2 days ago2 min read

Do you understand the impact of where and how you withdraw money on your taxes and Medicare costs during retirement? What Decisions Affect My Medicare and Tax Bill?

What Decisions Affect My Medicare and Tax Bill?

A basic understanding of taxation can help you keep your money working for you, avoiding an unpleasant tax surprise or unexpected Medicare co-pay increase. You will see examples so that you can recognize where a lack of tax understanding is costly. We do not cover the details of preparing a tax return or finding tax deductions.

Here si an example from the Retirement Guidebook which illustrates the importance of understanding how withdrawal methods can negatively effect your cash flow

Sara and Bill are comfortable in their retirement. Currently, their income covers all their expenses. Most of their retirement savings are in a traditional IRA valued at $980,000. They also have a $30,000 emergency fund and $60,000 in an investment account that Bill manages and trades in the stock market.

Their cars were getting old, and they wanted to replace the two cars with one new car and a golf cart. The car they wanted to buy cost $42,000 and the golf cart cost $20,000 for a total of $62,000. They negotiated a $11,000 trade-in for the new car, leaving them needing $51,000 for the new purchases. They decided to take the $51,000 out of their IRA. Since they would be withholding 10% for federal income tax, they had to withdraw $56,667. They were unpleasantly surprised the following year by an unexpected consequence of this decision. They owed $3,447 in federal and $2.888 in state taxes above their previous 10% federal withholding. The biggest surprise came a year later when their Medicare premium went up by $70 each per month. The IRA distribution to fund the car and golf cart elevated their income to the next Medicare income bracket, resulting in higher Medicare monthly cost.

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