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8 Important (But Little-Known) Rules To Know Before You Retire · Retirement Answers

• 0:00
  Jacob: Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host as always. And today I want to share with you eight important yet little known rules that I think you should know before you retire. So let's go ahead and just jump in with the first one.
• 0:13
  The first one is related to IRMAA and IRMAA stands for income related monthly adjustment amount, and this is an increase or a surcharge on your normal Medicare premiums if you have too high of income. But the catch here is that this is based on your income from two tax years ago, and this is the rule or the thing that I want you to know here in this one is that it's not based on what you earn this year, so you can't determine whether or not you're going to pay IRMA surcharges this year based on what you earn this year, you got to look back to what your income was two years ago. So in 2025, as the recording of this particular episode, if you are subject to IRMA in 2025, that would be based on whatever you earned in 2023. Now, there are income brackets that I want you to know about here, just so you're aware of where Irma starts and how much income you can earn before you actually go into that first surcharge bracket for Part B or Part D Medicare insurance. And And so if you're married filing jointly in 2023, if you earned $212,000 of modified adjusted gross income or less, then you are not subject to Part B or Part D IRMA surcharges, and for single folks, it is half of that, it's $106,000 or less.
• 1:20
  As soon as you have more than that and modified adjusted gross income, depending on if you're married, filing jointly or single, you would go into the first IRMA surcharge bracket. Now there's about five or six different brackets here and they step up as your income goes up, but just know that depending on your income, you could pay a higher amount on your premiums compared to what the normal premium is. And here's a quick tip for you, if you just retired, let's say, and you've been working and you just turned 65 and you retired, obviously your income could be well above these modified adjusters income limits for IRMA surcharges because you were working in 2023. If your income at that point was higher than whatever the brackets are today, then you will automatically be assessed IRMA surcharges. But what you can do is appeal this by saying, hey, I had a life changing event, I actually retired, so I don't think I should be penalized for working until this point, by looking at two years ago income.
• 2:10
  So what you can do to do that is file or submit form SSA-forty four and notate on that form that you should have your IRMA waived this year because of a qualifying event being retirement. And obviously, if you do that this year, if this is your first year of retirement, once you reach 65, next year as well, you would have IRMAA surcharges begin applying again because you would be looked at on your 2024 income. And again, if you worked in 2024 and your income was above those surcharge income levels, then you would have to file this form again to have that IRMAA removed from your Medicare premiums. So that's number one, if you are having IRMAA applied to your Medicare premiums and you're having to pay those additional surcharges, it's because of your income two tax years ago, and if you just retired and you also just turned 65, you can appeal those surcharges by sending that form to them because of your life changing event being retirement. The second rule to know is that you, if you're married, are entitled to 50% of your spouse's benefits, even if you've never worked a day in your life.
• 3:05
  You don't have to have any earnings credits, you don't have to have anything in terms of like your own benefits in order to qualify for a spousal benefit, but there are a few nuances around spousal benefits. I won't get into the details of that, but basically, if you wait to begin taking spousal benefits or take your own benefits until your full retirement age, you're entitled to 50% of your spouse's Social Security benefits at their PIA, their primary insurance amount, whatever their benefit would be at their full retirement age. So you don't get additional credits if they delay past 67 or whatever their full retirement age is. You get to have half of whatever their primary insurance amount is, that's what they would get at their full retirement age, but if you decide to take your own benefits before your full retirement age, you would get less than 50% of your spouse's PIA, all the way down to 32.5% if you take your benefits immediately at 62 when you're first eligible. So just know that you don't have to work a day in your life to get your spousal benefit from Social Security.
• 3:58
  The third rule to know is around Roth IRA conversions and the five year rules that might apply there. So there's two different five year rules when it comes to Roth IRAs. The first one has to do with your contributions, okay? And if you add money to a Roth IRA, you cannot take out the growth on that contribution. You can always take the contribution out without penalty or any age requirements, but you cannot take out the growth on that contribution until two things have happened.
• 4:21
  Number one, the account has been open for at least five years and you're at least 59 and a half upon distribution of the growth. Now, here's the thing, whenever you take money from a Roth IRA, you're always taking out your contributions first, okay? So you're never taking out the growth first, so it's technically taking out non taxable money first and then the last thing to come out would be the growth. So that's a good thing from a Roth perspective, but just know, if you put $5,000 in a Roth IRA today, and it grows to $8,000 over the next year, and you're not 59.5 yet, or even if you are 59.5 yet, and you just opened this Roth IRA, you can only access the $5,000 of contribution without tax or penalty, you cannot access the $3,000 of growth until the five year mark until the five year mark of the account being open and being 59.5 has been met. Now, the next thing to know here is that you can do Roth conversions and Roth conversions have a separate five year rule.
• 5:14
  So here's what you need to know about this one. Let's say that you are under 59 and a 0.5, and the account has not been over five years, I guess that one doesn't really matter at this point, but let's say you're under 59 and a half. If you do a Roth conversion today, next year, you cannot go take out the amount that you just converted from your Roth as a tax free distribution. There is a holding period, a five year holding period that has to take place before the converted amount becomes classified as a quote contribution at that point. So there's a five year period of time that has to take place before you can actually consider that to be a contribution at which point you could take out however much you converted completely tax and penalty free.
• 5:52
  So think of it this way, let's say that you have no Roth IRA right now today, you're 55 years old, you do a Roth conversion of $20, and that $20 goes into the Roth IRA and then it grows to 25,000 over the next twelve months. So you got a $5,000 growth amount in there. Sometimes people think, oh, well, I pay my tax on my $20,000 that I converted, so I should be able to take that $20,000 out without tax or penalty because it's just like a contribution, right? Well, in our minds, it might be like a contribution because you paid the tax on it, but from the IRS's perspective, they're saying that that 20,000 has to wait five years before it could be taken out as if it were a contribution without tax or penalty. Now, I want to talk really quickly about the growth here.
• 6:34
  The growth from 20,000 to 5,000, even if you are able to take the $20,000 out after five years, regardless of your age, let's say you did the conversion at age 40, you have to wait till 45 before you can get the $20,000 that you converted out of the account, okay? That $5,000 of growth or any growth that takes place on the converted amount that is treated like growth no matter what and you cannot touch that until again, the account is over five years and you're 59.5. So that money has to stay in there until fifty nine and a half before you can access it without tax and penalty. Now, I say all of that to kind of lay the groundwork here for what's this interesting rule that I think you should know. Let's say that you retire at 62, you do not have a Roth IRA at all, and you want to do a Roth conversion.
• 7:19
  There's a couple things you gotta know. Number one, you can absolutely do the Roth conversion. Totally fine. Let's say you do a $20,000 Roth conversion at this point. You don't have a Roth IRA, this is the first dollars you're ever getting into a Roth IRA.
• 7:29
  Whenever you do that conversion, the converted amount, you do not have to wait five years anymore. That goes away because you are over age 59.5. So the amount that you convert, the $20,000, that is free and clear. You can take that money out the very next day or the next year, whatever. No five year restrictions.
• 7:46
  But the growth on that $20,000, the tax free growth that would happen, that is subject to five years moving forward because again, the account is just now getting opened for the first time. So the growth on the dollars are actually subject to the five year rule. So you have to wait five years before you can touch any of the growth on the amount you just converted. So for example, let's say that you convert $20,000 today, it grows to $30,000 over the next twelve months, and then you're like, I gotta go buy a new car. Okay.
• 8:14
  Well, you can go buy a new car, and you're thinking, oh, I just want to, take my $30,000 out of my Roth IRA. It'll be completely tax free because in a Roth, I'm over 59 and half. I'm good. Right? Well, not quite.
• 8:25
  You can actually take the 20,000 as I described earlier. You can take that out completely tax and penalty free, but the 10,000 of growth that happened in the account, that is not tax and penalty free because again, you have to wait five years because the account has been not been opened for five years. So, a lot of nuance there, but the way that I try to remedy this for my clients is is we try to open a Roth IRA and put a $100 in it or convert a $100 into it if we can't contribute directly. We try to get something in the account as soon as they become a client, and here's why. Let's say that you're 57.
• 8:59
  Right? Let's say that you're 57 right now, and you come to me and Jacob. Let's start working together. I need your help. Perfect.
• 9:04
  Okay. Let's open a Roth IRA because if you don't have one already open, we need to do that. We need to either convert some money from somewhere out of a traditional IRA into it. We can do it very small, just get a dollar or 2 in it, or we can contribute a couple dollars to it or a $100 to it just to get the account open and started. When we do that, we're starting that five year clock.
• 9:23
  So what would happen there is if you're 57 today, you would be eligible to take any and all types of money out of a Roth IRA at 62. But if you don't open that Roth IRA today and you do a Roth conversion, as I just described a second ago, you would have to wait the five years on that growth, before you're eligible to even take the growth out. So the recommendation is this, get a Roth IRA opened and get some sort of money in it. It can be a very small amount, but the dollar amount going in actually starts that clock in terms of a contribution or a conversion. You can't just open the account, have it set at zero forever, and count that as the account starting because, again, no money has gone into it.
• 9:56
  So get something in the account as soon as you can so that the five year clock actually gets started for you. And the fourth rule that I think you should know, and a lot more people are discovering this and kinda learning how this works, but it's the ten year rule for inherited IRAs for non spouses. If you're a spouse and you receive your spouse's IRA after they pass away, guess what? You can continue to stretch or assume that that IRA is your own depending on which option you choose to go with. Not gonna cover that.
• 10:20
  But if you're a non spouse like a child or a grandchild or or something like that who receives an inherited IRA or inherited tax deferred account, you will have to follow the ten year distribution rule as set forth by the Secure Act and then later redefined by Secure Act two point o and kind of clarified. So a lot going on there, and there's many different things I'm not gonna get into because there is a bunch of detail. I've actually done an episode on this before. You can go back and find it. It it outlines it all pretty clearly.
• 10:47
  But this ten year rule applies to inherited IRAs, and depending on when the person who passed away, depending on when they passed, whether that be before they started their RMDs or after their RMDs, that will dictate whether or not you, as the person who is the beneficiary or the person receiving this inherited money, will have to be required to take a RMD every single year or not. And the thing here is this, whether or not you have to take RMDs every single year, you're gonna do that based on your life expectancy table. And again, I'm not gonna dig into the details of that because there's that's a whole episode for itself. But just know that regardless if you have to take an RMD or not, whenever you receive an inherited IRA, the full account has to be distributed out by the end of the ten years no matter what. So even if you're not required to take a minimum amount yearly, you still have to have the account fully empty by the end of that tenth year.
• 11:36
  And if you do have to take an RMD every single year as the beneficiary of that money, you still have to have it all taken out by the end of the tenth year. So that's inherited traditional IRAs. Now what happens if you inherit a Roth IRA? Well, the ten year rule still applies. All of the money has to be taken out by the end of that tenth year after death, but guess what?
• 11:56
  You do not ever have to take a required distribution annually. So the thought process here would be something like, if you inherit a Roth IRA, unless you need the money for something for a major expense, it might be thoughtful to simply leave the money in the inherited Roth IRA for as long as possible so that it continues to grow tax free over the next ten years. And then before the end of the tenth year, make sure that is fully distributed out, and that's a tax free distribution. You're not getting taxed on Roth IRA money. The key there is just that it all does have to be taken out by the end of that tenth year.
• 12:24
  So, lots to dig into maybe there on inherited IRAs, especially after the Secure Act. All the change. No more stretch for non spouse beneficiaries for the most part, and there's different types of beneficiaries, whether you're eligible or non eligible or designated beneficiaries, all these different kind of terminologies. Again, I've done an episode. I'll try to link it down in the description for you below you if want go check that out in a little bit more detail.
• 12:46
  The fifth rule to know about is that your required minimum distributions for your own IRAs can be satisfied by another IRA. So if you've got an IRA at Fidelity and an IRA at Schwab and one at Vanguard and Robinhood or wherever, If you've got IRAs that are traditional IRAs spread out across the board multiple, which I I don't I wouldn't recommend it necessarily, but if you wanna do it that way, that's up to you. Just know that if you are required to make those required minimum distributions, you can take all of your RMDs for all of those accounts from one account. So this is possible only within the IRA world. So if you've got 500,000 in one IRA, a 100,000 another, and 200,000 in another, and your total RMD across all of those things combined is, I don't know, $30,000, You can take all 30,000 from one account and satisfy the required minimum distributions for all of those accounts.
• 13:36
  So that's the key there is you can combine all RMDs into one distribution from one account. This is not possible though for four zero one ks's. Every single four zero one k or four zero three b and really for ERISA or employer sponsored plans, every four zero one k has to make its own RMD. You can't mix and match or combine and consolidate from one account. Every single one has to take its own RMD from its own bucket of money.
• 13:58
  So that's the fifth rule around required minimum distributions and maybe some options you have there. The sixth rule to know about is around HSAs and the fact that you can turn your HSA into a traditional IRA style retirement account once you do reach age 65. So we know an HSA is a health savings account. It's meant for health purposes, which you can always use it for that, and it's triple tax advantage. So whenever you put the money in, you defer taxes and you don't pay that on the front end whenever earn the money to put it in the HSA while you're working.
• 14:26
  It then grows tax sheltered, so you're not paying taxes on the growth along the way, and if you take that money out for a qualified medical expense, you do not pay taxes at that time either. So it's the most tax efficient account out there, even more so than a Roth IRA because you get a deduction on the front end, but also tax redistributions on the back end, which is not possible anywhere else. But what most people don't realize is that if they build up an HSA and never have to use the money for medical expenses specifically, guess what? It can turn into a traditional IRA in terms of how it would be taxed later on in life once you're 65 or older. So once you reach age 65, you can actually distribute all of the the money out of your HSA penalty free, so you don't pay an extra penalty for it, but you would just pay the income tax on the distribution as a normal traditional IRA.
• 15:09
  So you can access the funds for retirement purposes in general, not only health purposes, and avoid that extra penalty for a non medical expense if you wait till 65 and after to withdraw the funds. A So lot of people can take advantage of this once they're 65 or older, or you can continue obviously saving it for yourself, for for medical purposes if something arises, but you have options. That's really the point, and a lot of people just don't know that they have the opportunity to take money out once they get to 65 or older without the extra penalty there for a non medical expense. The seventh rule or thing to know about here is that not all income is treated the same for ACA subsidies or IRMA surcharges and ACA subsidies apply to health insurance from the private market. It's Obamacare.
• 15:50
  You get the opportunity if your income is low enough to have your premiums on your private insurance reduced depending on what level of income you do have. And then IRMA stands for income related monthly adjustment amount. We talked about this earlier, but the the point that I want to make here is that you've got to pay attention to what income is included that determines if you qualify for the subsidies or not or if you're going to have surcharges applied or not because Roth IRAs are not included. Really, what we're looking at here is what's called your modified adjusted gross income. So it's your AGI, but you have a couple different add backs that might take place, and one of those add backs could be municipal bond interest.
• 16:25
  So you might have municipal bonds intentionally so that you reduce your total taxes on the interest within your brokerage account or whatever it might be. The key there is you might not be paying taxes on that interest, but that interest technically is being included in your modified adjusted gross income whenever that could impact something else like ACA's or your IRMAA surcharges. So if you're making a bunch of money or interest off of municipal bonds, you're like, man, I'm good. I'm not paying any taxes. Therefore, I don't have very much income, so I shouldn't have to worry about ACA's or IRMAA surcharges.
• 16:54
  Well, if that municipal bond interest is added into your adjusted gross income to make up your modified adjusted gross income and it becomes too high, then you could be subject to those IRMA surcharges or not be able to qualify for ACA subsidies. So it's important to pay attention to the types of income you have, how that income is being taxed, but also how that income is being factored into all of the other little minute details around your retirement situation because some of these things catch people off guard. And the eighth and final rule to know about is that you do not have to start taking your survivor benefits when it comes to Social Security If your spouse predeceases you, you don't have to take those immediately. You can actually delay taking those so that the benefit continues to increase over time depending on your age and your situation. I've done an episode on this where I I kinda dive deep into survivor benefits, but a lot of people don't understand that they they can actually delay taking their survivor benefits and allow those to continue to grow over time while they keep taking their own benefits, and this would actually lead to a larger total Social Security income once you do delay those and take that in the future.
• 17:54
  So, survivor benefits, you can delay it if you'd like to. You don't have take them immediately, and there could be a big increase there. So pay attention to that as you analyze. If your spouse does pass away and predecease you, just know that you are entitled survivor benefits. That's the first thing.
• 18:06
  But the second thing is that you don't have to take them immediately. You can take them at the time of your choosing, and it might be beneficial to do so. Thanks so much for tuning into this week's episode of Retirement Answers. I hope it's been helpful and beneficial for you. If it was, please share it with a friend and then let them know about the show.
• 18:21
  That way they can learn from these same tips, ideas, and strategies. Thanks so much. We'll talk again next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only.
• 18:39
  Thanks for tuning into this week's episode. I look forward to talking with you again next week.