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Medicare Isn't Free

Dana Anspach of Sensible Money explains the costs associated with Medicare including Part B and Part D premiums and the income-related monthly adjustment amount or IRMAA.

Contrary to popular opinion, Medicare isn’t entirely free.

In a video interview, Dana Anspach, the founder and president of Sensible Money, explained the components of Medicare and the costs associated with Part B and Part D.

Medicare Part A, often referred to as hospital insurance, is free if you worked enough years in the U.S. to qualify. “Typically, if you're eligible for Social Security benefits, you're also eligible for Medicare Part A at no cost,” said Anspach.

Medicare Part B covers other services and supplies, and it has a monthly cost that varies depending on your income.

And there is Part D, for prescriptions, and it is free if your income is low enough, but it has a cost once your income exceeds various threshold amounts.

The Four Parts of Medicare

The Four Parts of Medicare

The standard Part B premium amount in 2022 is $170.10. And most people pay the standard Part B premium amount, according to Medicare.gov.

However, if your modified adjusted gross income (MAGI) as reported on your IRS tax return from two years ago is above a certain amount, you'll pay the standard premium amount and an income-related monthly adjustment amount (IRMAA). IRMAA is an extra charge added to your premium.

“Like so many things associated with retirement, it's more complicated than you may think,” said Anspach. “First, the Social Security office references your tax return data from two years prior to determine your premium level, so if 2022 is your first year enrolling in Medicare, they will use data from your 2020 tax return.”

Anspach gave this example: Let's assume you are turning 65 in 2022, and your MAGI from 2020 is below $91,000 if single/$182,000 if married filing jointly; in this case, your Part B premiums are $170 per month and Part D will be free. (Your MAGI is calculated by adding back any tax-exempt interest income to your adjusted gross income (AGI).)

Now, if your MAGI exceeds additional threshold amounts, your premiums will be higher. “This is referred to as means testing and is technically called the IRMAA. You are notified of your premium amounts via a letter from the Social Security office called your Initial Determination Letter, said Anspach.

As an example, she noted that singles with MAGI greater than $142,000 or marrieds greater than $284,000 will pay $442 per month for Part B and $52 per month for Part D.

The largest premiums of $578 for Part B and $78 for Part D apply to MAGI greater than $500,000 for singles and $750,000 for marrieds.

Now if you are not yet enrolled in Social Security, you will receive a quarterly invoice for these premiums, said Anspach. But if you are enrolled in Social Security, the premiums are deducted from your monthly Social Security payment.

Part B premiums

Part B premiums

Requesting a new initial determination

Anspach also explained how beneficiaries can request a new initial determination from the Social Security Administration. There is a list of life-changing events that affect MAGI, and your situation must be on the list to make this request, she said.

For instance, you are eligible to request a new initial determination if your MAGI goes down at least one range in the table above because:

  • you married, divorced or became widowed, or your marriage is annulled,
  • you or your spouse stopped working or reduced work hours,
  • you or your spouse lost income-producing property due to a disaster or other event beyond you or your spouse's control,
  • you or your spouse experienced a scheduled cessation, termination, or reorganization of an employer's pension plan, or
  • you or your spouse received a settlement from an employer or former employer because of the employer's closure, bankruptcy, or reorganization.
  • You have an amended tax return for your determination year (which would be 2020 if you are enrolling in 2022), and your MAGI from your amended tax return is lower than the MAGI we received from the IRS.

If your request for a new initial determination is denied, Anspach said you have 60 days to file what is called an appeal using form SSA-44. The letters you receive will give you the details on when and how to appeal.

There are three ways to get form SSA-44:

Read Appealing a higher Part B or Part D premium (IRMAA) and Initial IRMAA Determination.

IRMAA and one-time events

What about Medicare beneficiaries whose IRMAA is based on a one-time event that happened two years ago?

Anspach gave the following examples.

  • Let’s say you did a Roth IRA conversion in 2020 and it pushes your MAGI into a higher threshold. Two years later, now in 2022, you will pay larger Part B and D premiums for one year. “Now, I've seen people forego the Roth conversion because of this, but in many cases, when we do an analysis that factors in this cost, it still makes sense to do the Roth conversion,” she said. “So, I wouldn't automatically pass on a Roth conversion just to avoid an IRMAA increase.”
  • You sold a property or business in 2020. This does not qualify for an exception, and you will be subject to the increase. But suppose in 2021, your income is below the thresholds? When you get to 2023 your premiums will go back down.

RMDs and IRMAA

The IRMAA affects about 5% of the 61 million Medicare beneficiaries. And among those 3 million beneficiaries are those households with large balances in their IRAs and 401(k) plan who are subject to required minimum distributions (RMDs).

“When you have large balances in IRAs and 401(k)s, and your RMDs begin, now at age 72, this additional income pushes many people into these higher threshold amounts, even if they only paid the basic amounts before,” said Anspach. “This can become yet another factor in considering Roth conversions in the age 60 - 72 age range. When done right, if you can convert enough to Roth IRAs, and lower your RMD, it may keep you in a lower Medicare premium bracket for many years once you are age 72 and beyond.”