06 Mar Why is Social Security taking more out of my check?
Q. I’m 73. My wife and I sold our house and I took money from my 401(k) to purchase a new home. Now the government said we are in a higher tax bracket and deducted money from our Social Security checks. The government already withheld $18,000 or 10 percent when I withdrew the 401(k) money. Is there anything I can do?
— Need help
A. There are a couple of issues to consider here.
First, it’s odd that only 10 percent was withheld for taxes from your 401(k) withdrawal.
It’s customary for custodians to automatically withhold 20% if a distribution is taken and not rolled over to another plan or IRA, said Altair Gobo, a certified financial planner with U.S. Financial Services in Fairfield.
Let’s hope you’re not in for a surprise when you file your tax return.
Gobo said it appears that your Medicare Part B and Medicare prescription drug coverage premiums have been impacted by your increase in taxable income from withdrawing funds from your 401(k) to purchase your new home, Gobo said.
“If your taxable income exceeds certain thresholds you will pay an additional premium for Medicare Part B and prescription drug coverage,” he said. “The premiums are subject to the ‘income-related monthly adjustment amount,’ or IRMAA.”
Medicare Part B helps pay for your doctors’ services and outpatient care as well as physical and occupational therapy, Gobo said. In general, the government pays about 75% of the Part B premium and the beneficiary pays the remaining 25%.
“If you are considered a ‘higher-income beneficiary,’ you will pay a larger percentage of the total Part B cost,” Gobo said. “Depending on the income that is reported to the IRS, the beneficiary’s share can increase substantially.”
To determine if you will pay higher premiums, Social Security uses the most recent federal tax return and Medicare uses a sliding scale to make adjustments to the amount you pay based on your Modified Adjusted Gross Income (MAGI), Gobo said.
If you are married filing jointly and your MAGI is greater that $170,000, you will be subject to IRMAA, he said.
There are some exceptions.
If your income has changed, you can contact Medicare to explain your specific situation and request a new decision on your IRMAA, he said.
Medicare will consider:
1. Change in marital status or widowed.
2. Stopped working or reduced work hours.
3. Loss of income-producing property because of a disaster or event beyond your control.
4. Cessation or termination of an employer’s pension plan.
5. Received a settlement from an employer due to closure, bankruptcy, or reorganization.
If any of that applies to you, you will need to provide documentation verifying the event and reduction in income, he said.
Medicare provides a chart with the IRMAA based on your MAGI. You can see that here.
Although it is too late for you, Gobo said it’s often a better choice to take a loan from a 401(k) rather than a large withdrawal if that’s an option for your plan.
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This story was originally published on March 6, 2020.
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