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Your retirement questions answered: Social Security, buying service credits and Medicare

Robert Powell

Q: I am 62. Last year, I got a Social Security calculation showing that when I am 66-plus-years-old, I will receive $400-plus in Social Security benefits per month. Because of my health, I started to work only three days a week. Will this reduce the amount of my benefits? If l decide to quit my job, but not apply for my Social Security benefits until I'm 66-plus, will it reduce my monthly Social Security benefits?

A: Social Security calculates your monthly benefit by taking your highest 35 years of earnings and your age, says Rick Fingerman, a managing partner with Financial Planning Solutions. “So, if you stop working before your full retirement age or FRA, as you suggest, you could see a lower benefit if you do not have 35 years of higher earnings already.”

The same answer applies if you quit your job altogether at 62 and wait until 66 to collect, he says.

One option, says Fingerman, could be if you were going to wait until your FRA and you have a spouse that is already collecting on their own benefit. “You might receive a higher monthly benefit on their record as you would get 50% of what they are receiving, which could be more than the $400 a month under your own benefit,” he says.

Q: I will be retiring in about three years. I work for a municipal government and will receive a defined benefit retirement payment after I retire. I will only have 21 years of credit in the system when I retire.

The system gives me the option of purchasing another five years of service credit. If I choose to do this, it will add 10 percent of the average of my top three years of compensation to my annual retirement benefit. My question is, what are the tax implications of purchasing this extra credit using funds in my 401(k) account?  

A: Any withdraw of 401(k) funds other than as a loan or hardship withdrawal will incur income tax and potential penalties says Dave Cherill, a CPA and member of the American Institute of CPA's personal financial planning executive committee. If you are at least age 59½ there will be no penalties on the withdrawal but there will be income tax.

In your case, Cherill recommends reviewing the total cost-benefit of purchasing the additional retirement credit keeping in mind that taking money from the 401(k) will need be accounted for "after-tax" and with the assumption that those 401(k) dollars would still grow tax-deferred for a period of time as currently invested.

Q: I turn 65 in August 2019. Currently I get health insurance thru the Marketplace. I have a silver plan, which includes insurance for my husband and my premium is very low after the subsidy because our income is so low.

As I understand it, once I am on Medicare, I will lose the subsidy, because getting a subsidy for Medicare has an asset consideration. So, for part Medicare B, I would pay $137 month, and if I get Medicare Advantage plan the cost would be even more per month.

Can I delay signing up for Medicare until November 30, 2019, and stay in the insurance through the Marketplace until then? Can I sign up for Medicare earlier, and pick the start date to be November 30? Or does the Medicare start date start with your birth month?    

A: First, enrollment in a Marketplace plan (at www.healthcare.gov or state-specific portal) cannot co-exist with Medicare, says Jae Oh, the managing principal of GH2 Benefits and author of Maximize Your Medicare: Understanding Medicare, Protecting Your Health, and Minimizing Costs.

Also of note, in 2019, Medicare Part B will cost $135.50 for most Americans. Higher-income individuals and couples – about some 6.6 percent of Medicare beneficiaries -- may need to pay more.

According to Oh, financial assistance for those under 65 years old is administered differently from financial assistance under Medicare. Under Medicare, he says, there is the federal “Extra Help” program to assistance for prescription costs, and there are many levels of state-specific assistance which can include assistance towards paying the Part B premium.

In most states, there are Medicare Advantage plans that have no additional premium, and all Medicare Advantage policyholders are required to be enrolled in Medicare Part A and Part B, says Oh.

As for enrolling, Oh says it’s possible to enroll prior to August 1, and request a delayed effective date. “However, it is important to note that enrolling after August 1 will result in an automatic delay of the effective date, which will vary depending on the date on which a beneficiary enrolls,” he says. “Therefore, a person who wants to intentionally delay the effective date should visit the local Social Security Administration office, which ultimately handles Medicare eligibility.”

Robert Powell is the editor of TheStreet’s Retirement Daily www.retirement.thestreet.com and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

This article originally appeared on USA TODAY: Your retirement questions answered: Social Security, buying service credits and Medicare