Medicare Surcharges: What They Are and How to Avoid Them
Did you know that the price for Medicare premiums is not set in stone for everyone? Many people are surprised to learn that there are Medicare surcharges for those who make over a certain amount in modified adjusted gross income.
What should you know about the potential of a Medicare surcharge for you, and how much should you expect to pay? Here’s what you need to know to plan ahead and minimize out-of-pocket spending on your Medicare premiums.
What are Medicare Surcharges?
One of the age milestones you’ll reach in the golden years of retirement is the ability to enroll in Medicare, which happens at age 65. Medicare Part A, which covers hospital services, is free. However, Medicare Part B premiums, which covers medical services, starts at $174.70 per month, per person in 2024.
But depending on how much taxable income you have post age 65 determines if you pay that amount, or if you’ll be assessed a “surcharge” on your premiums.
This is a part of the Income-Related Monthly Adjustment Amount (IRMAA) that was put in place back in 2003.
If you’re a high-earning individual who has significant taxable income from investment withdrawals and/or wages in retirement, you may face even higher premiums for your Medicare Part B insurance. In fact, it can more than triple your out-of-pocket spending on premiums to $594 per month, per person!
Higher taxable income can even impact the cost of your Part D plans for prescription drug coverage.
IRMAA is a surprise for many high-income individuals who may not have banked on shelling out more money for their health insurance coverage in retirement. Beneficiaries of Medicare can learn more about the surcharges in an update each November, but there are some ways you can eliminate or reduce your surcharges if you know where to look.
How Much is the Surcharge?
If you’re worried about paying up for Medicare coverage, start by understanding the income thresholds. They’re factored into your premium based on your modified adjusted gross income (MAGI). This includes all your income minus contributions to retirement savings accounts and other potentially tax-deductible expenses like alimony.
However, the cost of your surcharge isn’t one-size-fits-all for those who make above the amount indicated by the government. Instead, it’s based on a sliding scale with five different income brackets.
The starting bracket for the Medicare surcharge is $103,000 for a single individual in 2024. If you’re married, your MAGI should be less than $206,000 to avoid surcharges.
Here is a breakdown of the five income brackets for Part B premiums based on MAGI:
Here are the IRMAA surcharges for Part D premiums:
Common Exceptions
Nobody wants to receive that notice from Social Security that your income hit a threshold that indicates an IRMAA Medicare surcharge. The good news is some life events can eliminate these surcharges or lessen them. These events serve to lower your income and might give you some financial relief from surcharges.
Here are the life-changing events you might be able to claim:
Marriage, divorce, or annulment
Death of a spouse
Stopping or reducing work
Involuntary loss of income-producing property
No more pension income
Employer settlement payment after closure or bankruptcy
If you had a one-time spike in income (due to a house sale, for example), you can appeal to not have your premiums jump because of your change in tax bracket. These appeals are not always approved, but we always encourage clients to apply for them. Note that your appeal won’t be approved if you simply took more money out of your IRA in a single year. The request has to be reasonable. 🙂
You’ll need to fill out the Social Security SSA-44 form to notify the appropriate office of your life-changing event. You may have to provide proof and move quickly, generally in the first 60 days after receiving your bill for the IRMAA surcharge.
Even if you can’t eliminate the surcharge entirely, you may be able to get it reduced.
Tips to Reduce or Mitigate IRMAA
There are several ways you can reduce MAGI if you’re trying to get around the IRMAA premium imposed by Social Security. Here are some ways you can leverage your wealth and make a smart money move.
Charitable Donations: Giving money to charity makes a huge impact on your community while quickly lowering your MAGI. Plus, you can start a donor-advised fund with both cash donations or other assets and set yourself up for future charitable giving.
Reduce Capital Gains on Investments: Most people have a variety of assets in a diversified portfolio, but you can minimize your MAGI by selling funds with a higher cost basis, realizing a lower capital gain.
Track Your Income: By tracking your total income throughout the year, you can determine what to sell next based on the Medicare surcharge bracket that it could put you in (or keep you out of). Remember that selling in a non-retirement account often results in capital gains that put you in a higher IRMAA bracket.
Roth IRA Conversions: Another savvy money move to reduce IRMAA is to convert to a Roth IRA between the moment you retire and the day your Required Minimum Distributions begin between ages 73-75 depending on your year of birth for traditional IRAs or 401(k)s. Watch out though! Roth conversions add to your income so be sure to know how much you can convert before hitting a Medicare surcharge.
Stay In Control of Your Retirement Plan
After working for decades to build up your retirement savings, the last thing you want is to watch Medicare surcharges eat into your nest egg month by month. At Consilio Wealth Advisors, we specialize in wealth management for hard-working professionals who want to retire with confidence in their future. As fiduciaries, we act in your best interests…all the time. And our expert team of CERTIFIED FINANCIAL PLANNER™ professionals can help minimize the impact of taxes, fees, Medicare surcharges, and more.
If retirement is on the horizon for you, check in with us and craft a plan to make the most of your income without being hit with hefty IRMAA Medicare surcharges. Reach out to us today to learn more about how we can help you with your wealth planning.
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