You Can Buy Medicare Without Social Security

Q: I recently attended a financial seminar and was told that teachers, who are otherwise not a part of the Social Security system, could purchase Medicare benefits separately. How can I do it, and what will it cost? -- T.K.

A: If you are not eligible for Social Security benefits on your spouse’s account, you may purchase Medicare benefits separately. For hospitalization insurance, the premium is $175 per month. Simple supplemental medical insurance costs $28.80 per month. You may not purchase the hospitalization coverage without the supplemental insurance.

You may also be interested to learn that a new state law offers California teachers, who are not covered under new Medicare deduction programs, the opportunity to have Medicare taxes withheld from their paychecks. (More recently hired California teachers are already subject to Medicare tax withholding.)

However, be advised: to qualify for Medicare coverage, you must contribute at least 10 years’ worth of Medicare taxes. And, even if you sign up for Medicare withholding, you would still have to pay separately for the supplemental medical coverage, as does everyone else in the Social Security system who wants this additional insurance. Contact the personnel office of your school district for details about how the deduction program is being handled in your district.

If you are eligible to receive spousal Social Security coverage, you do not need to elect separate Medicare coverage. Remember, you are eligible to receive Medicare coverage on your spouse’s account even if you do not qualify to receive spousal Social Security payments.

What a Big IRA You Have, IRS May Say

Q: I will turn age 70 in October and my wife is 64. I will soon be forced to withdraw increasingly large sums from my individual retirement account, which now has about $2.5 million in it. Due to the volatility of my holdings, and depending on when the last day of trading falls each year, the estimated value of my account could vary greatly. So, I may not be able to withdraw a sufficient amount each year to avoid penalty. Does the law permit a grace period? -- P.A.W.

A: Better than a grace period, the law allows you an entire year. The value of your IRA for purposes of mandatory distribution is set as of Dec. 31 of the previous year. So, for 1991--the first year for which you will be required to take a minimum distribution--you would calculate the withdrawal you must make based on the account’s value as of Dec. 31, 1990.

However, given the size of your account, you should probably seek assistance from someone other than a newspaper columnist. Did you know that if your IRA gets too big, you could be liable for what is called an excess accumulation tax? Under this provision, if the size of your account is greater than what you could withdraw at the rate of approximately $150,000 per year over your actuarial life expectancy, you could be hit with a 15% tax.

Professional advice from a financial planner, tax attorney or accountant can help you steer a course between the excess accumulation tax and your required annual minimum withdrawal.

How to Handle Stocks Under Minors Gift Act

Q: I have stocks and mutual funds that were set aside for me in 1977 under the California Uniform Gifts to Minors Act. In 1985, three months after I turned age 21, my father, who was the custodian of my account, died. What is my cost basis in these stocks when I go to sell them: their value when they were originally given to me in 1977, or the date of my father’s death? Will the dividends that these shares have been accumulating be subject to tax as well? -- C.E.W.

A: We’ll tackle your last question first because it is by far the easier of the two. Any cash dividends your shares generated over the years--even if they were reinvested in new shares of stock--should have been recognized annually and taxed. It is possible that no tax was paid because your income wasn’t large enough, but these dividends should have been declared each year.

Your first question, our tax experts say, is actually more sophisticated and tricky that it first appears. There are no clear-cut rulings from the Internal Revenue Service on such cases. Accordingly, explains Paul Hoffman, of the Los Angeles law firm of Hoffman, Sabban, Brucker & Watenmaker, the answer will be determined by whether your account was included in the value of your father’s estate when he died. If the account was included in the estate--regardless of whether any taxes were paid on it--the tax basis of your account is its value on the date your father died.

However, Hoffman says, the IRS may well argue that your account should not have been included in your father’s estate because you were entitled to take possession of the account when you turned 18. If your account had terminated when it was supposed to, and you had taken control of it at age 18, it obviously would not have been included in your father’s estate. But since your father apparently kept control of the account until his death, you could argue that the account should be included in the estate.

Whose argument wins? Who knows? The law offers no guidance, Hoffman says. You should probably consult a tax lawyer or accountant.