Do Required Distributions Affect My Medicare Part B Premiums?

This week’s Slott Report Mailbag looks at the process of reporting IRA distributions on your tax return – and what happens if you pay too much tax? –  answers a question about a woman’s rising Medicare Part B premiums and points out the key 401(k) employer plan provision that could allow you to move employer plan funds outside the plan while still a plan participant. As always, we recommend that you work with a competent, educated financial advisor to keep your retirement nest egg safe and secure. You can find one in your area here.

1.

Dear Mr. Slott:

I have a nondeductible IRA, and I am turning age 70 ½, so I told the financial institution to make a distribution of the entire IRA to me. I forgot to tell them it was a nondeductible IRA, so they withheld 10% for federal taxes (thinking that it was a regular deductible IRA). Is there a way for me to get that 10% withholding back when I file my tax return in 2016? If so, how do I do it?

I will appreciate any information you could provide.

Larry

Answer:
The IRA custodian is not responsible for tracking any after-tax amounts you may have in your IRA. It is up to you to track them on IRS Form 8606. You must file this form with your tax return in any year in which you either make an after-tax contribution to your IRA or take a distribution from any IRA.

You cannot take a distribution of just the after-tax amounts. All of your IRAs are considered one IRA for distribution purposes and this includes SEP and SIMPLE IRAs. Your distributions are subject to the pro-rata rule. Each distribution is considered to be partly made from pre-tax amounts and partly from after-tax amounts. If 10% of your IRA balances is after-tax funds, then 10% of a distribution you take will not be taxable. The formula for this calculation is also on Form 8606.

If you have paid more in income tax than you owe, then you will get a refund of any overpayment when you file your tax return for 2015.

2.

I’ve read many of your books, and I’m so happy that I found this website.

Question: for the past two years, my Medicare Part B premiums have gone up. Does taking RMDs (required minimum distributions) impact my Medicare Part B? I also converted funds to a Roth IRA. Will that affect Medicare Part B as well?

Thank you,

Carol Shu

Answer:
Yes, your IRA distributions and conversions are included in your AGI (adjusted gross income) and can impact your Medicare Part B premiums.

3.

Hi,

I am hoping that you can help me with a situation. Several years ago, I rolled my old 401(k) from a previous employer into my new 401(k) plan with my current employer. I am not very happy with how the account is performing and would like to roll out the old plan funds into an IRA with more investment options. I understand that anything I have put in as an employee must stay with the current employer’s plan; however, I am being told that I cannot roll out my old plan funds. My current employer changed plan trustees earlier this year, but when I looked in the plan documents, I didn’t see an option to roll out my funds. Is there a way around this? I am 56 years old and would really like some other investment options where I could have a bit more control. Can you please offer any guidance?

Thanks!

Samantha

Answer:
You can only withdraw the funds that your plan will allow you to withdraw. Did you check to see if your plan has an in-service withdrawal provision? That provision would give you access to some of your plan assets.