Archive for the ‘General’ Category
Getting Through The Part A Part B Part C Part D (whew) Enrollment Phase
What do Halloween and Medicare Advantage Open Enrollment Periods have in common?
A. They both are spooky.
B. They happen at about the same time.
C. They leave many people in the dark.
D. Too much of either can make you sick.
E. All of the above.
The correct answer, of course, is: E. All of the above.
By the end of this brief post you will understand what a Medicare Advantage Open Enrollment Period is. We are currently in it. This year (enrollment for 2012) it runs from October 15 through December 7. You will also understand the differences between Medicaid Parts A, B, C and D and the importance of a Medigap policy.
First let’s take a look at what Medicare Advantage is and how it is different from “Original” Medicare. If you bear with me to the end, I’ll even mention a few neat tricks (or treats?).
Original Medicare
Medicare, as originally set-up and as it remains currently, has two principal parts (in fact, I read somewhere that Medicare was actually patterned after Blue Cross and Blue Shield). Part A provides hospital and other inpatient facility benefits . . . which is why it is called “Hospital Insurance” (imagine!). Part B covers other medical expenses (physician and other provider services, various diagnostic and screening services and durable medical equipment –like walkers and heavily advertised motorized chairs).
If you have the required work history you can signup for Medicare Part A and Part B (if it hasn’t been done automatically upon going on to Social Security) three months before the month of your sixty-fifth birthday, the month of the birthday, and three months following. If you are working and receiving group health benefits at work, you can delay signing up for Part B without a premium penalty for up to eight months after terminating employment. If you miss one of these sign up periods, be prepared to pay an extra 10% for every twelve month period you go without Part B. Take a look at a downloadable chart comparing the various sign-up periods on this site.
Part A is free (unless you didn’t have enough work credits for Social Security . . . but even then you can “buy-in” to Part A). Part B is not free. It costs $96.40 for most folks in 2011 ($99.90 in 2012). Part B premiums are more for others depending on income. And for the first time in a few years, premiums will go up in 2012.
Medicare expects you to chip in with coinsurance and deductibles. In fact, without extra help, the coinsurance and deductibles can get pricey (very). That is why, if you decide to go with “original Medicare” a good Medigap or Medicare supplemental policy is highly advisable (in fact, not purchasing a policy to save a few dollars is foolish). If you sign-up within six months of signing-up for Part B, the Medigap insurer must charge you the same premium it charges everyone else. If you wait too long, they can ask all sorts of nosey questions about your health and charge you accordingly. You may read more about Medigap insurance elsewhere on this site. We also have a great downloadable chart comparing the different types of Medigap plans (look at the second page).
Part C or Medicare Advantage
Congress decided to set up a mechanism to allow private insurers to join the Medicare party and provide coverage as an alternative to 
“Original Medicare.” Part C of Medicare provides for Medicare Advantage plans that are in lieu of Part A and Part B. The plans must provide all of the basic Medicare Part A and Part B services – but they can also offer other services that Original Medicare does not cover (perhaps dental, hearing aids, and other exotic benefits like gyms) – and they can (and do) charge various amounts for their plans. The federal government then pays the plans a fixed amount per plan participant. There are several delivery models to choose from (notably health maintenance organizations, preferred provider organizations, and private fee for service plans).
Medicare Advantage plans are gaining in popularity. I’m coming around, but I have been suspicious of them. Often folks sign-up beguiled by extra services only to discover they are paying more for the core services they really need.
Now this is really important: Some Medicare Advantage Plans offer a Part D drug benefit – but not all do. Understand what is being offered, because it could have serious consequences later if you decide to switch out of a Medicare Advantage Plan that doesn’t offer a drug benefit.
Generally, you can sign up for an Advantage plan when you first become eligible to sign-up for Medicare. Once in an Advantage plan you’re generally stuck with it until the next Open Enrollment Period although you can bail out of an Advantage plan anytime between January 1 and February 15 as long as you go back to original Medicare. If you had a Part D drug plan with your Advantage plan (discussed below) make sure you sign up for a new Part D plan when you make that switch. You will not have to wait to an Open Enrollment Period to make a switch if you move out of the coverage area, go on Medicaid.
No one may sell a Medigap policy to an Advantage plan enrollee. Remember, the idea behind Medicare Advantage is that it is all “bundled.”
Medicare Part D
Medicare Part D is the drug benefit that has been around a few years. This is the home of the famous “donut hole.” Like other Medicare plans you can sign-up in the seven month window beginning three calendar months before the month of your sixty-fifth birthday and ending three calendar months after the month of your sixty-fifth birthday.
Really important: Do NOT go more than 63 days during ANY period of time after you first become eligible for Medicare without being in a Part D plan or having other “creditable coverage.” If you do, you’ll pay a premium penalty of about $.32 for every month that you went without coverage when you try to sign-up again. If your other drug coverage is “creditable coverage” you’ll know – they have to tell you in writing if it is.
Generally speaking, if you’re in a Part D plan, you’ll be stuck with it until the next Open Enrollment Period rolls around, and at that time you can make changes effective for the first of the year. There are exceptions, however, in case you move out of the coverage area, lose other “creditable coverage” or move to a nursing home.
I have not left out Part D drug plans . . . you may download a Part D enrollment period chart on this site.
So Here We Are . . .
In the middle of the 2012 Open Enrollment Period. If you are happy with your coverage, ignore all the commercials. If you are in an Advantage plan and not very happy, or if you are in original Medicare and are thinking about an Advantage plan, then do some comparison shopping. Do not take the first sales pitch that comes along.
Here is a Neat Trick: Go to www.medicare.gov/find-a-plan for a great comparison shopping tool. It works for both Part C Advantage plans and for Part D drug plans. It is easy to use.
And Here is Another Neat Trick . . .
Beginning December 8, 2011, you can switch out of a Medicare Advantage Plan or Drug Plan anytime as long as you are switching to a 5-Star Plan. Medicare has begun collecting consumer health care provider input to rate plans. 5-Star Plans are the top of the heap. The idea is that the more lowly starred or unstarred plans will be a bit more customer friendly if they know you can walk at anytime. It will be interesting to see how that works.
In a nutshell:
- Part C Advantage Plans replace Original Medicare Part A and Part B.
- You may have either Parts A and B or Part C, but not both.
- If you stick with Original Medicare, you should stick with a good Medigap policy.
- If you drop (or fail to sign-up for) a Medigap plan anytime after you enrolled in Part B, you may have to pay more premiums based on your health (and may even be denied coverage).
- You may have a Part D drug plan with either Parts A and B or with Part C (although many Advantage plans have a drug plan “built in”).
- Do NOT go more than 63 days without a Part D drug plan or other “creditable coverage” if you want to avoid a penalty.
Download these handy charts (they’ll help you through the maze):
Part A and Part B Enrollment Calendar and Medigap Plan Type Grid
Part C (Medicare Advantage) Enrollment Calendar and Plan Type Grid
Part D Drug Plans Enrollment Calendar
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Naming A Trust As IRA Beneficiary: Great Idea? Bad Idea?
According to conventional wisdom you should always name your spouse as beneficiary of an IRA. Let’s smash some traditional pumpkins (I am writing this in October, after all). Read on to understand why it might be a great idea to name a trust as the beneficiary of an IRA and what some of the trade-offs of doing so are.
Standing on Tradition: Naming The Spouse As IRA Beneficiary
There really is a good reason for naming the spouse as IRA beneficiary . . . much of the time. As I have written, the beauty of an IRA is that the longer money can be allowed to languish in an IRA, the more it will grow without being burdened by taxes. Because of that, the usual thinking is to try and take out as little as possible. On the other hand, there are all sorts of tax rules about when someone MUST take distributions and how much those distributions must be. Remember the rule:
SOMEDAY, SOMEHOW, SOMEONE WILL PAY TAXES ON THE IRA.
Why Naming A Spouse The IRA Beneficiary Is So Slick (Usually)
If a spouse “inherits” an IRA, she can treat it as her own. This means she does not have to begin distributions until she is 70 ½. When she does begin taking distributions she can use a special table that assumes she has a husband 10 years younger (heh, heh, heh) even though she may have just become a widow. That means MUCH smaller mandatory distributions because they are being spread out over her life and the life of Mister-Make-Believe-Ten-Years-Younger-Romeo.
The special spousal rules for inherited IRAs also say that she can name the kids as beneficiaries and upon her death they will have separate IRAs they can take out over their life expectancies (although I have found – quite nonscientifically – that most IRAs inherited by adult children quickly become new cars or tuition payments!).
On The Other Hand . . .
Sometimes naming a spouse as IRA beneficiary is a bad idea. There may be reasons that outweigh the usual good tax reasons for naming a spouse. For example, I often encounter couples concerned about protecting assets for a surviving spouse in case he or she ever needs to go into a nursing home. An IRA left directly to a spouse will be a countable asset for Medicaid purposes. There may be other good asset protection motives involved, as well.
The solution may be to name a trust as the beneficiary of the IRA. That way, IRA assets may be protected while remaining available to benefit the surviving spouse.
There are a number of ways a trust can be designed, depending upon what the client and I are trying to accomplish. Much of how a trust will be treated depends upon whether it is something the IRS calls a “designated beneficiary.”
Is A Trust A Designated Beneficiary?
If a trust benefits only real live (as in “beating hearts living”) people then the trust will be a “designated beneficiary.” If a trust says “Mom is the primary beneficiary, then the kids” that will suffice. If the trust says “Mom may receive some, but not necessarily all benefits, then when Mom dies the North Carolina Zoo takes” the trust will not be a designated beneficiary.
If a trust is NOT a “designated beneficiary” of an IRA, then the IRA must be distributed within five years if the owner dies before 70 ½. If an IRA is not huge, being forced to completely distribute it within five years is not necessarily bad.
If the owner dies after age 70 ½, however, then the trust can take distributions over what would have been the deceased owner’s life expectancy had he been alive each year. That actually will be a bit faster than if he had been alive and married because the rules use different tables that calculate distributions as if the deceased owner were still alive and single. On the other hand, for older spouses about the same age, there may not be too much difference. The difference is if Mom had inherited directly she would have used a table that pretended there was the “Ten Year Younger Romeo” (slower distributions to account for the younger Romeo’s added life expectancy) but the trust is stuck with using a single person’s table (faster).
Bottom line: If a trust fails the “designated beneficiary” rule it means the IRA must be distributed over five years if the owner died before age 70 ½ and over the owner’s life expectancy (pretending he is alive and single) if he dies after age 70 ½.
Should Everything Be Distributed To Mom?
If we set up a trust to qualify as a “designated beneficiary” the next issue is to decide whether to make the trustee pay out to Mom all of the distributions the IRS says the trust MUST take from the IRA (this is called a “conduit trust”), or to let those IRA distributions accumulate inside the trust (where they are protected).
If the trust is a conduit trust, Mom gets all IRA distributions and she pays all income taxes (probably at her low tax rate). Also, if a trust is a conduit trust the IRA distributions can be stretched out a little bit more than if the trust was an accumulation trust. It also means that if Mom goes to the nursing home on Medicaid, all of those IRA distributions will be paid to the nursing home before Medicaid kicks in.
If the trust gives the trustee the right to accumulate IRA distributions and to decide whether to 
pay some, all, or none of the IRA distributions through to Mom, the IRA will be distributed to the trust slightly faster, but the assets will be safe from nursing home expenses. To the extent the trustee decides not to distribute to Mom (maybe she is in a nursing home on Medicaid) the IRA distributions being held in the trust will be subject to income taxation at much higher rates than Mom would have paid had the trustee passed the IRA distributions on to Mom. On the other had, if they were paid out to Mom, everything would be gone!
Get Help!
This is a complex topic. The purpose of this brief article was to give an overview of the possible advantages of naming a trust as IRA beneficiary. Sometimes it is a great idea, and other times it may be a really bad idea. Bring it up with your attorney or financial advisor and see what she says.
Kill Your IRA. Get Away With Murder.
For many people, this may be a great time to kill an IRA. Dismantle it. Take it down. Cash it in. And save thousands of 
dollars doing it. Especially as we head into the home stretch of 2011.
Many of my financial advisor friends are now on the floor. They think I’ve “gone ‘round the bend.” Don’t worry, friends, I’m going to suggest folks come see you and ask for your help.
Why a Creative IRA-cide May Be Smart.
Many people have a huge portion of their savings tied up in an IRA. If an IRA owner needs to go into a nursing home, the IRA will be a countable asset and prevent that person from qualifying for Medicaid. The only way she will qualify is by cashing in the IRA and doing other things with the cash.
Take, for example, Irma and Ira Roth, a married couple. They have about $200,000 in Medicaid countable assets, including Ira’s $150,000 traditional IRA. Ira is about to be admitted to a nursing home.
Had all of the Roth’s assets been liquid (cash, CDs, money market), we would have qualified Ira for Medicaid by moving about $110,000 to Irma, and spending about $90,000 for Irma (home improvements, new auto, perhaps an annuity). But their assets aren’t liquid. Ira has a big IRA.
To qualify for Medicaid, Ira MUST cash-in the IRA. Because IRAs are taxable as ordinary income upon receipt of distributions, Ira and Irma will include $150,000 on their joint tax return for 2011. With no other deductions or income considered, the tax bill will be about $30,069. If Ira’s IRA is $200,000, the tax bill will rocket to $44,069.
Spread The Pain.
Had Ira and Irma had a premonition back in 2010 that Ira would be in a nursing home by 2012, they could have laid plans for the intentional demise of Ira’s IRA and saved a pile of money. In fact, by killing the IRA slowly over two years they could have lowered the tax bill by over $8,000. If the IRA had been $200,000 they would have saved almost $10,000 in taxes!
It has to do with income tax rates. Income tax rates are on a curve. $20,000 taxable income will be taxed at just a bit over 10% . . . $150,000 taxable income will be taxed at 28% . . . $200,000 at almost 33%.
By breaking up income over two or more years, the income is taxed at a lower rate. For example, the tax on $150,000 in one year is about $30,000. The tax on $75,000 is about $11,000. The tax on $75,000 in each of two years is about $22,000, compared to the tax of $30,000 on $150,000 in a single year.
For someone contemplating the real possibility of a nursing home in the next few years, there are still three months to take a planned, but hefty, installment for 2011, then look at distributions in 2012 and maybe 2013.
But Isn’t Murder Always Wrong?
In our modern, relativistic society the answer is: Not always; it depends. Especially when we’re talking about IRA killing.
I tend to be a traditionalist, and traditional teaching is to leave an IRA alone and to take as little out as possible. The traditional wisdom is based on the math undergirding the federal tax rules that apply to retirement savings.
Uncle Sam says “I’ll let you put money into this thing called an IRA. I may even give you a tax deduction for the money you put in. I won’t even tax you on the investment income and the capital gains inside the IRA. That way your IRA will grow much bigger and much faster.”
And you say, “What’s the catch?” The catch is that someday, somehow someone WILL pay taxes on that IRA. It is never a question of IF, but WHEN. That is why there are all sorts of complicated rules about when someone must start taking distributions and how big those distributions must be. Uncle Sam is impatient and wants his cut.
The beauty of an IRA depends upon two things: The amount invested and time. The more time and the more money someone has to keep an IRA going, the more attractive it will be. On the other hand, a large IRA doesn’t do too much good if it is going to remain invested for just a little longer.
Uncle Sam isn’t completely heartless, and he certainly understands that his tax rates are on the curve I described above. In that case he doesn’t set the amount too high that an owner MUST take out every year.
But when factors other than tax rules start controlling how much must come out (perhaps even dictating that ALL must come out in the case of a nursing home placement with Medicaid) it is time to start thinking outside the tax box.
So . . . RIP IRA. But before you seriously think of killing your IRA, do run it by your financial advisor.