How much should I expect to pay for Medicare in retirement?

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How much should I expect to pay for Medicare in retirement?

Joann North

Answered By

Nancy Nawn, CFP, CIMA

Managing Partner and Financial Planner at WatchDog Planning

Question:

How much should I expect to pay for Medicare in retirement?

Answer:

Everyone on Medicare pays the Part B medical insurance premium of $174.70 per month in 2024. Additional premium costs depend largely on whether a retiree signs up for Medicare Advantage or Original Medicare. Medicare Advantage, also known as Part C, offers HMO and PPO plans that cover hospital, medical, and prescription care. Premiums can be as low as $0 per month, which is cost-effective for many retirees, but co-pays can get expensive, and access to healthcare is limited by geography and providers in the plan. Original Medicare allows recipients to purchase separate supplemental (MediGap) plans (as well as prescription plans), that cover any sharing costs assigned to the patient. Policies can run $200 to $400 per month and are accepted by most healthcare providers, giving retirees wider access to care nationwide.

I always plan for my clients to pay for Original Medicare with MediGap/Prescription policies if financially feasible. This structure offers access to the best medical care wherever it is needed without co-pays. All Medicare enrollees are eligible for Original Medicare during initial sign-up and can switch to Medicare Advantage at any time. But beware, switching back to Original Medicare requires underwriting, and most retirees will have some pre-existing condition, such as high cholesterol, that will disqualify them from obtaining a new MediGap policy.

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Beware of Your Medicare Premium

Purse Strings Approved Professional

Blog Series

Beware of Your Medicare Premium

Preparing for retirement requires a projection of expenses that capture the lifestyle of your dreams. Paying for Medicare beginning at age 65 is one of the most anticipated costs for retirees, but every client I have ever prepared for retirement was unaware of a term called IRMAA and the substantial impact it can have on Medicare premiums. This additional premium may not show up until a dozen years into retirement, but when it does, you could be paying it for the rest of your life.

 

What is IRMAA?

IRMAA is the Social Security Administration’s (SSA) acronym for Income-Related Monthly Adjustment Amount. It is a monthly fee in addition to your regular Part B and Part D premiums if modified adjusted gross income (MAGI) exceeds a certain amount. MAGI is the sum of your adjusted gross income (AGI) on your annual tax return plus any tax-exempt interest, non-taxable Social Security benefits and untaxed foreign income. In other words, some of the income you didn’t pay tax on gets added back for IRMAA determination.

The amount of additional premiums a taxpayer owes, if any, is updated every calendar year for each taxpayer on Medicare. The determination is based on a 2-year lookback of your tax return, so the IRMAA determination for 2024 would look at MAGI for tax filing year 2022. Because incomes can fluctuate in retirement, as the need for cash changes and the requirement to distribute tax-deferred savings increases over time, it is possible to be subject to IRMAA in some years and not in others. It is not a simple expense to plan for many retirees.

 

Who Pays IRMAA

Certain taxpayers, depending upon projected spending, tax-deferred savings and MAGI, will be subject to IRMAA, but first a quick lesson on Medicare. All taxpayers must enroll in Medicare during a 7-month period around their 65th birthday. Recipients are automatically covered by Part A (hospitalization) and most will have coverage for Part B (doctor visits, diagnostics) and Part D (prescriptions). Part A doesn’t have a premium associated with it for most Medicare recipients, only Parts B and D. All Medicare members pay the Part B monthly premium, which is $174.70, or $2,096.50 annually, in 2024. The Part D premium is determined by the prescription drug plan of the participant. IRMAA premiums are added to the Part B and Part D premiums based on your MAGI from two years ago. The table below shows what your total premium would be for Part B and Part D with IRMAA in each MAGI bracket.

 

2024 Medicare Premiums Adjusted for IRMAA Based on 2022 MAGI

Individual Married Filing Jointly Married Filing Separately Part B Premium Part D Premium
$103,000 or less $206,000 or less $103,000 or less  $174.70 Your plan premium
Above $103,000 up to $129,000 Above $206,000 up to $258,000 Not applicable $244.60 $12.90 + your plan premium
Above $129,000 up to $161,000 Above $258,000 up to $322,000 Not applicable $349.40 $33.30 + your plan premium
Above $161,000 up to $193,000 Above $322,000 up to $386,000 Not applicable $454.20 $53.80 + your plan premium
Above $193,000 and less than $500,000 Above $386,000 and less than $750,000 Above $103,000 and less than $397,000 $559.00 $74.20 + your plan premium
$500,000 or above $750,000 or above $397,000 or above $594.00 $81.00 + your plan premium

Source: SSA.gov

Looking at this, one may think that her MAGI will likely not fall into the higher ranges. However, when forecasting projected distributions in retirement, I often see clients become subject to IRMAA after their Required Minimum Distributions (RMDs) begin, especially for single filers. Another component to consider is the sale of assets in retirement, such as a second home or rental property. And if you’re lucky enough to have a pension, this will also be included when determining IRMAA premiums. Pension income is taxable at the federal level and included when calculating MAGI, pushing taxpayers closer to premium increases.

 

Strategies to Reduce or Avoid IRMAA

By far, the biggest culprit of IRMAA is the Required Minimum Distribution (RMD) in later retirement years. Many savers have taken advantage of tax-deferred retirement savings plans like 401(k), 403(b) and IRA retirement plans. Money saved into these accounts is not included as income on your prior tax returns, but Uncle Sam eventually wants his cut. Distributions we take in retirement are reported on our tax returns and become a part of MAGI. Luckily, planning strategies can help dampen or even eliminate IRMAA premium increases down the road.

For those that have been working for many years and already have much of their savings in a tax-deferred vehicle, Roth conversions could be a way to decrease IRMAA exposure. Roth conversions allow taxpayers to move tax-deferred savings into tax-exempt savings by paying tax at the time of the conversion. Paying the tax and reducing the amount of savings in tax-deferred vehicles will lower future RMDs since the account values will be smaller due to the conversions. And distributions from Roth accounts are not recognized when computing MAGI. Be aware, these transactions are complex and require an analysis of your current tax situation, so always consult with a tax professional such as a CPA or EA before utilizing this strategy. Another consideration is the number of investments allocated to tax-exempt bonds in retirement. Wealthy taxpayers often utilize tax-exempt bonds to avoid paying tax on income at the federal, state or local levels, but any interest earned on these types of bonds is added back to income when computing MAGI. Strategically managing exposure to tax-exempt bonds could also help reduce the possibility of qualifying for IRMAA.

 

The Bottom Line

According to the Medicare Board of Trustees, about 6.8 million seniors, or roughly 16.6 percent of all Medicare beneficiaries, will pay approximately $20 billion in IRMAA surcharges in calendar year 2024. The percentage is expected to increase to 25.8 percent by 2031. This is compounded by the increased participation in defined contribution plans that are tax-deferred by nature, thereby driving up RMDs in the future. Younger workers today are more likely to see future IRMAA assessments over their older peers.

If you are subjected to IRMAA, assessments can be appealed by filing Form SSA-44 with a local Social Security office. Generally, appeals are only considered for life-changing events including marriage, divorce, the death of a spouse, loss of income, and an employer settlement payment. You may be required to file an amended tax return to have an IRMAA assessment overturned.

Single taxpayers are much more vulnerable to IRMAA, as well as divorcees in retirement since they are assessed at the lowest MAGI level, but many more taxpayers overall will be paying IRMAA premiums in the near future. It is possible to decrease exposure by working with a financial planner and tax professional to develop a diversified tax strategy. The sooner taxpayers plan for the possibility of an IRMAA assessment, the more likely the chance of avoiding it.

Nancy Nawn, CFP®, CIMA®

Nancy Nawn, CFP®, CIMA®

Managing Partner and Financial Planner at WatchDog Planning

I help women measure and evaluate their individual circumstances and incorporate them into their personal values and goals. Through this process, you will learn about capacity for risk not only in the stock market, but also with aging and declining health. Along the way, we’ll find the best tax planning and investment strategies to minimize expenses while optimizing outcomes. We’ll stress test your plan for market crashes and long-term care events. We’ll determine the best social security claiming strategies and options to deliver income. And we’ll build an estate that brings the most value to heirs and honors your final wishes. The result is a custom, comprehensive financial plan that can reduce anxiety and guide decisions to approaching and living in retirement. Learn options and actions that make sense for you, and ONLY you.

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