MML #061: Medicare and Taxes: The Planning Intersections Most Lawyers Miss

Over the past few weeks, we've covered Medicare Advantage vs. Medigap and how IRMAA surcharges affect high-earning lawyers. But there's a bigger picture I don't want to leave unfinished: how your healthcare decisions in the years before and after retirement connect with your tax planning in ways most people don't expect.

Your healthcare decisions and tax planning work together, and missing these connections can cost you thousands—or wipe out planning opportunities you didn't know existed.

Let's walk through the key connections.

The HSA Contribution Trap

If you've been maxing out a Health Savings Account (HSA) contributions as part of your tax strategy, enrolling in Medicare ends your ability to contribute. If you need a quick refresher on HSAs, I wrote about them here.

Here’s the tricky part. Medicare Part A coverage goes back up to six months from when you apply (or back to when you first qualified, whichever is shorter).

This means you should stop HSA contributions six months before you plan to enroll in Medicare. Otherwise, you'll face an IRS penalty for contributing while covered by Medicare.

But what about that nice balance you’ve accumulated? Good news. You can still pull money from your existing HSA tax-free for qualified medical expenses throughout retirement, even after enrolling in Medicare. Many retirees use their HSA as a tax-free healthcare ATM for decades.

But if you're planning to enroll in Medicare at 65, stop those HSA contributions at 64½. If you’re approaching 65, I’d mark it on your calendar now as it’s an awkward thing to remember (My whole life runs on Salesforce!).

The Pre-65 Retirement Gap

Retiring before Medicare starts creates both a coverage gap and a tax planning opportunity.

Your bridge coverage options:

• COBRA - Expensive (you pay the full premium plus up to 2% extra for the admin costs), but keeps your coverage going. Important note: COBRA doesn't count as creditable coverage for delaying Medicare Part B, so don't make that mistake.
• ACA Marketplace - Depending on how you manage your income, marketplace plans can work well. If you're controlling your taxable income carefully in early retirement, you might qualify for big subsidies.
• Spouse's coverage - If your spouse is still working with solid employer coverage, this might be your best option.

Regardless of your bridge option, those gap years between retirement and age 65 are often your best window for Roth conversions. You're no longer earning W-2 income, you're not yet hit with IRMAA surcharges, and you have flexibility to manage your income.

But you need to balance conversion income against ACA subsidy eligibility if you're using marketplace coverage. Convert too much, and you might lose subsidies worth thousands each year. You need to model both sides.

Working Past 65: The Creditable Coverage Question

If you're working past 65, the tax and coverage coordination gets more complex.

For lawyers in firms with 20+ employees, you can usually delay Part B enrollment without penalty if you have group coverage. This might make sense if your employer coverage is solid.

If your firm has fewer than 20 employees, tread carefully. Your group coverage likely doesn't count as creditable coverage for delaying Medicare. Solo practitioners and lawyers in small firms probably need to enroll at 65 even if they're still working. 

Get a certificate of creditable coverage from your insurer and keep it. You'll need proof that any delay was legitimate to avoid permanent penalties.

And remember the HSA issue from earlier—if you enroll in Medicare while still working, your HSA contribution window closes.

The Roth Conversion Timeline

We covered this in detail two weeks ago with IRMAA, but it's worth repeating: the timing of your Roth conversions matters a lot once Medicare is in the picture.

Your best windows:

• Ages 60-64 (if retired early): Consider a conversion before IRMAA kicks in. You're in lower tax brackets without W-2 income and not yet hit with Medicare surcharges.
• Age 65+ (on Medicare): Plan each conversion against IRMAA brackets two years out. Sometimes you convert right up to a threshold. Other times you stay below to avoid the next tier. We have a pretty sweet conversion tool that illustrates key breakpoints and helps clients consider their options.

The key is thinking two years ahead. That 2024 conversion hits your 2026 Medicare premiums. Plan accordingly.

The Geographic Wild Card

One factor that affects both taxes and healthcare costs: where you live in retirement.

Medigap premiums change a lot by state. The same Plan G policy might cost $180 monthly in one state and $280 in another. Medicare Advantage plan quality and availability differs by county.

If you're thinking about relocating—maybe to a state with no income tax or lower cost of living—factor Medicare costs into that decision alongside the tax implications. A move that saves you $10,000 each year in state income taxes might cost you $3,000 more in Medicare premiums. You need both numbers.

Bringing It All Together

Medicare planning needs to work with your broader retirement and tax strategy:

• HSA contributions affect your Medicare enrollment timing
• Medicare enrollment affects your Roth conversion strategy
• Roth conversions affect your IRMAA surcharges
• IRMAA surcharges affect your retirement budget
• Your retirement budget affects your withdrawal strategy
• Pre-65 coverage choices affect ACA subsidy eligibility
• ACA subsidies affect optimal Roth conversion amounts

See how it all connects?

To maximize your strategy, I’d recommend lawyers start planning at least three years before retirement. Map out the timeline, coordinate the decisions, and avoid the expensive mistakes that come from treating these as separate, unrelated choices.

It goes without saying, but you don’t want to be the one paying permanent penalties, missing conversion opportunities, or discovering tax consequences you didn't expect.