Archive for December, 2011

Medicare Benefits for Health Care Abroad

Posted on: December 27th, 2011 by Lawrence A. Friedman

In our mobile society, people often vacation and even retire outside the United States. U.S. citizens and permanent residents generally are eligible for Medicare at age 65 provided the individual or spouse has worked at least ten years in employment subject to Social Security payroll tax. Medicare also is available to some younger people with serious disabilities or renal failure.

Medicare comes in two flavors. Original Medicare is a traditional health insurance indemnity plan with deductibles and percentage co-payments while Medicare Advantage plans are managed care plans that may require referrals and limit care to networks. Medicare covers certain pharmaceuticals under separate optional plans that can be combined with Original Medicare or a Medicare Advantage plan or included within a Medicare Advantage plan While all Medicare plans provide comprehensive health care within the United States, what if you get sick outside the country?

Original Medicare doesn’t cover care outside the United States other than medical costs on a cruise ship in or near a United States port and very limited hospital costs while traveling through Canada to or from Alaska, where a foreign hospital is closer to a home in the United States than domestic hospitals, or when a medical emergency arises in the United States and a foreign hospital is closer than any domestic hospital. Medicare doesn’t cover drugs purchased outside the country, and except for limited emergencies, Medicare doesn’t even cover dialysis outside the United States.

While some foreign countries’ national health plans may cover Americans who receive care within their borders, Medicare participants generally must make their own financial arrangements for foreign emergency and routine treatment and costly evacuations for medical treatments. Two solutions are available to cover the nightmarish costs that can escalate out of control when a medical emergency arises abroad– supplemental Medicare coverage and private insurance.

Some employers and unions provide retiree coverage that supplements Medicare and may cover travel. Also, Medicare participants can buy optional Medicare supplement insurance against gaps in Medicare coverage such as deductibles and co-payments. These “Medigap” policies are sold by many private insurers as well as AARP and other affinity groups. Medigap premiums can vary considerably depending on coverage desired and the particular insurer, and not every Medigap plan covers medical care outside the United States.

Medigap plans are designated by letter, which indicates the benefits offered. More comprehensive Medigap plans offer some travel emergency coverage. Medigap plans C, D, F, G, M, and N (also E, H, I, and J if purchased before June 30, 2010) cover 80% of certain medical costs in foreign countries after a modest deductible with a current lifetime limit for foreign care of $50,000. Private travel insurance may be another option, but read the fine print to make sure it covers health care and not just lost luggage or trip interruption.

Medical emergencies can happen anywhere so it is important to have comprehensive medical benefits when traveling outside the United States. While Medicare provides high qualify insurance for medical costs within the country, it usually will not pay for foreign treatments or evacuations. To fill this void, Americans should consider Medigap plans or other insurance that covers foreign care. Finally, because limitations apply and benefits may change over time, contact your insurer before you travel outside the United States to make sure you have adequate coverage. The State Department website also can be a wealth of information on dealing with emergencies when traveling abroad.

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Time Social Security and Spending to Increase Your Retirement Funds

Posted on: December 24th, 2011 by Lawrence A. Friedman

Mid wealth retirees typically rely on Social Security, savings, and sometimes pensions to fund retirements. By timing receipt and expenditures of these different kinds of funds, retirees often can generate significant tax savings.

Savings can be either tax free, tax deferred, or taxable. Typical tax free savings are the kinds of municipal bonds that generate tax exempt income. The most common tax deferred savings are IRAs and qualified retirement plans like 401(k) plans, pensions, and profit sharing plans. Qualified retirement plans and some IRAs are particularly advantageous because their initial funding is with pre-tax dollars.

Because tax deferred accounts generate taxable income when withdrawn, it usually makes sense first to spend taxable amounts and defer withdrawing from tax accounts. Therefore, one retirement strategy calls for funding living expenses with Social Security and taxable investments in order to retain tax deferred accounts intact for as long as possible. While that can be sensible for some people, other folks may be able to save substantial tax by deferring Social Security and funding early retirement year expenses entirely from taxable accounts.

Instead of taking Social Security early or at normal retirement, it can pay to wait. Deferring the start of Social Security can increase wealth in two ways. The later you start Social Security up to age 70, the higher your annual benefit. At the same time, starting Social Security later keeps Social Security out of your income longer, which may reduce your income tax rate in early retirement years.

If you don’t take Social Security when you first retire and you keep retirement funds like 401(k) and pension accounts tax deferred by leaving them in the retirement plan or rolling them over to an IRA, your income probably won’t be large if it consists of income and dividends on modest taxable investments, possibly supplemented by tax free bond income. In that case, deferring Social Security will keep your taxable income and tax bracket down.

In addition, as you spend your taxable savings for normal living expenses, your taxable income will drop even further. Depending on your taxable income and tax rate, you may be able to realize substantial reductions in potential tax on your tax deferred accounts by converting some of them to Roth IRAs each year before you start to take Social Security. Roth IRAs are includible in taxable income upon conversion but earnings on the Roth IRA after conversion aren’t taxed at all.

Depending on your other income, you may be able to convert as much as $50,000 from tax deferred regular IRA to Roth IRA without increasing your federal income tax bracket. For instance, if you are married filing jointly with taxable income of $19,000, you would be in the 15% federal income tax bracket in 2011. If you convert $50,000 of your regular IRA or 401(k) account to a Roth IRA, you would stay in the 15% bracket and pay only $7,500 federal income tax on the conversion, which you probably can make up simply through by avoiding tax on post conversion income on the Roth IRA as well as savings by paying tax at a 15% rate rather than the 25% or higher federal income tax rate that would apply to withdrawals from tax deferred accounts and Roth conversions when you are at a higher income tax rate.

By timing spending of pre-tax and post-tax accounts and the start of Social Security, middle wealth retirees can realize significant reductions in potential income tax and increase overall wealth accordingly. However, it is crucial to analyze your particular spending habits, savings, income, and obligations before embarking on any financial plan. While the financial strategies discussed below may save tax and increase wealth for many people, they also can backfire and generate higher tax, lower return on investment, or other negative consequences for people in certain situations.

House Republicans Propose Major Medicare Premium Increase

Posted on: December 13th, 2011 by Lawrence A. Friedman

While Republicans continue to thwart President Obama’s proposals to increase taxes on people earning over $250,000 or even $1,000,000, House Republicans are expected to pass legislation that describes people earning over $80,000 (families earning over $160,000) as high earners who must pay far higher Medicare premiums. Current law sets higher Medicare premiums for individuals earning more than $85,000 and families with incomes over $170,000 and adjusts these thresholds for inflation. The House Republicans’ plan would cut or freeze the high earner income thresholds until 25% of Medicare participants are subject to the high earner premiums. This would trigger a five fold increase in the percentage of Medicare participants facing the higher premiums. Where less than 5% of Medicare participants now pay higher earner premiums, 25% would face the higher charges under the House Republicans’ plan– a dramatic increase in Medicare costs for many Americans of retirement age. Republicans maintain that they simply are cutting federal health care subsidies to better off seniors, but some advocates counter that the change is equivalent to a middle class tax hike since it would force many Medicare participants to pay more to the federal government.

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Homepage photo: Cows grazing at Meadowbrook Farm, Bernardsville, NJ by Siddharth Mallya. October 23, 2012.
Interior photo: Somerset hills pastoral scene by Lawrence Friedman.