Carla Fried: What you need to know about Medicare by age 63. Yes, 63
When their 65th birthday is approaching, most Americans begin seriously studying their Medicare options.
But few realize that financial moves made at age 63 can mean you will pay a higher monthly premium for Medicare Part B. It pays to plan way ahead.
Part B: Everyone needs it. Nearly everyone pays
Medicare Part B is insurance that pays 80% of the costs for outpatient care. Doctor appointments, tests, and outpatient treatment such as chemotherapy and dialysis. (Medicare Part A covers hospitalizations and on a limited basis will cover skilled nursing home care.)
The vast majority of Medicare enrollees pay a monthly premium for Part B coverage. (Low income households may qualify for state-run programs that help pay the Part B premium.)
The standard monthly premium for 2021 is $148.50 per person. And higher income households pay more.
IRMAA: A new retirement acronym to master
Medicare Part B premiums became means-tested beginning in 2007. The official Medicare term for the means-testing is Income Related Monthly Adjustment Amount, or IRMAA. Nutty acronym aside, it’s a tax based on income.
The standard $148.50 premium is for individuals with modified gross income, known as MAGI, below $88,000 or married couples with MAGI below $176,000 in 2021.
Make more, and you will pay more for Medicare Part B.
Individuals with income between $88,000 and $111,000 and married couples with income between $176,000 and $222,000 pay $207.90 per person, per month in 2021.
With income between $111,000 and $138,000 (individual) and $222,000 to $276,000 (married couple) the monthly per-person premium is $297, double the standard premium.
Premiums climb from there, topping out at $504.90 per person, per month for the very wealthy.
The widow tax
Granted, the $176,000 ceiling for married couples to qualify for the lowest possible premium is plenty high. But when one spouse dies, the surviving spouse will pay based on the individual income limits.
That can lead to a higher premium, right at a time when the surviving spouse is facing lower monthly income. That’s because surviving spouses are entitled to one Social Security benefit, not two.
Medicare MAGI used for calculating IRMAA
Throughout our maddening tax code there are instances where the rules are based on MAGI. There are different MAGI formulas for different programs. For purposes of figuring out your Medicare Part B premium, MAGI is your adjusted gross income (line 11 on the IRS Form 1040 for the 2020 tax year) plus any tax exempt (municipal) bond interest (line 2A on Form 1040). Add the two together and that’s your MAGI that will be used to determine if you will owe any IRMAA.
Medicare premium based on tax return from two years ago
When you decide to sign up for Medicare, the Social Security Administration needs to look at your federal tax return to figure out your MAGI. The way it works is that Social Security routinely checks your federal return from two years ago.
And that’s why every 63-year-old needs to get up to speed on things. The federal tax return you file at age 63 is going to determine your Medicare Part B premium at age 65.
This two-year look back happens every year. So when you are 70, your Medicare Part B will be based on the tax return you filed when you were 68. At 75, it’s going to be based on your age 73 tax return. Etc.
Keeping MAGI Part B premium lower
• Maybe delay signing up for Medicare. If you are still working at 65, with health insurance, and your employer has at least 20 covered employees, you can delay signing up for Medicare. But be very, very careful (work with someone with Medicare chops in HR) to confirm you are covered. (An important note for anyone who was laid off recently and has COBRA: If you are turning 65, you don’t want to delay signing up for Medicare. For an ex-employee using COBRA who is eligible for Medicare, the private insurer will presume Medicare is the “primary” payer. Translation: Your COBRA policy won’t cover claims, whether you have Medicare or not. All the insurer cares about is that you are Medicare-eligible.)
• Be careful with Roth conversions. With tax rates near historic lows, a popular tax strategy for people with sizable savings in traditional IRA accounts is to move the money into a Roth IRA. All money converted to a Roth counts as taxable income in the year you do the conversion. The payoff is that there are no required minimum distributions (RMDs) on Roth IRAs. (Once you turn 72, you must take RMDs from traditional IRAs and 401(k)s.)
Roth conversions can be a smart move, but once you hit 63, you want to be extra careful deciding how much to convert in any given year. It’s not just your tax bill for that year you need to manage. That taxable income is going to play into your age 65 Medicare Part B premium. And any conversions in other years could also impact your premiums. That’s not a reason to avoid conversions, but a reason to consider working with a financial planner to help figure out how best to manage a lot of income-related moving pieces in your 60s.
• Delay Social Security as long as feasible. If you retire in your 60s and can afford to wait until age 70 to start Social Security, academic research shows it pays to wait, assuming you do not have serious health issues.
That can help manage Medicare Part B premiums until age 70, because in many households, a portion of income from Social Security gets counted as taxable income. And that could cause your income to increase enough that your Medicare Part B premium will be greater.
“… Few realize that financial moves made at age 63 can mean you will pay
a higher monthly premium for Medicare Part B. It pays to plan way ahead.”