An inheritance in your 80s can raise Medicare costs, advisers warn
Financial planners say late-life windfalls need tax checks before retirees park the money in CDs, savings accounts or Treasury bills.
By Frankie Delgado · News Reporter
3 min read
A retiree in her 80s who suddenly receives an inheritance may face more than a happy bank balance: the windfall can ripple into taxes, Medicare premiums and Social Security taxation, financial planners told MarketWatch.
The issue came up in MarketWatch’s Help Me Retire column, after a reader asked how a modest-living older relative should handle money inherited from a distant family member. The relative was described as highly cautious with money and interested in conservative choices such as certificates of deposit or a high-yield savings account.
MarketWatch retirement columnist Alessandra Malito noted that inheriting from someone other than a spouse in a person’s 80s is unusual, though it can happen, such as after the death of a sibling without a spouse or children.
The big question is what was inherited. If the money comes through a traditional IRA or another tax-deferred retirement account, withdrawals can be taxable, Malito wrote. If the inheritance includes assets that have risen in value, capital-gains issues may also need attention.
Andrew Fincher, a certified financial planner at VLP Financial Advisors, told MarketWatch that many people in their 80s already have their regular retirement income covered by Social Security, pensions, required minimum distributions and savings. That means the right move may depend on whether the retiree needs the money now or is thinking about estate and legacy planning.
Carlos Salmon, a certified financial planner and partner at Wooster Square Advisors, described a client in her 80s whose inherited money changed her tax picture in one year. According to Salmon, her taxable income rose tenfold, her tax bill climbed, her required minimum distributions increased and her higher modified adjusted gross income pushed up her Medicare Part B and Part D premiums.
Salmon said the same client also saw more of her Social Security benefits become taxable. In one year, tax withholding elections were not updated, leaving her with a large payment due to the Internal Revenue Service, he told MarketWatch.
Medicare’s income-related monthly adjustment amount, known as IRMAA, is a surcharge added to standard Part B and Part D premiums. MarketWatch noted that it is based on income from two years earlier, which means a one-year income jump can show up later in Medicare costs.
The practical advice: check the paperwork before chasing yield. Depending on whether the inheritance is cash, investments or retirement-account assets, the retiree may need help from a bank, brokerage firm or accountant before the next tax season.
Malito wrote that the retiree may also need to adjust withholding from retirement distributions, pensions or Social Security benefits to avoid a surprise tax bill.
For the money itself, the column pointed first to an emergency fund for unexpected costs. After that, conservative options may fit a risk-averse retiree, especially one who wants access to funds for home repairs, medical bills or care.
CD ladders were cited as one option, with different certificates maturing at different times. The retiree could reinvest principal as each CD matures while using the interest to add a small income stream.
Treasury bills may also appeal to conservative investors because they are backed by the U.S. government, can offer competitive yields and are exempt from state and local income taxes, according to MarketWatch. High-yield savings accounts and money-market funds can provide flexibility.
If the goal is to pass along the inheritance, the column advised reviewing the estate plan and making sure beneficiary designations on financial accounts are current.
This story draws on original reporting from MarketWatch.