To the surprise of many retiring, Medicare isn’t free.
All my life I paid taxes to support the program. Plus, when you finally start using Medicare, you’ll have to pay more cash to cover monthly premiums, deductibles, and other costs.
And if you’re not careful, you could end up paying more than you expected. Medicare premiums can be higher for people with incomes above certain thresholds in old age.
Luckily, there are things you can do to reduce your chances of high Medicare premiums.
Here are some steps you can take to keep your Medicare premiums as low as possible. These tips should not be considered tax or investment advice. Please consult a financial professional before using these strategies.
What is Medicare Part B IRMAA?
Before we talk about how to save, it’s important to understand how the Medicare Income Related Monthly Adjustment Amount (IRMAA) works for people with Part B and Part D coverage.
Medicare Part B covers outpatient care, including physician services, ambulatory hospital services, and durable medical equipment.
Millions of Americans pay standard premiums for this insurance. The price for 2023 is $164.90 per month.
But some people pay more.
Premiums are higher for individuals or couples who file separate federal income tax returns and earn more than $97,000. This also applies to married couples filing joint returns with incomes of $194,000 or more.
Those in this situation can pay a premium fee of $230.80 to $560.50 per month for Part B.
What is Medicare Part D IRMAA?
Medicare Part D covers prescription drugs for people with Original Medicare.
Part D premiums are based on income. If you fall into one of the following categories in 2023, you will also pay IRMAA between $12.20 and $76.40 per month for this coverage.
- Individuals and married individuals who file separate federal income tax returns with adjusted adjusted gross income (MAGI) greater than $97,000
- Married couples filing joint returns with MAGI of $194,000 or more.
For more information on how IRMAA works, see Multiple Medicare Costs Cut in 2023.
Now for how to save.
1. Be aware of your calendar
Most Americans qualify for Medicare the year they turn 65. But her income two years earlier was— at age 63 — Determine the amount of premiums to be paid during the first year of the program. That’s because governments usually Use previous year’s tax returns It determines Medicare premiums and its tax returns report data for the previous year.
This fact probably surprises many people. It may come as a shock to find out that you owe IRMAA because you retired at 65 and earned a lot of money from your job two years ago. See next slide for details.)
It helps to know this rule in advance Avoid IRMAAFor example, if you plan to retire early and convert your traditional IRA to a Roth IRA, we recommend doing so before you turn 63.
2. Ask the government to reassess your income
As mentioned above, your income in any given year determines your IRMAA two years ahead.
But what if your income has plummeted in the last two years? For example, it wouldn’t be fair that he would have to pay IRMAA based on his higher salary in 2021 if his income in 2023 was much lower.
Uncle Sam is aware of that fact and sometimes suggests a little “doing over”.
You can submit a form to Medicare asking the federal government to reassess IRMAA in light of a specific life-changing event that resulted in a sharp drop in income. Examples of such events include job stoppage, divorce, death of a spouse, and even loss of income property.
If that situation applies to you, stop by the Social Security Administration website and fill out the form.Medicare Income-Related Monthly Adjustments — A Life-Changing Event.“
3. Save for retirement with a Roth IRA or Roth 401(k)
If you’re still working, but sick of thinking about paying IRMAA in the future, consider building your retirement nest within a Roth 401(k) or Roth IRA.
When you tap a Roth IRA, you don’t pay taxes on withdrawals and they don’t show up as income on your tax return.In other words, this money not part of the calculation Used to determine if you owe IRMAA.
This means you can pull tens of thousands of dollars out of Ross in a year, but you still look poor in Uncle Sam’s eyes, like the famous proverbial church rat.
It is important to note that there may be good economic reasons not to take this approach. Some people may be better off with a traditional 401(k) plan and a traditional IRA during their tenure, even if it means paying his IRMAA upon retirement.
So before proceeding with a Roth-only approach, stop by the Money Talks News Solutions Center to find a good financial advisor who can provide you with the right guidance.
4. Sell loss-making investments to offset high income
We all want to make money in the stock market. But there are also years of investment failures, as many experienced in 2022.
In many cases, it makes sense to hold onto a losing investment in the hope that it will recover. However, in other situations it may be better to release the loser.
If we choose the latter approach, we can take advantage of these losses to offset your income Up to $3,000 per year on tax returns. If you’re approaching higher Medicare premium income thresholds, you may not have to pay his IRMAA for the year.
Selling your investment at a loss, even if it can help you avoid paying IRMAA, isn’t for everyone in every situation. But if you’re resisting selling losers, this perk might tip the scales.
Consulting a financial professional can help you determine if this approach is wise.
5. Donate from IRA to charity to reduce RMD income
Giving more money to charity also helps reduce income and keep IRMAA at bay. This technique is especially effective when donating directly from a traditional IRA. Fidelity Investments Summary:
“People over the age of 70 and a half can donate up to $100,000 directly from the IRA to charity and avoid paying income tax on distributions. This is known as qualified charitable distribution. This is limited to IRAs and is subject to other exclusions and considerations.”
If you’re old enough to pay the minimum required distribution, you can avoid paying taxes by donating that money to a worthy cause. Exclude RMD from calculation This will determine whether you have IRMAA obligations.
So if you have a generous heart, combine it with a wise one and donate to charity in ways that help lower your taxes and avoid IRMAA.
6. Explore Medicare Low Income Grants
The following tips won’t affect whether you pay for IRMAA, but they can help reduce the amount that goes toward your Medicare premium.
Some Medicare beneficiaries are covered by the government’s Extra Help program to help pay premiums, annual deductibles, and copays related to prescription drugs.
The Social Security Administration estimates that each beneficiary of this assistance will save about $5,300 annually.
You must have limited resources and income to qualify. Find out if you’re eligible on the SSA website.
7. Deduct your Medicare premiums from your taxes if you qualify
Medicare premiums are deductible on your tax return if both of the following apply:
- Itemize the deductions on your tax return.
- Subject to medical expense deduction. This allows him to deduct a portion of eligible medical expenses in excess of 7.5% of adjusted gross income.
You can also deduct other costs, such as deductibles and copayments. Dental, hearing, and vision costs not covered by insurance. medical equipment, etc.
National Tax Agency Publication 502, Medical and Dental Expensesto help define eligible expenses.
Another option if you have self-employed income Medicare premium deduction It should be listed as an expense on Schedule C.
8. Pay your Medicare premiums with HSA
None of the items on this list may prevent you from paying IRMAA. In that case, you may have to accept the pain of paying higher Medicare premiums.
However, if you’re still working, there’s one last way to alleviate the pain of IRMAA having to pay in the future.
Some financially savvy people spend their years of service donating to Health Savings Accounts (HSAs). People who are really on edge invest their money in the stock market. With any luck, they retire with accounts worth hundreds of thousands of dollars.
There is good news for those who think so. The federal government HSA pays many Medicare-related costsincluding premiums.
Withdrawing money from your HSA to pay your Medicare premiums will consume less cash than paying your premiums using a traditional IRA or 401(k) withdrawal.
why? Because the money comes out of the HSA tax-free. On the other hand, you must pay taxes on each withdrawal from a traditional IRA or 401(k).
Using tax-free HSA withdrawals to pay your Medicare premiums can save you significant money over time.