Stepping into retirement requires measured planning and awareness to avoid unexpected financial blows. Often when people think of financial blows, it’s the fear of running out of money in the midst of their retirement, but what about when you’ve made so much money throughout your life that you’re forced to pay additional surcharges during retirement?
Today we’ll discuss why and how some retirees experience up to a 300% Medicare cost increase and how you can prevent it.
What is the Cost of Medicare?
Medicare does have a cost, but the cost of Medicare can vary for individuals based on their income prior to enrolling. To set a baseline, we’ll first look at the cost of Medicare for most beneficiaries.
When you enroll in Medicare, there are a few primary ways to structure your coverage:
- Stick with Original Medicare Parts A and B,
- Enroll in a Supplemental plan to fill the gaps in Original Medicare, or
- Enroll in a Part C Medicare Advantage plan
No matter which route you choose, you have to be enrolled in Medicare Parts A and B. Part A is free for most, so long as you have paid 40 quarters into the Medicare system or are drawing your work record from someone who has.
Medicare Part B comes with a premium. The base premium that many will pay is $174.70 a month in 2024. This balance is auto-deducted from your Social Security check if you’re already drawing Social Security benefits. Whether you choose a Medicare Advantage or Supplemental plan, you’re still responsible for the Part B monthly premium. On a few occasions, you can find an Advantage plan that has a Part B giveback program.
Does Medicare Have Variable Costs?
While there is a standard cost of Medicare, parts B and D can vary based on on your income. This increase is due to an Income-Related Monthly Adjusted Amount or IRMAA. The government determines this by looking at your Modified Adjusted Gross Income (MAGI) from two years prior to your Medicare enrollment year.
The IRMAA is applied when a single filer’s income exceeds $103,000, or a couple filing jointly exceeds $206,000 in 2024. The additional amount applied to your premium is determined by your specific income and has the potential to range from an extra $78 to $470.
Let’s get into how you can manage these variable costs and prevent surges in your premiums.
Understanding your MAGI to Manage Medicare Premiums
The key to managing your potential Medicare costs is understanding what contributes to your Modified Adjusted Gross Income (MAGI).
Your MAGI is calculated by making adjustments to your gross income — your total income before deductions or taxes.
Total income could include:
- W-2 income
- Self-employment income
- Interest
- Dividends
- Capital gains
- IRA of 401K distributions
To find your Adjusted Gross Income (AGI), subtract ‘allowable adjustments’ such as student loan interest, HSA contributions, or contributions to IRA or 401K from your gross income. Next, add your tax-exempt interest (like municipal bonds) to the AGI. The final result is your MAGI.
Modified Adjusted Gross Income (MAGI) = Adjusted Gross Income (AGI) + Tax-exempt Interest
Adjusted Gross Income (AGI) = Gross Income – Allowable Adjustments
With this understanding of MAGI, you can put together a strategy to reduce it, if possible, in your retirement years to lower or even avoid the IRMAA. If you’re a more than a few years away from being Medicare eligible it may not make sense looking into how to lower your MAGI since IRMAA rates are adjusted every year.
How to Avoid Paying More For Medicare
Remember, your MAGI is impacted by the total of your required minimum distributions from your 401K or IRA accounts. If you want to avoid the IRMAA, pull less from your 401K or IRA, since that income counts toward your MAGI.
However, avoiding these required minimum distributions altogether could incur a tax penalty, so strategic planning is essential. Ultimately, seeking professional advice for your unique situation is often the best way forward.
If you believe your IRMAA has been incorrectly applied, you can also appeal your IRMAA.
Preserve Your Retirement Income with Medicare School
Understanding these details about Medicare and being proactive about planning your retirement income can potentially save you from a significant increase in your healthcare costs. To further minimize your healthcare costs into your golden years, give Medicare School a call or schedule an appointment with a Medicare guide. As Medicare brokers, we can help you compare multiple Medicare plans so you can find the coverage you need at the price that’s right for you.
You can learn even more about the costs associated with Medicare in our free, online Medicare workshop.