Although it’s a surprise to many who reach retirement, Medicare is not free.
Throughout your working lifetime, you paid taxes to support the program. In addition, once you finally start using Medicare, you must shell out more cash to cover a monthly premium, deductibles and other expenses.
And if you are not careful, you might pay more than you expect. Medicare premiums can be higher for those whose income exceeds specific thresholds during their golden years.
Fortunately, there are things you can do to reduce your chances of having to pay more for Medicare.
Following are some steps you can take to make sure your Medicare premiums remain as low as possible. None of these tips should be considered tax or investment advice. Before using any of these strategies, consult with a financial professional.
What is a Medicare Part B IRMAA?
Before we get into the ways you can save, it’s important to understand how the Medicare Income-Related Monthly Adjustment Amount (IRMAA) works for those who have Part B and Part D coverage.
Medicare Part B covers outpatient care, such as physician services, outpatient hospital services and durable medical equipment.
Millions of Americans pay the standard premium for this coverage. The cost in 2023 is $164.90 per month.
However, some people pay much more.
If you are an individual or married couple filing separate federal income tax returns and earn more than $97,000, your premium will be higher. That is also true of a married couple filing a joint return who earn more than $194,000.
People in these circumstances can pay anywhere from $230.80 to $560.50 per month in Part B premium costs.
What is a Medicare Part D IRMAA?
Medicare Part D covers prescription drugs for those who have Original Medicare.
Part D premiums are based on your income. If you fall into one of the following categories in 2023, you will also pay an IRMAA of between $12.20 to $76.40 per month for this coverage:
- Individuals and married people filing separate federal income tax returns, with a modified adjusted gross income (MAGI) of more than $97,000
- Married couples filing joint returns with a MAGI of more than $194,000.
For more on how an IRMAA works, check out “Multiple Medicare Costs to Drop in 2023.”
Now, on to the ways to save.
1. Make sure you are aware of the calendar
Most Americans qualify for Medicare in the year they turn 65. However, the income you earn two years before that — to age 63 — determines how much you will pay in premiums during your first year in the program. That’s because the government typically uses the previous year’s tax return to determine your Medicare premium amount, and that tax return is reporting data from the year prior.
This fact likely takes many people by surprise. It can be a shock to retire at 65 and learn that you owe an IRMAA because you earned a large amount of income at work two years earlier. (Although there may be a way around this — check out the next slide for details.)
Being aware of this rule in advance can help you avoid the IRMAA. For example, if you retire early and plan to convert your traditional IRAs to Roth IRAs, you might want to do so before you turn 63.
2. Ask the government to re-evaluate your income
As mentioned earlier, your income in any given year will determine your IRMAA two years into the future.
But what if your income has fallen sharply in those two years? For example, it hardly seems fair that you would have to pay an IRMAA based on a high 2021 salary if your income is much lower in 2023.
Uncle Sam is aware of that fact, and he offers a bit of a “do-over” in some cases.
You can file a form with Medicare that asks the federal government to re-evaluate your IRMAA in the light of specific life-changing events that have sharply reduced your income. Examples of such events include work stoppage, divorce, the death of a spouse and even the loss of an income property.
If such circumstances apply to you, stop by the Social Security Administration website and fill out the formMedicare Income-Related Monthly Adjustment Amount — Life-Changing Event.“
3. Save for retirement in a Roth IRA or Roth 401(k)
If you are still working today — but get queasy at the thought of paying an IRMAA in the future — consider building your retirement nest egg inside a Roth 401(k) or Roth IRA.
When you tap a Roth IRA, you do not pay taxes on your withdrawals, and they do not appear as income on your tax return. That means this money will not be part of the calculations used to decide whether you owe an IRMAA.
This means you could withdraw tens of thousands of dollars from a Roth in a single year and still appear to be poor as the proverbial church mouse in Uncle Sam’s eyes.
It’s important to note that there can be good financial reasons not to take this approach. Some people might be better off using traditional 401(k) plans and traditional IRAs throughout their working years, even if it means they have to pay IRMAAs in retirement.
So, before you forge ahead with a Roth-only approach, stop by the Money Talks News Solutions Center and look for a good financial adviser who can give you sound guidance.
4. Sell losing investments to offset high income
We all hope to make money in the stock market. But as 2022 painfully reminded many of us, there are years when investments go south.
Oftentimes, it makes sense to hold on to investments that have lost money in hopes they will rebound. But in other situations, you might be better off cutting your losers loose.
If you choose the latter approach, you can use these losses to offset your income up to $3,000 per year on your tax return. If you are close to the income threshold for higher Medicare premiums, it is possible you could drop out of the requirement to pay an IRMAA for that year.
Selling investments at a loss isn’t right for everybody in every situation, even if it helps them avoid paying an IRMAA. But if you are on the fence about selling losers, this perk might tip the scales.
Talking to a financial pro can help you decide if this approach is wise.
5. Give to charity from your IRAs to reduce RMD income
Giving more money to charity can also help reduce your income and keep an IRMAA at bay. This technique is particularly effective if your giving comes straight out of your traditional IRA. Fidelity Investments summarizes:
“People who are age 70 ½ or older can contribute up to $100,000 from their IRA directly to a charity and avoid paying income taxes on the distribution. This is known as a qualified charitable distribution. It is limited to IRAs, and there are other exclusions and considerations as well.”
If you are at the age where you must take required minimum distributions, donating the money to a worthy cause can help you avoid a tax bill and keep your RMD out of the calculation that determines whether you owe an IRMAA.
So if you have a generous heart, combine it with a shrewd mind and give to charities in a way that lowers your tax bill and helps you avoid an IRMAA.
6. Look into a Medicare low-income subsidy
The following tips do not impact whether you pay IRMAA costs, but they can reduce how much of your money goes towards Medicare premiums.
Some Medicare beneficiaries are eligible for the government’s Extra Help program that offers assistance in paying for premiums, annual deductibles, and co-payments related to prescription medications.
The Social Security Administration estimates that each beneficiary who gets this help will save about $5,300 annually in costs.
To be eligible, you must have limited resources and income. Find out if you qualify for at the SSA website.
7. Deduct Medicare premiums from taxes when eligible
Your Medicare premiums are deductible on your tax return if both of the following apply:
- You itemize deductions on your tax return.
- You qualify for the medical expenses deduction, which allows you to deduct the portion of qualifying medical expenses that is above 7.5% of your adjusted gross income.
You can also deduct other expenses, such as deductibles and copayments; dental, hearing and vision expenses that insurance does not cover; medical equipment and more.
IRS Publication 502, Medical and Dental Expenseshelps define which expenses are eligible.
If you have self-employment income, another option for deducting Medicare premiums is to list them as an expense on your Schedule C.
8. Use an HSA to pay your Medicare premiums
It’s possible that none of the items on this list will prevent you from paying an IRMAA. If that is the case, you might simply have to accept the pain of paying higher Medicare premiums.
However, if you are still working today, there is one last way to prepare to reduce the sting of any IRMAA you have to pay it in the future.
Some financially astute folks spend their working years contributing to a health savings account (HSA). Those who are really on the ball invest that money in the stock market. With any luck, they reach retirement with an account worth hundreds of thousands of dollars.
If that sounds like you, we have some good news: The federal government allows you to use yours HSA to pay many Medicare-related expensesincluding premiums.
Pulling money from an HSA to pay Medicare premiums results in spending less of your cash than if you would if you paid premiums using withdrawals from a traditional IRA or 401(k).
Why? Because the money comes out of the HSA tax-free. On the other hand, you have to pay taxes on each withdrawal you make from a traditional IRA or 401(k).
Over time, using tax-free HSA withdrawals to pay Medicare premiums could create substantial savings.