22 Dec Will Medicare costs rise if I cash out my 401(k) to buy CDs?

Q. I’m 68 years old, retired and on Social Security and Medicare. I have a 401(k) that I haven’t touched and I would like to cash it out to start ladder Certificates of Deposit. If I cash out the 401(k), I understand my Medicare costs will go up two years later, but what will happen in the third year after the cash out? Will Medicare costs stay at the higher rate because I don’t have a so-called life-changing event?
— Ready for change

A. You said you were interested in cashing out your 401(k).

That would mean facing a big tax bill on the gains in your account. You have another option.

First, let’s talk Certificates of Deposit, or CDs.

CDs are issued by banks and provide a fixed interest rate for a specific term, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

She said these instruments are covered by the Federal Deposit Insurance Corporation (FDIC) and also include foreign banks that have insured branches in the U.S.

FDIC insurance will cover up to $250,000 per depositor per insured bank, she said.

You can buy CDs in your 401(k) rather than cash out the whole account.

“CDs can be purchased in IRA accounts at banks and many custodial platforms such as Vanguard and Fidelity,” Mott said. “Before you cash out your 401(K), consider rolling it over into an IRA at one of these types of institutions.”

If your account’s value exceeds $250,000, using a non-bank custodian may be more efficient due to the FDIC insurance limit, she said.

A CD ladder is typically created by purchasing equal amounts over a number of maturities such as 6, 9, 12 and 18 months. When a CD comes due, a new one is purchased for the longest maturity in the ladder if the desire is to continue to keep the same time periods in place, she said.

“Given that the opportunity exists for you to move your 401(k) to an IRA via a rollover, you will avoid the value of the account being reported as taxable income and therefore impacting your Medicare costs,” she said.

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This story was originally published on Dec. 22, 2023.

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