Medicare 101
In 1965, Medicare was created as a part of the Social Security Act to provide medical insurance to people who are 65 or older, regardless of their medical history.
Prior to Medicare only 60% of Americans over 65 had medical insurance because it was much more expensive for aging adults.
Today, over 65 million individuals are covered by the plan which ultimately covers about half of all healthcare expenses for those who are enrolled.
The other half is typically covered by private insurance or by adding other plans to supplement base (Plan A & B) coverage.
Because private medical insurance costs are so high, the Medicare eligibility age of 65 sets a sort of artificial milestone for retirees.
Many Americans delay their retirement until they reach Medicare age or are very close to it so they can avoid having to bear all of the costs of medical coverage themselves.
And they are wise to consider this.
Individual medical coverage for an early retiree costs about $5,500 each year and family coverage averages around $14,000 annually.
Clearly, medical insurance is a considerable factor in any retirement evaluation. Ignore it at your own peril.
What Does it Cover?
There are four different plans within Medicare, each covering specific types of care or medical needs.
Medicare Part A
Part A is also known as hospital insurance and, as the name suggests, covers hospital visits but it also provides coverage for hospice care, skilled nursing facilities, and some home-based care options.
Part A coverage is automatic for anyone who receives Social Security benefits, but enrollment is available through the Social Security Administration’s website for those who don’t already receive benefits.
2024 Medicare Deductible and Copay Amounts are as follows:
Medicare Part B
Medicare Part B covers outpatient services like normal doctor visits, preventive services, ambulatory services, mental health care, and some medical devices.
Medicare Part C/ Medicare Advantage
Medicare Part C, also known as Medicare Advantage, is offered by private insurance companies and bundles Medicare Parts A & B (and usually D).
At a minimum, Part C providers must provide coverage that is at least equivalent to Medicare Parts A and B. Typically Advantage plans include Part D, lower out-of-pocket costs, and other benefits like dental, vision, and hearing care.
Medicare Part D
Part D helps cover prescription drugs and is also available as a part of Medicare Advantage.
How Much Does Medicare Cost?
The cost of the various types of Medicare plans depends on a number of factors.
For most Americans who have paid Medicare taxes while working, there is no additional cost for Part A (aside from the copays and deductibles listed above). However, if you worked and paid into Medicare for less than 10 years, you may have to pay a monthly premium for Part A coverage.
The standard monthly premium for Part B is $174.70, but your actual premium will depend on your income which I will discuss below.
Your monthly premium for Part B coverage could also be higher if you fail to sign up when you’re first eligible for Medicare benefits. For each year you wait to sign up for Part B after you are eligible, your premium will permanently increase by 10%.
The annual deductible for Part B is $240. After that, copay is 20% of the cost of services.
Pricing for Part C varies depending on the coverage purchased and out-of-pocket maximums in the plan.
According to the National Council on Aging, the average in 2024 is $18.50 per month, though premiums can be $200 per month or more.
Premiums for Medicare Part D also vary depending on which plan you sign up for and, like Part B, you pay a penalty if you fail to sign up when you are first eligible for coverage.
In the case of Part D, you’ll owe an additional 1% per month for each month that you delay coverage and it is a permanent increase in your premium.
Aunt IRMMA
I mentioned earlier that your actual monthly Medicare premiums are dependent upon your income.
The income-related monthly adjustment amount (a.k.a. “IRMMA”) is a surcharge placed on Medicare premiums for Parts B and D based on a beneficiary’s modified adjusted gross income (MAGI).
One quirky thing to keep in mind about IRMMA is the surcharge is based on your MAGI from two years prior, not the most recent tax year.
So, for 2024, your 2022 MAGI will be used to evaluate whether or not IRMMA applies to you. If your 2022 MAGI was below $103,000 as a single filer or $206,000 for a joint return, you don’t have to worry about IRMMA.
Calculating modified adjusted gross income is a bit tricky. First, you need to know your adjusted gross income (line 11 on Form 1014). Then, add back other sources of income like untaxed foreign income, non-taxable Social Security benefits, and tax-exempt interest.
And now for another IRMMA quirk…
MAGI for Medicare is calculated differently than it is for other tax issues like eligibility for Roth IRA contributions. I’m am not a licensed tax professional, so I am obligated to suggest you reach out to one for help calculating your MAGI if you care that much.
Personally, I wouldn’t worry too much about it because you don’t have to bother calculating your MAGI for IRMMA. The Social Security Administration will do that for you.
When you sign up, you’ll be charged the standard premium amounts. If IRMMA applies to you, you’ll receive a predetermination notice, which gives you an opportunity to push back if you feel there was an error in your calculation.
Later, you’ll receive an initial determination notice with instructions on how to how to dispute the calculation (again).
If you don’t dispute the calculation, your premiums will be withheld from your Social Security benefits. If you don’t receive benefits, you’ll get a bill with directions for submitting payment.
IRMMA Brackets & Income Planning
For your information, here is a table with the 2024 IRMMA surcharge brackets and premiums.
There are many people who intentionally limit withdrawals from retirement accounts or the amount of taxable income they realize, just so they can keep their IRMMA premiums low.
Since this could potentially save you around $5,000 per year per person, it’s not a bad idea. This is especially true if income is tight in retirement.
Personally, if you have a comfortable income and significant wealth, I’m not a huge fan of letting the IRMMA tail wag the income dog.
The reason is the annual savings are relatively insignificant if you have a high income or a large amount of wealth.
Sure, you could save $5,000 a year by limiting your realized income from $500,000 to $100,000. But if you have the level of wealth or income that would put you in that highest bracket, what would you be saving the money for?
And if your income is lower, your surcharge is even less meaning the payoff for placing restrictions on your income is less significant.
Ultimately, you’ve got to be 65 to enroll in Medicare. You’re not young anymore. It’s time to enjoy your wealth, not pinch pennies.
Additionally, you may have a great opportunity to do some Roth conversions which have the potential to save you far more over the remainder of your life than your monthly IRMMA premium.
Many times it’s penny-wise and pound-foolish to choose lower IRMMA premiums over conversions, especially if you have a large tax-deferred retirement account balance that will be subject to Required Minimum Distributions one day.
Be sure to keep all of these moving parts in mind as you evaluate income plans for your retirement.
