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:
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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.
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