What is FICA?

What is FICA? You know that during your working career, taxes are taken out of your paycheck for various obligations like federal and state taxes, right? Do you realize how much is taken from you and your employer for social security and medicare taxes? Both you as the worker and your employer contribute 1.45% of your income to medicare and 6.2% to social security. That's 7.65% from you and 7.65% from your employer. That is a huge amount! Those two taxes are a result the Federal Insurance Contribution Act or commonly called FICA.

Social Security Payments

According to the Social Security Administration, if you start collecting payments at 62, which is the earliest you can start collecting, unless you are disabled, you can expect to get 75% of your full benefit. At age 65 you would get 93.3% of your full benefit and at age 66, the benefit hits 100%. If you can hold off until age 70, you would get 132% of your full benefit. Even if you retire at your regular job at 65, it would behoove you to not collect social security payments for as long as you can hold out.

It is important to try and get this right because if you start collecting payments early and then decide you need to work part time to make ends meet, it will have a negative effect on your payments. You stand to lose $1.00 for every $2.00 you earn above the limit which as of 2008 was $13,560.00 per year. Fortunately the limit rises to $36,120.00 in the last year before full retirement age. During this period you could lose $1.00 for every $3.00 over the limit. After you reach full retirement age, there is no more penalty to your social security payments if you decide to work.

Also note that you might have to pay income taxes on your social security earnings if you exceed certain limits. This is based on a sliding scale that can go up to 85% of your benefits being taxed if one-half of your benefits plus all your other income exceed $34,000.00 per year for single filers and $44,000.00 per year for married filing jointly.

Medicare

Medicare is a social insurance program administered by the federal government. It provides health care coverage for people age 65 and older. You could also qualify below age 65 with certain disabilities.

This is where FICA gets interesting. Social Security with-holdings phase out at an income above $102,000.00 but medicare with-holdings have no ceiling. These FICA withholdings fund the social security payments we learned about in the first section of the Retirement Concepts. It also funds your participation in Medicare, specifically Medicare part A.

Medicare part A, also known as hospital insurance covers your health needs if you become hospitalized. It also covers brief stays in a skilled nursing facility if certain criteria are met.

Medicare part B, also known as medical insurance covers you for doctor's visits, durable medical equipment, physical therapy and other items like diabetic supplies but there is a premium to pay. In 2008 the base premium was $96.40 per month.

Medicare part C is often called Medicare Advantage and very often works like a medigap policy covering you for things not covered in parts A & B. Part C is administered through private insurance and hence the premiums vary from carrier to carrier.

Medicare part D covers you for prescription drugs. This part is also administered through private insurance with a wide range of premiums. You will also probably have a deductible and RX co-pays to pay before the policy kicks in to pay for your prescriptions. This coverage is good for up to $2,510.00 in prescription costs at which point you fall into what they like to call a doughnut hole. While in this hole, you pay 100% of prescription costs up until you have reached $4,050.00 at which point medicare part D coverage kicks in again to the tune of 95% while you shoulder the remaining 5%.

For more information on FICA, Social Security, and Medicare, be sure to check Google Search!

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