I was one of the early COVID movers, moving into my current home in June 2020. My wife was teaching kindergarten remotely, and my 2-year-old was finding new, dangerous ways to entertain herself. The space got very small, very fast.
As part of our move, I had all of our property and casualty policies reviewed. We decided to increase our auto coverage. Yes, the cost was higher, but the peace of mind was worth more than the additional premium—a classic cost-benefit analysis. However, paying a higher premium doesn’t always mean you’re getting more benefits.
If you are on Medicare and receive the dreaded income-related monthly adjustment amount (IRMAA) letter, there are four important things to know:
1. A Higher Premium Does Not Equal More Coverage
Unlike my auto example above, your premium doubling does not mean that you get more coverage. This may sound tongue-in-cheek, but it’s a crucial point. Your income from two years ago determines your Medicare Part B and Part D premiums. Unlike Medigap plans, Part B (physician coverage) and Part D (prescription drug coverage) of Medicare are the same for everyone. While your premium can change from year to year, your coverage will remain the same.
2. Your Premium Is Based on Gross Income (MAGI)
In today’s financial landscape, taxable income is more significant than gross income because it dictates our income tax bracket. Oversimplifying, our taxable income is our adjusted gross income minus “below-the-line” deductions. Adjusted gross income (AGI) is the total of our taxable sources of income, while Modified Adjusted Gross Income (MAGI) is AGI plus municipal bond income. It can be challenging, but not impossible, to reduce MAGI.
The way to effectively lower MAGI includes utilizing “above-the-line” deductions. Common examples are qualified charitable distributions (QCDs), self-employed retirement plan contributions (like IRAs and 401(k)s), and health savings accounts (HSAs) if you are in your 60s. However, each of these options comes with specific eligibility requirements that warrant discussion with a financial professional.
3. It’s Not Forever
Nothing is permanent, especially when it comes to Medicare premiums. These adjustments are typically one-year changes. As we approach the end of 2023, we are already considering premiums for 2025.
The inspiration for this discussion stems from many individuals who unwittingly paid more due to financial movements they made without realizing the implications on their Medicare premium. Common scenarios include selling a family home, converting funds from an IRA to a Roth IRA, or taking on consulting work that pushed them over income thresholds. Although it can be frustrating, the premium increase is accurate, though it may feel unfair; fortunately, it is only a temporary situation.
4. You Can Appeal
Additionally, you should consider appealing if you believe you’ve been charged too much. Too often, individuals pay higher premiums unnecessarily because they did not dispute the charges. Form SSA-44, also known as the life-changing event appeal form, specifies situations where an appeal is permitted. These include:
- Marriage
- Divorce/annulment
- Death of your spouse
- Work stoppage
- Work reduction
- Loss of income-producing property
- Loss of pension income
- Employer settlement payments
Planning for Medicare expenses is essential in retirement. While we often strategize to help clients avoid IRMAA, there are occasions when exceeding the threshold may be financially beneficial despite the increased premium costs. For example, this could relate to Roth conversions or decisions around selling assets like stocks or property.
Every financial decision in retirement creates a series of implications, often resulting in a domino effect. By becoming informed, the surprise of IRMAA can be significantly minimized.
Disclaimer
This article was written by and presents the views of the contributing author, not the iBestTravel editorial staff. You can check adviser records with the SEC or with the FINRA.
