Advice on Social Security, Medicare and IRA Bequests

Q: I plan to retire in a few months at age 62. I know that if I start collecting Social Security at that point, my monthly benefit will be permanently reduced to 75% of the "full benefit" that I would receive if I waited until age 66. My wife plans to stop working in about two years, also at age 62. Her benefit will be based on my record rather than her own.

If we both start receiving benefits at age 62, will her benefit be 75% of my reduced benefit, or 75% of my full benefit, or some other amount?

Jack Thrush
Melbourne Beach, Fla.

A: The correct answer is "some other amount," and it's lower than you guessed -- 35% of your full benefit, which is equal to about 47% of your reduced benefit.

Here's the explanation: The Social Security "full retirement age" is exactly 66 years for a wide swath of people, born in the years 1943 through 1954. As you note, at age 62, these individuals can collect a monthly retirement benefit that is 75% of what they would get based on their work record if they waited until 66 to file for Social Security.

If your wife has had only limited earnings, she'll get a larger benefit based on your record than on her own. Her benefit is based on your full-retirement benefit, coupled with her age when she starts to collect.

Let's say Social Security calculates that your benefit would have been $1,000 a month if you waited until 66 to start collecting, although you'll actually collect $750 a month starting at age 62. If your wife retires at her full retirement age, she can collect half of your full-retirement benefit, or $500 a month.

If your wife decides to retire at 62 like you, however, her spousal retirement benefit would be 35% of your full benefit -- or $350 in our example.

Readers can check the Social Security Web site for the benefit percentages that apply in their personal circumstances. Start at socialsecurity.gov/retire2/agereduction.htm, which shows the percentage reductions for workers and spouses who start collecting at age 62. Click on your year of birth for details on benefits between age 62 and full retirement age.

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Q: I am 67 years young and am still working full time with the intention of retiring at the end of this year. I understand that if I plan to participate in Medicare Part D prescription-drug coverage, I must sign up within 63 days after my current company insurance ends. I am very healthy and take one prescription maintenance drug which is very low cost.

What do I do about Part D when I retire? I won't need it and will have no idea what, if any, medical problems requiring prescription drugs may be in my future. I hesitate to sign up for even a "minimum coverage" choice as I may never need it and I don't want to add any unnecessary costs to my budget.

Ann Cohen
Chicago

A: First things first: Are you certain that you won't have retiree medical insurance from your employer that would include prescription-drug coverage? If a retiree plan is available, even if the premiums are sizable, you should probably take it, says Deane Beebe, a spokeswoman for the Medicare Rights Center in New York. A company-provided plan is usually better than a Medicare supplement plan you purchase yourself, she explains, and "if you give it up, you usually can't get it back."

We'll assume you are unfortunately losing coverage under a company plan that includes drug coverage at least as generous as the standard Medicare Part D plan. So you, indeed, face that important 63-day special-enrollment window after your coverage ends. But note that this isn't your only opportunity to sign up for Medicare drug coverage. Rather, this is your only opportunity to sign up without a penalty for delayed enrollment. If you wait to enroll in Part D, your premium will be increased by 1% of the average national premium for every month you didn't have coverage.

For people like yourself who are in good health, "it's a very individual decision" to buy coverage or wait, Ms. Beebe says. If you sign up for a Part D plan, your costs for the coverage and medications could end up being higher than if you simply paid your minimal drug costs out of pocket. But you would be avoiding future penalties and assuring yourself of some drug coverage if your health were to worsen and your drug bills soar.

Keep in mind that most people can sign up for Medicare Part D only in annual open-enrollment periods that run from Nov. 15 through year end, for the following calendar year. On the other hand, if you buy a Part D plan now, Ms. Beebe notes that there's no guarantee that any specific medicines you later come to need will indeed be covered by that particular plan.

You can check the terms and prices of the Plan D offerings in your area at the federal government's medicare.gov Web site. For 2006, the lowest-premium plan listed in Illinois was a $13.32-a-month offering from Humana Insurance Co. Check in coming weeks for 2007 information.

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Q: If a charity is listed as a beneficiary of a traditional IRA, what happens after the demise of the IRA owner? Does the estate have to withdraw the money from the IRA, give it to the charity, and have to pay income tax on the withdrawal with a deduction for the gift?

Or can the money pass directly from the IRA to the charity with no income-tax implications?

Richard Bartol
Baton Rouge, La.

A: When you name a charity as a beneficiary of your individual retirement account, the dollars indeed pass to that organization at death without any income-tax consequences for your heirs.

In contrast, there would be a tax bill if you made a bequest to the charity in your will and your heirs decided to satisfy that by pulling money out of the IRA, says Martin Shenkman, an attorney in Teaneck, N.J.

Note that a new law makes it easier for people over age 70½ to make charitable gifts from their IRAs in their lifetimes, but only this year and next: A person can have as much as $100,000 a year paid to a qualified charity without triggering federal income tax. The money must be paid directly to the charity, and it counts toward required minimum IRA distributions.

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