Are You Prepared for Higher Medicare Premiums?
Have you considered how your retirement savings could impact your Medicare costs? Many retirees are surprised to learn that their hard-earned savings can trigger unexpectedly high Medicare premiums. Could your 401(k) or IRA distributions push you into higher-cost brackets?
In this article, we’ll explore how required minimum distributions (RMDs) and other sources of taxable income can lead to increased Medicare premiums. More importantly, we will outline strategies, such as Roth conversions, Health Savings Accounts, and Qualified Charitable Distributions, to help you minimize these costs and protect your retirement income.
Understanding Medicare Premiums and IRMAA Surcharges
When planning for their clients’ retirement, most financial advisors tell their clients to utilize 401(k) accounts and IRAs to accumulate as much as possible in these tax-deferred accounts. Allowing these accounts to grow tax-deferred is a great way to save for a person’s secure retirement. However, accumulating a large 401(k) or IRA can come along with some unexpected consequences for clients during their retirement years.
One of those unexpected consequences can be higher Medicare premiums when clients start taking large distributions from their IRA accounts, especially after turning age 73, when they are met with taking RMDs (or required minimum distributions) from their IRAs.
How Medicare Premiums Are Calculated
Medicare charges premiums to participants in Medicare Part B, which covers doctor visits, and Part D, which covers prescription drug benefits. In 2024, the basic Medicare premium for Part B coverage was $174.70 per month, while the basic premium for Part D coverage varied depending on the prescription plan chosen. However, the Medicare premium charged to “high-income” individuals is substantially more than the basic $174.70 per month amount.
High income in this area of the tax law is defined as those taxpayers with MAGI (modified adjusted gross income) of more than $103,000 on the tax return of a “single” person or more than $206,000 on the tax return of a couple filing as “married filing jointly”.
For these high-income taxpayers, their Medicare premiums are subject to a surcharge known as an Income Related Monthly Adjustment Amount, or IRMAA for short. As the adjusted gross income on your income tax return continues to climb, the amount of the IRMAA (i.e., surcharge) continues to get larger.
IRMAA surcharges apply on a cliff basis. Reaching the first dollar of an IRMAA income level causes the full corresponding surcharge to apply to all premiums paid for the year.
Strategies to Minimize Medicare Premiums
1. Control MAGI Through Income Planning
Try to control your MAGI to minimize the Medicare surcharges. For IRMAA purposes, MAGI is defined as Adjusted Gross Income (AGI) with adjustments for some income that is exempt from federal tax, such as interest from state and local bonds (i.e., municipal bond interest). Medicare uses the MAGI reported on the federal tax return from two years ago in setting your Medicare premiums for the current year. For example, to determine whether someone will pay higher premiums for 2025, Medicare uses 2023 MAGI.
2. Utilize Roth IRA Conversions
Utilizing Roth IRA Conversions may help to minimize income in retirement years. Roth IRA conversions can help to reduce IRMAA surcharges during your retirement years as distributions from Roth IRAs are considered tax free, which can help to reduce your MAGI. However, making a large Roth IRA conversion in one year could push you into a higher income tax bracket for that year of conversion. Instead, you may want to consider making a series of partial conversions over a number of tax years to keep you in a lower tax bracket for each year.
3. Take Advantage of Health Savings Accounts (HSAs)
Consider using Health Savings Accounts (HSAs) in early years.You could make a deductible HSA contribution in your working years, then access your HSA tax- and penalty-free to pay for qualified medical expenses in retirement. These qualified distributions for medical expenses in retirement are not included in MAGI for purposes of determining Medicare premiums.
4. Use Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) may also be used to minimize income. For older clients (over the age of 70-1/2), QCDs may also be used to help reduce MAGI and, thereby, Medicare premiums.
Under the new tax law passed in December 2017, the standard deduction amounts have been increased whereby many clients will not receive any benefit from their charitable contributions because they will not be itemizing their deductions but taking the standard deduction instead.
With a QCD, an IRA owner who is age 70-1/2 or older can transfer up to $108,000 annually from their IRA to a charity tax free. A QCD can satisfy an IRA owner’s RMD for the year, and the RMD is never included in income at all, so it is not included in MAGI.
Take Control of Your Retirement Income
At the end of the day, retirees often face unexpected challenges when it comes to managing their Medicare premiums. The tax-deferred savings that helped build a secure retirement can also create unintended financial burdens if RMDs push MAGI above IRMAA thresholds.
If you’re ready to explore personalized strategies to minimize your Medicare premiums, contact the financial advisors at DHJJ Financial Advisors today.
About DHJJ Financial Advisors
DHJJ Financial Advisors is a Registered Investment Advisory Firm that has been providing asset management and financial planning services to its clients since 1988. For over 35 years, our team of dedicated investment advisers has worked closely with our clients to produce unique investment portfolios designed to meet their personalized needs. DHJJ Financial Advisors is affiliated with DHJJ Certified Public Accountants and Business Advisors. For more information, please visit our website, www.dhjjfinancial.com.
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by DHJJ Financial Advisors [“DHJJ”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information serves as the receipt of, or a substitute for, personalized investment advice from DHJJ. contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from DHJJ. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither DHJJ’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if DHJJ is engaged, or continues to be engaged, to provide investment advisory services. DHJJ is neither a law firm nor a certified public accounting firm, and no portion of the blog content should be construed as legal or accounting advice. A copy of the DHJJ’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.dhjjfinancial.com. Please Note: DHJJ does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to DHJJ’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a DHJJ client, please contact DHJJ, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
