How Popular Year-End Tax Strategies Could Hurt Your Client's Financial Plan

Christine Simone
February 7, 2024

As a comprehensive financial planner, one of your most important annual tasks is to ensure clients’ year-end tax strategies set them up for success next year. Also, as an advisor doing comprehensive financial planning, you want to look at clients’ entire financial picture. To offer truly holistic financial planning, you have to plan for every part of a client’s life that impacts their finances. Not doing so could hurt their financial plans in the immediate or far future.

For example, not considering healthcare costs would be an oversight for a comprehensive financial planner. After all, healthcare is the third-highest area of spending in retirement and 45% of Americans reported feeling “very” or “somewhat” worried about being able to afford various healthcare costs.

Beyond just including healthcare costs in the financial plan, it’s important to consider how certain strategies affect each other. Many people don’t know this, but there are popular year-end tax strategies that can have a major impact on a client’s healthcare costs and hurt their overall financial plan. 

Going into 2024, it’s more important than ever to consider these implications thanks to the Social Security Administration’s 3.2% increase in benefits based on the cost-of-living adjustment. Why? 

This change results in an estimated Social Security retirement benefit increase of more than $50 per month, on average. The average monthly retirement benefit for workers will be $1,907, up from $1,848 in 2023, as reported by the Social Security Administration. However, Social Security beneficiaries will know their exact increase in December when they receive annual benefit statements. 

So where do healthcare costs come in? Well, income impacts health insurance premiums. Let’s start with Medicare first. 

Part B premiums are typically taken directly from Social Security checks. So for clients enrolled in Medicare, make sure they know how much to actually expect each month in 2024 from their Social Security benefits. Additionally, Medicare Part B & D premiums are affected by income. Meaning, that the higher your client’s income, the more their Medicare Part B & D premiums cost, resulting in a larger sum being taken out of their monthly Social Security check.

Your client’s Medicare Part B and D premiums could have an income-related monthly adjustment amount (IRMAA) based on: 

  • Your client’s tax filing status. 
  • The current year’s adjustment amount. 
  • Your client’s modified adjusted gross income from two years prior. 

For 2024, the standard base monthly premium for Part B is $174.70. For Part D, you will pay the chosen plan’s premium, plus a potential income adjustment of up to $81. To calculate your client’s 2024 IRMAA, the Social Security Administration (SSA) will look at their tax return from 2022. Clients should have received these notices in November to know what they will be paying next year.

For the Marketplace, a client’s income affects their eligibility for premium tax credits, and, if they are eligible, how big of a credit they’ll receive. Premium tax credits reduce the monthly cost (premium) of Marketplace plans, which helps ensure clients who need Marketplace coverage (e.g., pre-65 retirees, self-employed clients, etc.) receive comprehensive healthcare coverage at affordable rates.

It’s important for comprehensive financial planners to analyze how their clients’ income might change (and how that impacts Medicare premiums) when implementing popular year-end tax strategies.

Roth Conversions

Moving pre-tax funds from a traditional IRA or an eligible qualified retirement plan to a post-tax retirement account is considered income for that year. Although it can be a positive for ensuring clients are able to make tax-free retirement withdrawals in the future, this increase in income could result in higher Medicare Part B premiums down the road. Two years down the road, to be exact. 

Let’s say your client was 63 in 2022 and made a Roth conversion that year. Before the conversion, their income (married, filing jointly) for 2022 was $350k. This means that in 2024, when they turn 65 and enroll in Medicare, their monthly Part B premium will be $454.20 and their monthly IRMAA surcharge will be $53.80. But the Roth conversion they took in 2022 brought their income up to $500k. This increase puts them in a higher bracket for Part B premium costs and IRMAA surcharge. Now, their monthly costs will be $559 and $74.20. That’s a total annual increase of $1,502. This might not seem like much, but if your client is retiring at 65 and going on a fixed income, this unaccounted-for increase becomes a bigger deal.

Even if the cost isn’t much of a worry for you or your client, what your client will care about is the fact that this expense wasn’t planned. What they will wish, is that they had been informed about all the Medicare documents they would receive stating they owe more than they expected in Medicare costs because of their income from two years prior. To reduce client confusion and stress, it’s critical to plan for these costs that impact a major milestone for most clients.

Usually, advisors try to avoid this by doing a Roth IRA conversion early. That way, it won’t affect their Medicare Part B & D premiums. But, that will impact premium tax credits in that given year if the client is on a Marketplace plan.

Let’s say your client is 60 and retiring next year. They still have five years until they’re Medicare eligible, so they’ll need a different form of health insurance during this gap. The Marketplace is an excellent option for most pre-65 retirees since there are typically several health plans to choose from, and premium tax credits help reduce the cost of monthly premiums. The credit that clients receive will be based on their income that year, the cost of insurance where they live, and the size of their household.  So if your soon-to-be retired, 60-year-old client does a Roth IRA conversion this year, that amount will be considered part of their income and could affect their eligibility for premium tax credits. Meaning, they may end up paying a lot more for healthcare coverage in retirement than they, and you, planned for. 

Charitable Distributions

Don’t worry, my advice isn’t to avoid charitable donations. But, you do want to consider what the best way for clients to make charitable donations is. Your retired clients who choose to take distributions from IRAs and want to make a charitable donation need to consider that this method will impact their tax return and, you guessed it, impact their income. Which, as I’ve established, is an important consideration for healthcare cost planning. An alternative to charitable distributions that don’t show up on tax returns is a qualified charitable distribution, which are direct gifts from an individual retirement account to an eligible charity.

As a bonus, here is a year-end tax strategy that can help your client’s financial plan by lowering premiums:

Tax Loss Harvesting

You likely know what tax loss harvesting is, but in case anyone needs a refresher, this popular year-end tax strategy allows clients to sell investments that are down, replace them with similar investments, and then offset realized investment gains with those losses. This actually lowers clients’ taxable income. Which is good in general, but also for lowering IRMAA in two years or increasing the client’s premium tax credit that year if they are on the Marketplace.

Final Thoughts

As you dive into end-of-the-year planning and assess popular tax strategies, take special care with your clients nearing retirement. If they’re 63 and older, there are common tax strategies you may want to avoid, like moving pre-tax funds from a traditional IRA or an eligible qualified retirement plan to a post-tax retirement account. You may need to adjust some strategies, like how your client does their charitable giving. 

The bottom line is to consider all the implications of certain year-end tax strategies, including how they impact healthcare costs, since this is a major expense for retirees and most non-retirees households. And keep in mind that costs aren’t the only thing that can hurt a financial plan. Wealthy clients likely won’t worry too much about an increase in their Medicare costs. Still, they will worry that their financial advisor didn’t plan for this increase or discuss which factors of their financial plan (and life) impact their healthcare costs in retirement. 

If you want to make sure you’re equipped to include healthcare costs in clients’ financial plans, book some time to chat with me!

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