Before you turn 65, you’ll want to become familiar with Medicare’s rules and features. And if you’re a high earner, you’ll want to be especially aware of the Medicare premium surcharge – because, over time, it can add up to some significant dollars.
The premium surcharge – known as the income related monthly adjustment amount, or IRMAA – is assessed on premiums for Medicare Parts B and D, and generally is based on an individual’s modified adjusted gross income (MAGI) of two years ago. So, the IRMAA for 2023 would be based on one’s MAGI from 2021.
For someone who’s married and files taxes jointly, and whose MAGI for 2021 was $194,000 or less, the Part B premium for 2023 will be $164.90 per month, and the Part D premium will be whatever amount is charged by their Medicare plan. But if their 2021 MAGI was between $194,000 and $246,000, they’ll pay $230.80 (a surcharge of $65.90) for Part B and an additional $12.20 for Part D. And the IRMAA rises at different income levels, reaching a maximum of $560.50 (a surcharge of $395.60) for Part B and an additional $76.40 for Part D for a MAGI of $750,000 or more.
If you’re unprepared for the IRMAA, it can be an unpleasant surprise. So, if you’ve still got a few years until you enroll in Medicare, you may want to look for ways to control your MAGI and possibly limit the surcharge.
Here are a few suggestions:
• Contribute to a Health Savings Account (HSA). If you have access to a Health Savings Account (HSA), your contributions will reduce your taxable income, helping you on the IRMAA issue. Furthermore, any investment growth within your HSA is tax free, as are withdrawals for qualified medical expenses, which can include Medicare premiums, deductibles and copays.
• Contribute to a Roth IRA. Roth IRA withdrawals are tax free, provided you don’t start taking them until you’re 59½ and you’ve had your account at least five years. These tax-free withdrawals can enable you to avoid taking taxable withdrawals from other accounts, which may help you avoid an increase in your IRMAA.
• Consider a Roth IRA conversion. You could convert some, or perhaps all, the assets of a traditional IRA into a Roth IRA. But you’ll need to consider the impact of taxes – any deductible contributions to your traditional IRA and the earnings generated by these contributions will be fully taxable the year of the conversion, so you’ll want to have funds outside your IRA available to pay these taxes. Also, timing is important – to be on the safe side, you might want to complete the Roth conversion three or more years before you enroll in Medicare, so the conversion and the likely increase in your MAGI won’t increase the IRMAA.
• Manage your withdrawal rate – Taking large withdrawals from your retirement accounts can bump up your MAGI bracket and your IRMAA. So, as you near retirement, you’ll want to establish a sustainable withdrawal rate – one that provides you the income you need but without going overboard.
While these moves could potentially help you control the Medicare surcharge, they still must make sense for your overall financial strategy. It’s obviously desirable to keep the surcharge as low as you can – but it’s even more important to take the steps necessary to reach your financial goals.