How Your Income Can Affect Your Medicare Premiums

How Your Income Can Affect Your Medicare Premiums

Healthcare costs are an important factor to consider when creating your retirement income plan. You want to ensure that these expenses are properly accounted for. However, these costs can potentially be affected by your income in retirement.

Some higher-income retirees may have to pay more for their Medicare Part B and Medicare Part D prescription drug coverage. This is due to something called the Income-Related Monthly Adjustment Amount (IRMAA).

Understanding IRMAA

The Income-Related Monthly Adjustment Amount (IRMAA) is an amount you may pay in addition to your Medicare Part B or Part D premium if your income is above a certain level. The income used to determine IRMAA is a form of Modified Adjusted Gross Income (MAGI).

It is different from your Adjusted Gross Income because it includes tax-exempt interest income. The 2021 annual modified adjusted gross income thresholds are $88,000 for single filers and  $176,000 for joint filers.

If your income falls above these thresholds in a given year, you are subject to the additional IRMMA surcharge in two years. For example, this year’s IRMAA surcharges are based on 2019 federal tax returns. 

Modified Adjusted Gross Income (MAGI) Formula Used by the IRS:​

(MAGI) = Adjusted gross income​ + Tax-exempt interest​ income

For those with income above the annual thresholds, the Part B premium ranges from $207.90 to $504.90. The Part D premium ranges from $12.30 to $77.10 in addition to your plan premium. The chart below shows the costs of the monthly premiums per individual.

Source: Centers for Medicare & Medicaid Services, 2021

Income-Related Monthly Adjustment Amount Example

For example, a married couple (filing jointly) has $5,000 interest income, $20,000 dividend income, and $5,000 tax-free interest; $105,000 of IRA income; and $50,000 annual Social Security benefits (of which only 85 percent, or $42,500, is considered taxable in the formula for modified adjusted gross income) for a total annual income of $185,000.

Their resulting modified adjusted gross income is $177,500, which is over the $176,000 income threshold for joint filers, and they could be subject to increased Part B and Part D premiums in two years*.

Based on the 2021 figures, this would increase their Part B premium by $59.40 per month, and their Part D premium by $12.30. This would result in a total premium increase of $860.40 per spouse for that year.

As you can see from this example, the increased premiums can be costly. Depending on your current circumstances there may be opportunities to reduce or avoid them.

Avoiding IRMAA with Tax-Free Income

This could be done by reducing your modified adjusted gross income. One way to do this is by replacing some of your traditional IRA income with tax-free Roth IRA income.

Going back to the previous example we can illustrate how the use of a Roth IRA may help reduce (and possibly avoid) the IRMAA surcharges on Medicare insurance premiums. In this new scenario, the couple has reduced their traditional IRA income to $100,000 and added $5,000 tax-free income from a Roth IRA. 

As a result, they would not be subject to the premium surcharges in two years. Their Roth IRA income is excluded from the MAGI formula, and thus their income is only $172,500, which is below the $176,000 threshold for IRMAA*.

Understanding how IRMAA surcharges can potentially increase your healthcare costs in retirement allows you to explore strategies to manage your income in retirement. Depending on your mix of tax-deferred, tax-free, and taxable assets, you may have the flexibility to control your income in a given year.

The sooner you can create your retirement income plan, the greater the potential options you will have available to you. 

*These hypothetical examples are used for illustrative purposes only. Actual results will vary.

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