Reviewing the Latest Changes to Social Security, Medicare, and Inherited IRAs
The numbers are finally out!
And that means, if you haven't already started, it's time to get serious about working with your advisor to update your financial plan for 2023.
On today's show, we discuss the changes coming to your Social Security and Medicare benefits next year, as well as an important clarification on the rules for inheriting IRAs that could impact how you and your family members think about legacy and tax planning.
1. Social Security
Ever since inflation and energy costs spiked over the summer there's been speculation that Social Security's cost of living adjustment (COLA) for 2023 could go as high as 10%. The SSA settled on 8.7%, which is still the largest increase in over 40 years. On average, seniors receiving Social Security will see $140 more on their monthly benefit checks.
Unfortunately, if the cost of consumer goods stays high into next year, that $140 might not go as far as the SSA hopes it will.
Which reminds me of a listener question that we fielded on another recent episode: if you delay taking Social Security until your full retirement age you receive an 8% annual increase PLUS the annual COLA. So, if you're not already receiving your benefits and that extra $140 per month isn't going to make or break your monthly budget, ask your financial advisor to help you crunch the numbers and decide if waiting is still your best option.
And if you are already receiving Social Security, your advisor should be prepared to help you review your monthly budget as well as your saving and investing strategy to determine the best use for those extra dollars.
Less substantial but still welcome are the savings coming to Medicare next year. Standard monthly premiums for Part B will cost $164.90, down $5.20 from this year. And the annual deductible for Part B beneficiaries is going down $7 to $226.
Saving around $60 per year might not sound like much. But the reason for these decreased premiums is that the cost of a new Alzheimer's drug, Aduhelm, and a few other services that Part B covers came in lower than projected. Alzheimer's can create serious emotional and financial burdens for seniors, so I'm glad that the millions of families who have to manage that terrible disease are getting some medical help at a manageable cost.
3. Inherited IRAs
Back in 2019, the Setting Every Community Up For Retirement Enhancement (SECURE) Act eliminated so-called "stretch" distributions from inherited IRA. Instead of taking required minimum distributions (RMDs) based on the IRS' life expectancy tables, most beneficiaries now have to finish taking RMDs within 10 years of inheriting the IRA.
However, as written, the SECURE Act was a bit unclear on how this new 10-year rule applied in certain circumstances. That's a big problem, because if you don't take RMDs in a given year, the IRS imposes an excise tax equal to 50% of what your RMD should have been.
Luckily, the IRS seems to agree that the SECURE Act needed some clarification, so it's waving those penalties on missed RMDs for folks who inherited an IRA in 2020 or 2021.
As for the rules on inherited IRAs going forward, we now have to make a distinction between three types of beneficiaries:
- Non-person beneficiaries such as trusts or charitable organizations.
- Designated beneficiaries The person or persons you designate to inherit your assets in your estate plan.
- Eligible designated beneficiaries (EDBs) Beneficiaries who fall into one of the following categories:
- A surviving spouse
- A child who is less than 18 years of age
- A disabled individual
- A chronically ill individual
- Anyone who is not more than 10 years younger than the deceased
Folks who do qualify as EDBs have some additional flexibility around how they withdraw funds from inherited IRAs.
Let's use a few case studies to examine how the inherited IRA rules work going forward:
Donald died in 2020 at the age of 55. His beneficiary is his 35-year-old brother, Jim.
Even though Donald chose Jim to be his beneficiary in his estate plan, under the new rules the IRS does not consider Jim an "eligible designated beneficiary" because he's not a spouse, he's more than 10 years younger than Donald, he's not sick or disabled, and he's not a child under the age of 18.
Since Donald died before age 72 and hadn't started taking RMDs yet, distributions from the inherited IRA are optional for Jim until December 31, 2030, at which point the entire account balance must be distributed.
So, should Jim take smaller distributions spread out over those ten years? Should he use those distributions to make contributions into his own IRA? Or should he take a lump sum distribution in the 10th year?
These are critically important tax calculations that Jim would have to work out with help from his financial advisor.
Bill died in 2020 at the age of 74, two years after he started taking RMDs. His beneficiary is his 40-year-old son, Larry.
Because Bill died after he started taking RMDs, Larry must take annual RMDs from the inherited account over his lifetime, based on the IRS' life expectancy table, beginning December 31, 2021. Additionally, Bill's retirement account must be fully distributed by December 31, 2030. But, thanks to that waiver we discussed above, Bill will not be penalized if he didn't take an RMD in 2021.
Sally died in 2020 at age 75. Her beneficiary was her sister Susie, who is 70 years old.
Susie is considered an eligible designated beneficiary because she is not more than 10 years younger than Sally. So, Susie must take annual beneficiary RMDs for 18 years, based on the IRS' life expectancy table, beginning December 31, 2021.
Pauline passed in 2015 at age 65. Pauline's designated beneficiary is her 40-year-old daughter, Jackie.
Under the old rules, Jackie elected to take distributions over her life expectancy, 42.7 years, starting December 31, 2016.
But then Jackie died in 2021.
In this case, Jackie's beneficiary, Jill, must continue taking annual RMDs based on Jackie's life expectancy. However, under the new rules, she also must fully distribute the account by December 31st, 2031, 10 years after Jackie's death.
4. Plan with a pro.
If you're feeling lost in an alphabet soup of industry jargon and confusing rules right now, then I hope you understand why it's so important to work with a financial advisor. At Keen Wealth, we track these kinds of changes against your financial plan on a regular basis as part of our checklist-driven process.
Make an appointment to visit our new office and let's discuss how to incorporate the latest Medicare and Social Security numbers into your plan for a successful 2023.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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