Many retirees are getting ready to pay more for your Medicare.

Medicare recently announced it’s 2011 rates for Part B coverage of doctor’s visits and outpatient treatments and for Part D prescription drug coverage.  Higher income individuals have always paid more for Part B premiums, but for the first time, they will also pay a surcharge for Part D drug coverage.

Also, new Medicare beneficiaries in 2011 will pay higher Part B premiums than current beneficiaries, who are protected from premium increases in year like this in which Social Security cost-of-living adjustments aren’t large enough.

Here’s what you’ll pay in monthly premiums in 2011, depending on your income level and year of enrollment:

Modified adjusted gross income less than $85k for individuals, and less than $170k for married couples:

Modified adjusted gross income from $85k to $107K for individuals, and married couples filing jointly with incomes from $170k to $214k:

Individuals with income from $107k to $160k and married couples filing jointly with incomes from $214k to $320k:

Individuals with income from $160k to $214k and married couples filing jointly with income from $320k to $428k:

Individuals with income of more than $214K and married couples filing jointly with income of more than $428K:

With Medicare, every beneficiary gets the same coverage and benefits no matter who you are.  I would love to hear if you think this is a good way to help pay for Medicare.  Or, do you think this is penalizing those who have worked and saved to put themselves in a position to have higher incomes during retirement.  What is your opinion?

Pay Now

When you convert part of your IRA or 401(k) to a Roth, you have to pay taxes now on the amount you convert.  Many people feel that tax rates are likely to go higher in the future (especially since our tax rates today are the lowest we’ve seen in decades).  Everyone knows about our government’s debt situation…it’s not good,  not to mention social security and Medicare.  To pay for all these things, they’re going to have to increase taxes at some point.  So to pay your taxes now may end being a pretty good deal.

Play later

Paying taxes at a lower rate today may sound nice, but the real benefits of the Roth IRA conversion are long term.  As you know, Roth IRA’s grow tax free.  That means that when you eventually pull your money out of the Roth at some point down the road, you don’t have to pay any taxes on ANY of the earnings!  This is especially attractive for younger individuals who have time to let the money grow and compound tax free.  In general you need to plan on the money growing for about 10 years or longer before you plan to use it in order to benefit from paying the taxes now.  The more tax rates go up in the future, the sooner you will “break even” so to speak, and come out ahead.

Out of Pocket, But Spread Out Over Two Years

When you convert part of your IRA or 401(k) to the Roth you have to pay the taxes out of your pocket.  You cannot have the taxes taken out of your IRA account.  This can limit the amount you may realistically be able to afford to convert.  If you have savings in an after-tax account, you could use money from that to pay the taxes also.  The best part is, you can spread that tax payment over the next 2 tax years!  So you don’t have to pay them all this year, which helps.

A Higher Tax Bracket?

Be careful as to how much you convert.  Not only do you have to pay the taxes on it out of pocket, but converting to the Roth could bump you into a higher tax bracket for this year.  Whatever amount you convert will be added as taxable income to the rest of your taxable income for the year.  So if you make $80,000 at your job, and you convert $20,000 to a Roth, your taxable income is now $100,000 for the year.  Be sure to consult a tax professional before you make a conversion so that you don’t regret doing it later.

Here are the 2010 tax rates:

Talk to your personal financial planner today to see if making a Roth IRA conversion might make sense for you in 2010.

This is the last of a 3-part series in discussing the factors that have contributed to this great recession we are in.  You can view Part 2 Here. and you can view Part 1 Here. 

When doing personal financial planning, you have to take steps to prepare yourself for these types of economic situations.  They are sure to happen again in the future, and you can start preparing yourself now for it.  I would welcome any comments you may have about this topic.

Today I will discuss the last 3 factors that I feel have contributed to this current recession, which are:  Credit default swaps, unemployment, and the stock market.

Credit Default Swaps

This is something that most of you had probably never heard prior to this mess.  In my 15 years of personal financial planning, I had never heard of them until a few years ago.  A credit default swap is similar to an insurance policy that is supposed to protect the buyer from losing money.  A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a swap or loan) goes into swap (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy, or even just having its credit rating downgraded.

There are some differences between a CDS and real insurance though.  With insurance, the buyer of the policy typically has some insurable interest such as owning the debt that he is insuring.  With a CDS, the buyer doesn’t even have to own the security.  Sellers of CDS’s do not need to be regulated entities, and do not have to keep reserves to pay off buyers.  However, major CDS sellers are subject to bank capital requirements.

One of the largest sellers of CDS’s was AIG, and they were selling a lot of them that were designed to insure against losses in mortgage securities.  When the mortgages started to blow up, everyone was coming to AIG to get paid, and they couldn’t pay them.  They didn’t have enough money to pay everyone they had sold them to.  You all know how the government stepped in to bail them out and cover their losses with tax payer dollars.

Unemployment

This is always a part of a recession, as businesses struggle and close up shop, people lose jobs.  As they lose jobs, they have less money to spend.  Since most of our economy stands on the back of consumer spending, more businesses start to struggle.  Then more businesses start to make cutbacks, and more jobs are lost.  It’s a downward spiral that won’t stop until things finally hit bottom and equalize.  In August 2009, the unemployment rate rose to 9.7% with 14.9 million people being unemployed.  Since this recession started in December 2007, the number of people who are unemployed has risen by 7.4 million and the unemployment rate has risen 4.8%.  So this is obviously affecting a lot of people, and you can see why there is so much less money being spent by consumers.

Stock Market

Some people may think that the stock market crashing causes recessions to start, and that recoveries make them end.  While there is definitely a correlation to the performance of the stock market and the economic cycles, the market doesn’t really cause recessions to start or end.  I would say that instead, the stock market is a good indicator of where we are at in an economic boom or recession.  There is certainly a relationship between the two.  The stock market peaked in November 2007.  When markets near high points, you might be surprised to know that those are the times that more people are adding new money into the market.  Stock mutual fund in-flows usually peak at about the same time that the market is peaking.  And when the market bottoms out, that’s when most people are taking money out of the market.  That’s just the time that you should be putting money back in.  But psycologically, it’s very difficult for someone to sell their stocks when they’re hitting highs, or buy them when they’re hitting lows.

This peaking out of the stock market in late 2007 was just another sign that a big correction was coming.  And there was nothing that anyone could do to stop it.

People ask me all the time, “Mark, why is it that when I buy something it goes down, and when I sell it, it goes back up?”  It’s really very strange how this happens to almost all individual investors.  This is one major benefit to hiring a professional money manager to help you manage your investments.  That person can take a lot of the emotion out of the investment process which helps them to do the opposite of what your gut tells you to do.  As the market hits highs, your advisor can take profits and rebalance your portfolio to protect money that you have made.  Then, when the stocks decrease in value, he or she can add more money to them at the the time when you should be buying more.

Today Washington announced that the U.S. will run a $9 trillion defecit over the next 10 years, $2 trillion more than it had forcasted earlier this year.  That’s a 28% increase in their estimate of a few short months ago!  Washington also predicted that our nations unemployment rate will rise to over 10% for a period of months and quarters sometime in the next year and a half.  Right now the jobless rate is at about 9.3%, so they expect it to climb somewhat higher.

While it is quite normal to let government spending balloon during economic recessions (in order to help stimulate the economy) these numbers are far greater than we’ve ever seen in our country’s history.  And it looks like it could take a while to climb out of this hole we’re in.   One major contributor to our huge deficit is the amount Medicare is spending each year for health care.  This administration hopes to help slow down Medicare spending with its health care overhaul, but many are concerned about the effects it may have on the quality or availability of health care that they recieve.  Cuts to Medicare means that doctors who care for Medicare patients will get paid less, or fewer proceedures will be covered.  This will cause doctors to no longer want to treat Medicare patients, and/or cause the patients to have to pay for more things out of pocket.  Many seniors are worried that they won’t be able to afford the care that they will need.  This is going to make having a good Medicare Supplement policy even more important.

To read more about this go to the Wall Street Journal online. 

If you haven’t changed your spending and saving habits already, now is a great time to start.  Since it could be a number of quarters before we start to see the unemployment numbers start to improve, we all need to be putting away some extra cash for a rainy day (or an unemployed day).  While spending less isn’t going to help stimulate the economy, we need to all worry more about taking care of ourselves and our families.  Our government is doing a fine job of spending plenty of money.

First, even though your Medicare part B premiums won’t go up in that year, the cost of everything else you buy will.  The cost of healthcare, food, utilities, gasoline & everything else you buy will increase in costs every year no matter what you do.  So while not paying more for your Medicare part B premiums will be nice, it’s hardly as nice as a cost-of-living increase in your social security check would be.

Secondly, what they don’t come out and say is that if you are an individual with a modified adjusted gross income of over $85,000, the “hold harmless” provision does not apply to you.  So if you’re in that boat, your Medicare part B premiums will continue to increase each year.  And these incrases are likely to be higher than normal because Medicare part B still needs to take in the same amount of revenue to cover it’s costs and pay benefits.

So isn’t this really a tax increase in disguise?  Maybe it’s technically not called a “tax”, but it’s still a “revenue generator” for our government, which is the same as a tax.  And this will apply to a whole lot of individuals who’s income is far less than $250K.  How many more “revenue generators” will be disguised this way in the years to come?  Costs continue to rise, and so do our taxes.

With a little bit of planning you can reduce your taxable income to bring it under this $85,000 level so that you’re not exposed to this kind of “taxation”.  Contact us now if you would like to discuss how we can help you do this and save yourself unnecessary taxation.

Also, if you would like to see if you can save tons of money on your Medicare Supplement insurance to cover the things that Medicare doesn’t cover, go to www.Great-Financial-Planning.com/best-medicare-supplement.html.