Opinion & Commentary

The Retirement Cliff Steepens

When deferred taxes begin to reemerge, a new strategy is needed

by Helen Simon

Ms. Simon has been the CEO of Personal Business Management Services, LLC, an investment advisory firm in Ft. Lauderdale, FL since 1998 and has more than 25 years of experience in the financial services industry. She is a faculty member at the Wayne Huizenga School of Business at Nova Southeastern University. She occasionally shares her posts with us. Connect with her by e-mail: helensim@nova.edu


Yet another boomer dilemma….for years the thought was that we would all have a lower income in retirement than we would have while working, so let’s defer like crazy.

Many of us have done a good job of this, but now we must plan our strategy for the retirement cliff or we may end up paying more taxes in retirement than we did when we were working! OUCH!

A few weeks ago, I blogged about my client, Rufus, and his cognitive dissonance about his tax situation at age 70 ½. As you might recall, he would be responsible for paying ordinary income tax on an income that would rival that which he enjoyed during his working years.

Rufus still has time to implement some strategies that might soften the blow of that cliff, and so might you. When it comes to tax issues in retirement, there are some issues that you may not even be thinking about.

The Magic Number

For example, A bigger piece of the retirement puzzle is the Medicare equation – the more you make, the more premium you pay! MAGI is the magic number…. If you make over the annual IRS limit, which for 2015 is $85,000 for singles and $170,000 for couples (http://www.ssa.gov/pubs/EN-05-10536.pdf), you will be paying a higher Medicare premium than those who fall under the limit.

A bigger piece of the retirement puzzle is the Medicare equation – the more you make, the more premium you pay!

Those in the highest bracket pay over $300 per month more than those in the lowest bracket. If you can tweak your retirement income to stay under that number, you may be able to save thousands of dollars per year in Medicare premium payments!

For those who have dual residences, some consideration should be paid to where taxes are filed. Your state of residence can ALSO affect your insurance costs in retirement. An all-inclusive decision in this regard should be made along with input from one’s tax adviser.

Once again…maybe a few bucks now, but lots of bucks could be saved in the long run. In my blog The Roth Rage I discussed the dangers of the good old one size fits all philosophy. While I stick to that argument, the Roth IRA does present an income stream that is MAGI neutral – in other words it does NOT count toward the MAGI calculation for Medicare.

So while a Roth conversion is not an option for everyone, it is a worthwhile consideration for those who are on the borderline of a higher MAGI, which would cost them a higher Medicare premium…..

BUT, you have to plan ahead! So, what’s the answer? Talk to someone who can guide you through these issues. It might cost you a few bucks, but save you a ton more in the long run, along with the piece of mind knowing you are taking the smart road while also being on the high road.

Farm out the headaches to someone whose job it is to know the best options for you.