3 Unexpected Ways Your Retirement Account Could Cost You
By Jeffery Levine, IRA Technical Expert
Follow Me on Twitter: @IRAGuru4EdSlott
When managing your retirement account, you should be aware of the unexpected ways those employer-sponsored or IRA accounts could actually COST you. Jeffrey Levine details 3 of those situations in the article below.
Student Aid
If you have a child who is already a college student or is quickly approaching that age, chances are you’ve noticed the extravagant costs that have come to be associated with post-secondary education. In today’s world, a four-year degree at even the most affordable of state-run colleges can easily run into the tens of thousands. It should come as little surprise then that students and parents alike go to great lengths to seek out any financial aid they qualify for to help with the cost. But can your IRAs impact your (or your child’s) ability to claim financial aid?
Well, thankfully there’s some good news here. Retirement accounts can generally be excluded from your assets when you’re filling out the free application for federal student aid (FAFSA). This includes your IRAs and Roth IRAs, as well as your company sponsored retirement accounts. It’s not all roses though. Although you can generally exclude these accounts from a FAFSA application, certain colleges and universities do look at these accounts when determining who qualifies for their own student aid programs. Plus, the FAFSA application includes questions on your income, which can be increased when you take distributions from your retirement accounts or make Roth conversions.
Medicare Premiums
What in the world does your IRA have to do with your Medicare premiums? Nothing, provided your money stays in an IRA. Start taking taxable distributions from your IRA or other tax-deferred retirement accounts though, and suddenly, your IRA can have a lot to do with your Medicare premiums.
That’s because Medicare Part B premiums are income based. For 2013, the “standard premium” is $104.90 per month. However, depending on your income, you could pay more than three times that amount! Those with the highest incomes must pay an additional $230.80 per month in 2013. Ouch! That income could be from continued employment, interest, dividends or other sources, including IRA distributions and Roth conversions.
Here’s the weird thing about the Medicare Part B premiums you need to know. They are generally based off of your tax return from two years prior. So that means that if you make Roth IRA conversion now, in 2013, you might not finish really paying for it until 2015! Some of you may be finding this out first hand this year, as Medicare Part B premiums for 2013 might be increased thanks to the additional income reported on your 2011 tax return from your 2010 Roth IRA conversion (remember, a special rule in 2010 allowed Roth converters to split income evenly over 2011 and 2012).
Taxation of Social Security
If you are currently receiving Social Security benefits, the amount of those benefits included in your gross income and subject to income tax depends on your “combined” – a.k.a. “provisional” – income. This calculation is a little complicated, but needless to say, it includes taxable income from your IRAs and other retirement accounts, as well as Roth conversions. If your income is low enough, you won’t pay tax on any of your Social Security benefits, but if your income is higher, you could pay tax on up to 85% of your benefits. If you’re planning on taking an IRA distribution or making a Roth conversion and receive Social Security benefits, you should factor in any impact it might have on the taxation of your Social Security benefits first.