uh, sale of a business, right? So if you're so- if you're selling a business and let's say you're retiring at 65, you sell it at 63, you have a five-year payout.

Mark Annese: Well, you're, you're gonna be looking at what the tax consequences as well as the IRMAA consequences on that. Little, little while later on in life, you know, you may be doing a dec- decumulation, like maybe you're getting rid of a second home. You're not getting a deduction on that second home, [00:21:00] so that whole sale goes right into your modified adjusted gross.

Mark Annese: Maybe you're doing a downsize. You know, that's another thing where you're gonna have a tax ramification as well as an IRMAA ramification on that. So it's really those big buckets that are being emptied along the way is where you see the biggest issues.

Christopher Hensley RICP, CES: Well, I'm taking notes here. This is all real-life stuff that happens. Uh, end of life, we know about that one, but the sell of a business, these are things when people are kinda stepping away, right? So they're selling their business, selling their house. Uh, uh, these are things that, that are really important.

Christopher Hensley RICP, CES: RMDs, things we don't have control over, even if you say, "Oh, I've got this big bucket of money over here, don't need to take it." Nope, you have to take it. And then that comes into play, and that gets added into that big math problem there. Uh, Mark, super important information that you're sharing with listeners.

Christopher Hensley RICP, CES: Can you tell us a little bit about the Retirement, uh, Advisor Pro software as far as, uh, if, uh, other advisors who might be looking at that, how does that look [00:22:00] at these types of problems?

Mark Annese: Yeah, no, and I, I appreciate that. So we ended up building the software about eight years ago, again, way too far ahead of the curve. Um, and over the past year, it's really come in more holistic planning, so it does IRMA Social Security, the whole retirement planning, but it presents it in a way where it's easy for an a- an advisor to input, easy for an advisor to understand, which that key is means it's easier for them to explain to a client, and the client can actually see right on screen what they're looking at without having to have seven different applications.

Mark Annese: It's just one application that does everything, including presentation, which makes the advisor's job easier and puts the client at ease, and that's the biggest thing that we've found is our advisors coming back saying, "The clients get it. It's a super simple, uh, story to tell. They understand it, and it's easy for us to walk through."

Christopher Hensley RICP, CES: My, my experience with all the software platforms that I'm using, uh, is that that's, that's probably the most [00:23:00] important piece of it, is to be able to translate it, turn around and then explain

Mark Annese: Yep

Christopher Hensley RICP, CES: a way that it doesn't have 50 million moving parts, right?

Mark Annese: Right

Christopher Hensley RICP, CES: that the client gets it. So, so that's definitely for other advisors looking for solutions for these problems, the Roth conversions, the IRMA, where we're at on that, uh, worth taking a look at for sure. Mark, we are, we are, uh, approaching the end of the show here. What have I forgot to ask you that you'd like to share with our listeners today?

Mark Annese: Yeah, no, I think for the listeners, you know, I would say that really talk to your advisor, really start asking these questions, get a little bit educated on these different pieces and different life phases, and then work with your advisor for that. You know, th- they're advisors for a reason. You know, you're an advisor for a reason.

Mark Annese: You do a great job. You're very, you know, successful with your clients. Is have the conversations and have the hard conversations. Again, that end of life, um, conversation is a very difficult one, but knowing how to plan then [00:24:00] is gonna save a lot of pain when, you know, when you get there

Christopher Hensley RICP, CES: Great place to leave the, the show today on that note. Mark, for listeners who'd like to find out more about you, where should we go to find out more?

Mark Annese: Yeah. Um, so you can either go to, um, www.retirementadvisorpro.com, or you can send an email to sales@retirementadvisorpro.com

Christopher Hensley RICP, CES: I love it. I love it. Mark, thanks so much for sharing this information with listeners. Have a good rest of the day, dear

Mark Annese: Chris, thank you very much. Have a great one. Thank you

Christopher Hensley RICP, CES: And you as well. Don't hang up. I'm gonna hit stop recording here. Don't hang up 'cause it's gonna