If you're of retirement age then you may be well aware of the fact that reaching Medicare eligibility can go a long way in helping with your healthcare needs, which happens to be one of the most expensive retirement related problems. The affordability and convenience of Medicare is one of the major benefits of turning 65 once you've made the necessary adjustments and selected from the various parts and plans. However, Medicare is based on a system of means testing surcharges. That means surcharges on the Medicare Part B and Part B premiums start to kick in if you earn over a certain threshold of income.
To add insult to injury, it is not a flat increase. In fact, the surcharges go up as your income level go up. In essence, the highest level tends to add hundreds of dollars in additional costs monthly. That adds up to thousands of dollars on a yearly basis. The good news is that by controlling your income levels, you can minimize or even avoid the Medicare Means Testing surcharge. However, this may be a bit easier to accomplish in early retirement. For example, if you have a large amount of money put away in a traditional tax-deferred 401(k) or IRA retirement account, you'll be required to take out minimum distributions when you reach the age of 72 or the age of 70.5 if you were born prior to July 1, 1949.
Required Minimum Distributions Explained
The Required Minimum Distributions, or RMDs for short, depends on a combination of the balance in your account, and your life expectancy as determined by the IRS. If you have more than one retirement account, you can take a distribution from each account or you can total your RMD amounts and take the distribution from that. RMDs for a given year must be taken by December 31 of that year, though you get more time the first year you are required to take an RMD.
If you're not sure whether to return the RMD or you need help with other retirement decisions, your financial advisor could help you figure out the best choices for your needs and goals. If you have multiple retirement plans such as a 401(k) and a traditional IRA you need to calculate RMDs for each plan separately. However, you can combine your RMDs and withdraw the total amount from just one plan or from any combination of the plans you own. You likely want to do this if it's more advantageous for you to draw down certain accounts or investments before others.
Facts To Know About RMDs?
If you don't own 5% or more of that company, you can delay making your first RMD until after you retire. Yet if you leave that company after you turn 72, you must start taking RMDs. You need to know RMD's are considered income, and could put you into an income bracket that requires Medicare Means Testing surcharges. The bottom line is that you may end up paying a large bill each month for your Medicare.
Medicare Surcharges Explained
Did you know that you paid into Medicare during your working years? In fact, approximately 15% of your paycheck was withheld for Social Security and Medicare taxes by the federal government during each pay period. However, all those years of taxes paid off now that you're of retirement age. In essence, you're receiving full health care for significantly less money than it cost you while you were working full time. Yet, Medicare alone probably won't cover all your healthcare related needs.
That's why most retired people also carry a Medicare Supplement. It fills the gaps in Medicare coverage but it does drive your monthly healthcare costs higher. In 2022, standard Medicare costs the average person $170.10, which is $21.60 more than it cost in 2021. The bottom line is that the federal government pays 75% of your costs for the Part B premium, and you are responsible for the other 25%. Keep in mind that you paid into this for decades out of your paychecks.
In addition, if your household income on your 2020 tax return is over $182,000 or $91,000 for a single person, you're required to pay Medicare surcharges along with your normal Medicare Premiums for Part B and Part D coverage. The Medicare Means Testing surcharges are also referred to as Income Related Monthly Adjustment Amounts, or IRMAAs for short. It should be noted that IRMAAs go back for two years and the social security administration will notify you if your income level triggers a surcharge.
If you happen to work right up until Medicare starts at the age of 65, your income from work may trigger the surcharge before your income becomes lower during retirement. However, there is a bit of good news on this front. You can request what is called a "new initial determination" in order to have the Social Security Administration reevaluate your surcharge. You must qualify based on the following situations:
1. An amended tax return since original filing
2: Correction of IRS information
3: Use of two-year-old tax return when SSA used IRS information from three years prior
4: Change in living arrangement from when you last filed taxes (e.g., filing status is now "married filing separately," but you previously filed jointly)
5: Qualified life-changing events such as work stoppage or illness.
Some Figures to Pay Attention To
Here's how the Medicare Means Testing surcharges break down for 2022 regarding how your modified adjusted gross incomes reported the previous two (2) years….
- In essence, you will pay $68 more per for Part B and $12.40 extra for Part D if you're married and earned $182,000 to $228,000 jointly or $91,000 to $114,000 as an individual.
- However, you'll pay an extra $170.10 monthly for Part B and $32.10 extra for Part D if you're married and earned $228,000 to $284,000 jointly or $114,000 to $142,000 as an individual.
- You'll pay an additional $272.20 per month for Part B and $51.70 extra for Part D if you're married and earned $284,000 to $340,000 jointly or $142,000 to $170,000 as an individual.
- You'll pay an extra $374.20 a month for Part B and $71.30 extra for Part D if you're married and earned more than $340,000 to $750,000 jointly or more than $170,000 to $500,000 as an individual.
Last but certainly not least, you'll pay an additional $408.20 monthly for Part B and $77.90 extra for Part D if you're married and earned more than $750,000 jointly or more than $500,000 as an individual.
How You Can Reduce or Avoid Paying Medicare Means Testing Surcharges
By enrolling in a Medicare Advantage Part C plan, or a Medigap policy, you may be able to reduce or even avoid paying Medicare surcharges. Most retired people are far better off having one of these additional policies in place in order to cover any gaps in their original Medicare policy anyway. The bottom line is that Medicare Means Testing surcharges are solely based on your tax return. That means it is possible to do a bit of tax planning to reduce, significantly reduce, and even eliminate paying any Medicare based surcharges.
For example, you could utilize any investment losses that balance your income, if your income happens to be higher this year based on a one-time gain. Of course, that one time gain may very well put you into a higher tax bracket that triggers the Medicare Means Testing surcharges. You could end up paying Medicare surcharges this year but can avoid paying any surcharges next year if your income is lower. The Medicare Means Testing surcharges are calculated on a yearly basis.
You should also work with a professional accountant to help you find ways to lower your Modified Adjusted Gross Income so that you can reduce or avoid paying Medicare surcharges.