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:
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
1. A higher premium does not equal more coverage.
Unlike my auto example above and pretty much every other type of insurance, your premium doubling does not mean that you get more coverage. This may sound tongue-in-cheek, but I don’t intend it that way.
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 changes from year to year, your coverage will remain the same.
2. Your premium is based on gross income (MAGI).
We live in a world where taxable income is more important 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. Modified adjusted gross income is AGI plus municipal bond income. Confused yet? The important takeaway is that it’s hard (but not impossible) to reduce MAGI.
The way to reduce MAGI is through “above-the-line” deductions. Our go-tos include qualified charitable deductions (QCDs), self-employed retirement plan contributions (IRA, 401(k), etc.) and, if you’re 63 or 64, a health savings account (HSA). All of these have specific requirements for eligibility that you’ll want to evaluate with a financial professional.
3. It’s not forever.
Well, I guess, nothing is… But with Medicare premiums, it is most definitely a one-year adjustment. As we do our 2023 end-of-year planning, we are considering 2025 premiums.
The inspiration for this article was a number of people who ended up paying more because they did something without realizing its impact on their Medicare premium. They sold their family home. They converted money from an IRA to a Roth IRA. They took on consulting work that took them over the income threshold(s). I often have to deliver the bad news that the premium increase is correct, though maybe not fair. The silver lining is that it is just for one year.
4. You can appeal.
And you probably should. Too often, I see people who paid higher-than-necessary premiums because they didn’t appeal when they could. Form SSA-44, aka the life-changing event appeal form, outlines very specific situations that allow you to appeal your premium. They are:
- Marriage
- Divorce/annulment
- Death of your spouse
- Work stoppage
- Work reduction
- Loss of income-producing property
- Loss of pension income
- Employer settlement payment
Medicare is an expense that needs to be planned for in retirement. While we sometimes go to great lengths to avoid the Medicare IRMAA for our clients, there are other situations where the benefit of going over the threshold outweighs the cost of the additional premium. That may be the case when doing Roth conversions. It also may be the case when deciding whether to sell a stock or a piece of property.
There is a domino effect to every financial move in retirement. I hope this keeps the dreaded surprise of IRMAA less of a surprise.
Related Content
- What You Must Know About the Different Parts of Medicare
- What You’ll Pay for Medicare in 2024
- Medicare Checklist: Avoid Costly Enrollment Mistakes
- 10 Things to Know for Medicare Open Enrollment
- Is a Medicare Advantage Plan Right for You?
-
Amazon Resale: Where Amazon Prime Returns Become Your Online BargainsFeature Amazon Resale products may have some imperfections, but that often leads to wildly discounted prices.
-
IRS Watchdog: Three Problems the IRS Must Address in 2025IRS The tax season is over, but new changes to the IRS can pose risks to your taxpayer experience.
-
Social Security's First Beneficiary Lived to Be 100: Will You?Ida May Fuller, Social Security's first beneficiary, retired in 1939 and died in 1975. Today, we should all be planning for a retirement that's as long as Ida's.
-
An Investment Strategist Demystifies Direct Indexing: Is It for You?You've heard of mutual funds and ETFs, but direct indexing may be a new concept ... one that could offer greater flexibility and possible tax savings.
-
Q2 2025 Post-Mortem: Rebound, Risks and Generational ShiftsAs the third quarter gets underway, here are some takeaways from the market's second-quarter performance to consider as you make investment decisions.
-
Why Homeowners Should Beware of Tangled TitlesIf you're planning to pass down property to your heirs, a 'tangled title' can complicate things. The good news is it can be avoided. Here's how.
-
A Cautionary Tale: Why Older Adults Should Think Twice About Being LandlordsBecoming a landlord late in life can be a risky venture because of potential health issues, cognitive challenges and susceptibility to financial exploitation.
-
Home Equity Evolution: A Fresh Approach to Funding Life's Biggest NeedsHomeowners leverage their home equity through various strategies, such as HELOCs or reverse mortgages. A newer option: Shared equity models. How do those work, and what are the pros and cons?
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the FairwayThink of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty MovesIf you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
