Act now to save on Medicare later

Once you turn 65, Medicare will likely become important to you – so it’s a good idea to learn as much about it as you can. And if you have a high income, one element you'll want to look into is the Medicare premium surcharge known as the income-related monthly adjustment amount, or IRMAA.

¹ Source: ssa.gov.
² Or 2020 if 2021 isn’t available.
³ For 2023, the base premium for Part B is $164.90 per month.
⁴ Single, Head of Household or Qualifying Widow(er) with dependent child.
⁵ For Married Filing Separately: Those with MAGI from 2021 of $97,001–402,999 are subject to a surcharge of $362.60/month for Part B premiums and $432.60/month for Part B and D premiums. Those with MAGI from 2020 of $403,000 and above are subject to a surcharge of $395.60/month for Part B premiums and $472.00/month for Part B and D premiums.

IRMAA is based on your modified adjusted gross income (MAGI), backdated two years. Your MAGI consists of several elements, including:

• Your adjusted gross income (AGI), which contains things like:
  - Earned income from employment
  - Social Security income (many people will have 50% to 85% of their Social Security benefits taxed)
  - Distributions from traditional retirement accounts (e.g., IRAs, 401(k)s)
  - Investment income (dividends, capital gains)
  - Pension income
• Tax-exempt interest income (e.g., interest from municipal bonds)

Take steps early to help control MAGI in retirement

As the chart above shows, the Medicare surcharge can be significant – and if it’s unexpected, it can be an unpleasant surprise. So, if you’ve still got a few years until you enroll in Medicare, you may want to take steps to control your MAGI and potentially limit IRMAA during your retirement. In fact, the earlier you start planning, the more flexibility you’ll have in managing your MAGI and IRMAA.

Here are a few moves to consider:

• Contribute to a Health Savings Account (HSA). If you are eligible to contribute to a Health Savings Account (HSA), take advantage of it – and if you can, save your contributions for use during retirement. HSA withdrawals for qualified medical expenses are tax-free, so by using these funds to pay for costs such as Medicare premiums, deductibles and copays, you can possibly avoid using taxable income – and the lower your taxable income, the lower your MAGI.
• Contribute to a Roth IRA. If you’ve got a Roth IRA, keep contributing to it if it’s appropriate for your overall financial strategy. Roth IRA withdrawals are generally tax-free. These tax-free withdrawals can enable you to avoid taking taxable withdrawals from other accounts, which, in turn, can help you avoid an increase in your IRMAA
• Consider a Roth IRA conversion. If you’ve been investing in a traditional IRA, you could convert some, or perhaps all, of the assets into a Roth IRA. The big issue in a Roth IRA conversion is taxes – converted amounts of deductible contributions to your traditional IRA and the earnings generated by these contributions are taxable in the year of the conversion, so you’ll want to have funds outside your IRA available to pay these taxes. But then you’ll have a tax-free source of income you can tap into, which can help you manage your MAGI.

And if a conversion from a traditional IRA to a Roth IRA is appropriate for your needs, you might want to act on it three or more tax years before you enroll in Medicare. If you convert a large amount from a traditional IRA to a Roth IRA after that, you could increase your MAGI bracket and bump up your IRMAA two years later. If you’ve missed that window, a Roth conversion may still be advantageous, but you want to be aware of the potential to trigger or increase IRMAA so you’re not caught off guard.

To determine if these or other taxable income-reducing strategies are right for your situation, you’ll want to consult with your financial and tax professionals.

Appeals

One last strategy to keep in mind is an appeal. One of the more common reasons this comes up is when someone retires and enrolls in Medicare at age 65, but their IRMAA is assessed from MAGI when they were still working (and their income was higher). For this and other life events, you can appeal the IRMAA determination, provide documentation that your income is lower and potentially reduce or eliminate your premium surcharge.

Awareness and planning are key

While IRMAA isn’t as well-known as other aspects of Medicare, having an awareness of its impacts, and thinking in advance of ways to address it, may help you when you’re retired. And by working with your financial advisor, you may be able to develop strategies that can help keep IRMAA from spelling trouble for you in the years ahead.