From Barron’s — By Elizabeth O’Brien —
Planning for your Medicare premiums isn’t on most preretirement checklists, but it’s an important consideration for those with higher incomes.
Your Medicare premium for a given year is based on your income from two years prior—typically from the last tax return on file. Since you know that in advance, there could well be opportunities to head off some income-based surcharges down the line.
First, it helps to understand how these extra costs work. For 2024, most beneficiaries pay the standard Part B premium of $174.70 a month. Individuals with 2022 modified adjusted gross incomes, or MAGI, over $103,000 and married couples filing jointly with incomes over $206,000 pay what’s known as an “income-related monthly adjustment amount,” or IRMAA.
There are five income tiers above the standard bracket, topping out at a monthly premium of $594 per month for individuals making $500,000 or more and couples making $750,000 or more. For example, moving from the third tier to the fourth, which starts above $193,000, raises your monthly premium to $559.00 from $454.20. (There’s also an income-related surcharge for Part D premiums, covering prescriptions, even for beneficiaries who opt for a Medicare Advantage plan with drug coverage.)
Note: While adjusted gross income, or AGI, has a fixed definition, modified adjusted gross income can vary by context. Your MAGI for Medicare purposes isn’t the same as your MAGI for determining the 3.8% net investment income tax, for example. Your Medicare MAGI is your adjusted gross income (found on line 11 of the Form 1040), plus tax-exempt interest income (found on line 2a of the Form 1040).
If your MAGI is on the edge of a bracket, you could save thousands of dollars a year if you can prevent it from going over.
Income Tiers for Medicare Part B Premiums *
*2022 MAGI
Source: Centers for Medicare & Medicaid Services
“Miss it by five cents and you’re sunk,” says Steve Parrish, professor of practice at the American College of Financial Services.
The government calculates your MAGI every year, and many retirees move IRMAA brackets annually depending on their circumstances, advisors say. The income thresholds are adjusted upward for inflation every year, and since you won’t know those dollar amounts well in advance, a conservative approach would be to plan around the current levels.
Many affluent retirees see their income rise in their early 70s, when the government requires them to start withdrawing money from their traditional retirement accounts and paying income tax on it. One way to lower your required minimum distributions is to convert your traditional accounts to posttax Roth accounts before the required minimum distribution requirement kicks in, currently at age 73. You will owe income tax on the amount converted, but if you do it between the time you retire and age 73, you may be in a lower tax bracket.
Another option available to those age 70½ and older is to donate to charity through a qualified charitable distribution of up to $100,000 a year. This money goes directly from your individual retirement account to a nonprofit organization and never hits your adjusted gross income, says Mike Piper, a certified public accountant in St. Louis.
Those who have seen their income decline due to a life-changing event like retirement or the death of a spouse can appeal to have their IRMAA based on their current income by filing a Form SSA-44 with a Social Security office.
While many IRMAA strategies focus on lowering your income, they can also involve bunching your income-generating activities into one year. For example, maybe you’re planning to sell your longtime home or business and realize considerable capital gains, which will raise your income and bump you into the next IRMAA bracket.
“It almost never makes sense to go $100 past [the bracket]” Piper says. Instead, consider selling appreciated stock, taking a big IRA distribution, or making other moves that will increase your income until you’re just shy of the next IRMAA tier. You’ll pay more in Medicare premiums in two years but potentially save yourself surcharges in subsequent years.
Reach reporter Elizabeth O’Brien at elizabeth.obrien@barrons.com
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