Medicare – When Do I Enroll?

The time to enroll in Medicare Parts A & B is between the 3 months before and after your 65th birthday. This is called your Initial Enrollment Period (IEP). It’s important not to miss this enrollment window because there is a PERMANENT penalty that increases each year you delay enrolling.

There is, of course, an exception.

You have an 8 month Special Enrollment Period if you or your spouse is working and covered by a group health plan through the employer or union. Your Special Enroll Period starts at one of these times (whichever happens first):

  • The month after the employment ends
  • The month after group health plan insurance based on current employment ends

Once you are enrolled in Medicare Parts A & B, it’s time to start researching what kind of Medigap Plan (Medicare Supplemental Plan) and Prescription Plan (Medicare Part D) to get.

*edited*

Even though it might be another 30 years or so before any of us millennials need to enroll in Medicare, we probably have parents/aunts/uncles that will be enrolling soon. So pass this information along because 90% of people get their enrollment period wrong and end up paying a lot of extra money for unnecessary coverage or worse, ongoing penalty fees.

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Reverse Mortgages

I’m not that familiar with the intricacies of reverse mortgages but one of my clients recently asked if it was a good idea for him to do one so I did some research. Here’s what I’ve learned about them so far:

When you have a traditional mortgage, you take out a loan and pay the lender payments so that after a period of time (30 years, usually) you own 100% of the home. With a reverse mortgage, you start off with a house that you own 100% and then borrow against it and the lender pays you. Now why would that be a bad thing? Because you’ve traded having no debt on your home for increasing debt on your home and when you pass away or decide to sell your home, you have to repay the loan and could end up with nothing (i.e. no home) depending on how much you owe and how much your home is worth at that time. Not to mention there are a bunch of fees involved and you’re still responsible for all the carrying costs – property taxes, HOA dues, insurance, etc.

You have to be over 62 to even qualify for a reverse mortgage so this obviously doesn’t apply to us millennials right now. However, this could apply to our parents. Most of our parents are over the age of 62 (or will be within the next decade) and they’ll likely have a paid off house. If they’re in retirement and running out of money, someone might tell them to do a reverse mortgage. And now that you know that it’s not a good idea, you can advise against it and try to convince them to consider other options instead like downsizing or selling their home and renting.

Social Security Changes Part 3 – Who Should File and Suspend?

I haven’t had time to draft my final post for Social Security but I still wanted to share the information before the file and suspend deadline, which is this Friday, April 29th.

Here is an article that does a pretty good job of summarizing who qualifies for this strategy:

Who Should File-And-Suspend For Social Security Benefits By The April 29 Deadline?

Social Security Changes Part 2 – Social Security Claiming Strategy

Last week, I gave a simple example of how Social Security benefits work.  Today I’ll explain the Social Security claiming strategy that many couples have used to increased their combined Social Security benefit.  The strategy has 2 parts: Part 1 is called File & Suspend and Part 2 is called Restricted Application for Spousal Benefits.

File & Suspend must happen first.  In my previous example, Wife was only allowed to take that extra spousal benefit because Husband started taking his personal benefit already.  He took it at age 66, giving up the 8% growth that he could’ve gotten on his benefit each year he waited till age 70.  With the file & suspend strategy, Husband does NOT need to start taking his benefit in order for Wife to start taking a spousal benefit.  All Husband would have to do is call the Social Security office and tell them that he wants to file and immediately suspend his benefit so that his wife can start taking a spousal benefit.  Once this step is done, Wife can now do step 2, which is call the Social Security office and tell them she would like to file for a restricted application for spousal benefits.

Like the previous example, she now gets to collect a spousal benefit (half of Husband’s personal benefit), while continuing to delay her own benefit and earning that 8% growth each year.

When Husband turns 70, he has delayed taking his benefit as long as Social Security will allow and will start taking his now increased benefit.  When Wife turns 70, she will switch from taking her spousal benefit to taking her own (also increased) benefit.  Together, they will each be collecting their maximum benefit in addition to having collected a spousal benefit for 4 years.

Sadly, this strategy will go away starting April 29th of this year (2016) with only a handful of exceptions.  Come back next week to find out who gets grandfathered in and what steps they’ll need to take before the April deadline to secure this benefit!

Social Security Changes Part 1 – How Social Security Benefits Work

The Budget Act that Obama signed late last year eliminates a major Social Security claiming strategy currently available to retirees.

To understand what’s going to change, you should first know how Social Security benefits work. It’s a complicated system so I think the best way to understand it is by seeing it played out in an example:

Husband and Wife are both currently 66 years old.  Since they have reached their full retirement age, they can start collecting their Social Security benefits.  However, if they choose to delay taking their benefits, it will grow by 8% each year until they reach age 70 (that’s the latest you can delay till).

But let’s just say Husband decided to take the money now (at age 66) because he needs it to pay for expenses.  By him taking his benefit, he activates the spousal benefit, which now becomes available to Wife.  The spousal benefit equates to half of his benefit.  So if he is collecting $2,000/month, she gets to collect a spousal benefit on top of that of $1,000/month.

The nice thing about this is, if they don’t need more than that combined total of $3,000 a month right now, Wife can still delay taking her own personal Social Security benefit, letting it grow that 8% a year.  Once she turns 70, she will switch from taking a spousal benefit to taking her increased personal benefit.  (Unfortunately, you can’t take both.)

That was a very straightforward and simple example of how claiming Social Security benefits works.  There are, of course, a ton of other more complicated scenarios like if they were different ages, if they were divorced, if they were single instead of married, etc.  But, one thing at a time.

Next week, I will talk about the awesome claiming strategy some people have been using to increase their combined benefit even more.  And the week after that, I’ll explain how the Budget Act changes this strategy and which people are the exceptions to the rule.

Medicare – A Quick Breakdown

Since medicare open enrollment is quickly approaching (October 15th), I thought now would be a good time to start talking about it.  I know most of us aren’t even close to being eligible for medicare (age 65).  But our parents might be and if they’re not sure how to navigate the system, it’d be nice if we were informed enough to help them.

So, first things first.  Did you know that Medicare has multiple parts that cover different things?  I didn’t, up until a few years ago.

Here’s a quick breakdown of all the different parts and what they cover.

Part A – Hospital Insurance (hospital bills)

  • Home health care
  • Hospice care
  • Inpatient hospital care (meals, hospital room, nursing services)

Part B – Medical Insurance (doctors’ bills)

  • Physician care
  • Laboratory tests
  • Physical therapy
  • Rehabilitation services
  • Preventative services
  • Annual check-up

Parts A & B make up “Original Medicare.”

Part C – Medicare Advantage*

  • Medicare-covered services available through private health plans, such as HMOs,
    PPOs, and private fee for service plans

Medigap – Supplemental Insurance*

  • Pays for things that Parts A & B won’t cover:
    • Deductibles
    • Co-payments
    • Anything beyond what the doctor has agreed upon with Medicare

*You can have Part C or Medigap but NOT both!  Medigap is the more popular choice.

Part D – Prescription Plan (medication)

  • Prescription drugs

This is just a very brief intro to Medicare.  Eventually I’ll cover topics like when you’ll need to enroll in Medicare, the different Medigap plans available and how to find the best Medigap and Part D plan for you.

IRA Phase Outs (aka when you make too much money for IRAs)

A lot of us millennials are familiar with putting money into a Traditional or Roth IRA for retirement savings.  When we first started working, contributing the max amount ($5,500 for 2014) into an IRA was nearly impossible for us and our entry-level salaries.  But as we work our way up the corporate ladder, we will start to experience “rich people problems” such as making too much money for IRAs.  Let me explain…

First, you have your Traditional IRAs.  For someone who is single (for tax purposes), the phase-out for 2014 begins at $60,000 and ends at $70,000.  What this means is that if your Adjusted Gross Income in 2014 is $60,000 or less, you can deduct the full amount you put into your Traditional IRA (on line 32).  If your AGI is $70,000 or more, you can’t deduct anything that you put into your Traditional IRA.  And if your AGI is somewhere between $60k-$70k, you can deduct part of the amount you put into your Traditional IRA.  Fidelity has a simple calculator that you can use to see how much of a deduction you can take.  Click “yes” under the Employer-Sponsored Plan section if you have a 401k with your employer.

Next, you have your Roth IRAs.  For a single person in 2014, the phase-out begins at $114,000 and ends at $129,000.  The reason why the phase-out limit is so much higher for Roth IRAs than Traditional IRAs is because with Roth IRAs, you do not get an immediate tax deduction regardless.  That’s just not how Roth IRAs work.  So the phase-out is for whether or not you can even contribute to the account and if so, how much.  If your AGI is $114k or less, you can contribute up to the max ($5,500 for 2014).  If it’s $129,000 or more, you can’t contribute anything.  If you fall within the phase-out range, you can contribute up to a specific amount.  You can use the calculator provided above to see what that amount is.

And lastly, you have your Non-Deductible IRAs.  There is no phase-out for Non-Deductible IRAs because it works like a Traditional IRA without the immediate tax benefits.  This IRA is appropriate for people who have an AGI over the phase-out limits for both Traditional and Roth IRAs but still want to take advantage of the tax-free growth.  So even though you don’t get to deduct your contribution on your tax return, you still don’t have to pay taxes on your account’s earnings each year.