Although it comes as a surprise to many reaching retirement, Medicare is not free.
Throughout your working life you have paid taxes to support the program. Additionally, once you finally start using Medicare, you’ll have to shell out more money to cover a monthly premium, deductibles, and other expenses.
And if you’re not careful, you might end up paying more than you expected. Medicare premiums can be higher for those whose income exceeds certain thresholds during their golden years.
Fortunately, there are things you can do to reduce your chances of having to pay more for Medicare.
Below are some steps you can take to ensure your Medicare premiums stay as low as possible. None of these tips should be considered tax or investment advice. Before using any of these strategies, consult a financial expert.
What is a Medicare Part B IRMAA?
Before we dive into ways you can save, it’s important to understand how Medicare’s income-related monthly adjustment amount (IRMAA) works for those who have Part B and Part D.
Medicare Part B includes 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 a lot more.
If you are an individual or couple filing separate federal income tax returns and earning more than $97,000, your premium will be higher. The same goes for a married couple filing joint taxes and earning more than $194,000.
In these circumstances, people can pay anywhere from $230.80 to $560.50 per month in premium costs for Part B.
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 any of the following categories in 2023, you’ll also pay an IRMAA of between $12.20 and $76.40 per month for this coverage:
- Individuals and married individuals filing separate federal income tax returns with a modified adjusted gross income (MAGI) greater than $97,000
- Married couples filing joint statements with a MAGI greater than $194,000.
For more information on how an IRMAA works, see Multiple Medicare Costs Set to Decrease in 2023.
Now for the savings.
1. Make sure you are aware of the calendar
Most Americans qualify for Medicare the year they turn 65. However, the income you earn two years earlier – at age 63 – will determine how much you pay in rewards 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 return reports data from the previous year.
This fact probably surprises many people. It can come as a shock to retire at 65 and learn that you owe an IRMAA because you made a large income at work two years earlier. (Although there is a way around this – see the next slide for details.)
If you are aware of this rule in advance, you can avoid the IRMAA. For example, if you are retiring early and planning to convert your traditional IRAs to Roth IRAs, you may want to do so before you turn 63.
2. Ask the government to reassess your income
As previously mentioned, your income in a given year will determine your IRMAA two years into the future.
But what if your income has fallen sharply in these two years? For example, it hardly seems fair that you would have to pay an IRMAA based on a high 2021 salary when your 2023 income is much lower.
Uncle Sam is aware of this fact and in some cases offers a sort of “overhaul”.
You can submit a form to Medicare asking the federal government to reevaluate your IRMAA in light of certain life-changing events that severely reduced your income. Examples of such events include a work stoppage, divorce, the death of a spouse, and even the loss of an income asset.
If such circumstances apply to you, visit the Social Security Administration website and fill out the Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event form.
3. Save for retirement in a Roth IRA or Roth 401(k)
If you’re still working today – but are queasy about paying an IRMAA in the future – consider building your retirement in a Roth 401(k) or Roth IRA.
When you tap a Roth IRA, you pay no taxes on your withdrawals and they don’t appear as income on your tax returns. This means that this money is not part of the calculations used to decide whether you owe an IRMAA.
That means you could withdraw tens of thousands of dollars from a Roth in a single year and still look as poor as the proverbial church mouse in Uncle Sam’s eyes.
It is important to note that there may be good financial reasons not to take this approach. Some people may be better off using traditional 401(k) plans and traditional IRAs throughout their working years, even if it means paying IRMAAs in retirement.
So, before proceeding with a Roth-only approach, stop by the Money Talks News Solutions Center and look for a good financial advisor who can give you sound advice.
4. Sell losing investments to offset high returns
We all hope to make money in the stock market. But as 2022 was a painful reminder to many of us, there are years when investments go awry.
It often makes sense to hold onto investments that have lost money in the hope that they will recover. But in other situations, it might be better if you let go of your losers.
If you choose the latter approach, you can use those losses to offset your income on your tax returns, up to $3,000 per year. If you’re close to the income limit for higher Medicare premiums, it’s possible that you could waive the obligation to pay an IRMAA for that year.
Selling investments at a loss isn’t right for everyone in every situation, although it will help them avoid paying an IRMAA. But if you’re not sure about selling losers, this advantage could make all the difference.
Talking to a finance professional can help you decide if this approach makes sense.
5. Donate to charity from your IRAs to reduce RMD income
Donating more money to charity can also help reduce your income and keep an IRMAA at bay. This technique is especially effective when your donation comes directly from your traditional IRA. Fidelity Investments summarizes:
“People age 70½ and older can donate 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’re of the age to make the required minimum distributions, donating the money to a good 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 smart mind and donate to charities in a way that will lower your tax burden and help you avoid an IRMAA.
6. Check out a low-income Medicare subsidy
The following tips won’t affect whether you pay IRMAA costs, but they can reduce how much of your money goes toward Medicare premiums.
Some Medicare beneficiaries are eligible for the government’s Extra Help program, which provides assistance with paying premiums, annual deductibles, and co-payments related to prescription drugs.
The Social Security Administration estimates that each beneficiary who receives this assistance will save approximately $5,300 in expenses annually.
To be eligible, you must have limited funds and income. Check the SSA website to see if you qualify.
7. Deduct Medicare premiums from taxes when eligible
Your Medicare premiums are deductible on your tax return if both of the following conditions are true:
- You state the deductions in your tax return.
- You are entitled to the Medical Expense Allowance, which allows you to deduct the portion of qualifying medical expenses that exceeds 7.5% of your adjusted gross income.
You can also deduct other expenses such as deductibles and co-payments; dental, hearing and vision expenses not covered by insurance; medical devices and more.
IRS Publication 502, Medical and Dental Expenses, helps define what expenses are eligible.
If you have income from self-employment, another way to deduct Medicare premiums is to list them as expenses 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’s the case, you may simply have to accept the pain of paying higher Medicare premiums.
However, if you’re still working today, there’s one last way to prepare to lessen the sting of any IRMAA you’ll have to pay in the future.
Some financially savvy people spend their working years investing in a Health Savings Account (HSA). Those who are really on the ball invest this money in the stock market. With any luck, they will 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 your HSA to pay for many Medicare-related expenses, including premiums.
Withdrawing money from an HSA to pay Medicare premiums results in you spending less money than paying premiums with withdrawals from a traditional IRA or 401(k).
Why? Because the money comes tax-free from the HSA. On the other hand, you have to pay taxes on every withdrawal you make from a traditional IRA or 401(k).
Over time, using tax-free HSA withdrawals to pay Medicare premiums could result in significant savings.