Lower Your Medicare Premiums: 4 Important Strategies to Know
Medicare is a national health insurance program administered by the Centers for Medicare and Medicaid Services (CMS) that helps Americans over the age of 65 and some people with disabilities offset various medical expenses, including hospital visits, skilled nursing facility care, medical supplies, and prescription drugs. These expenses are split into three groups: Part A (hospital insurance), Part B (medical insurance), and Part D (prescription drug coverage).
In 2024, most people enrolled in Medicare Part B pay at least $174.70, which is the standard monthly premium. However, those who earn more than $103,000 in modified adjusted gross income (MAGI) have to pay additional monthly charges, as do couples who earn more than $206,000. Married or common law couples with a MAGI exceeding $750,000 have to pay an additional $419.30 in monthly charges.
In addition to these premiums, those enrolled in Medicare may also have to pay a monthly surcharge on Parts B and D expenses known as Income-Related Monthly Adjustment Amount (IRMAA). Below is a quick review of IRMAA and strategies to reduce this surcharge.
How IRMAA Affects Monthly Medicare Premiums
Congress introduced the IRMAA provision in 2003 to address the financial viability of the Medicare program. Today, Medicare enrollees pay the monthly surcharge based on their MAGI from tax filings two years prior — for example, an individual who claimed more than $500,000 in income must pay an additional $578.30 monthly premium for Part B, which covers outpatient care. These limits are strict, meaning that even those who are $1 over the tax return thresholds can pay hundreds or thousands of dollars more in Medicare costs per year.
While the CMS ultimately decides how much more money higher-earning Medicare enrollees must pay each month, the Social Security Administration (SSA) determines who makes these payments and sends out letters to those subjected to the surcharges. IRMAA charges can be appealed under certain conditions, but it’s important to take a proactive approach in mitigating these costs. Individuals and couples can avoid or minimize IRMAAs through various tax and investing strategies.
Utilize Roth IRA Accounts
Roth IRA accounts have some drawbacks compared to traditional IRAs or 401(k) accounts, most notably upfront taxation on all contributions. However, while you’ll pay a little more when contributing to the account, you’ll benefit from tax-free income withdrawals in later years, as long as the account has been open for at least five years and the owner is at least 59.5 years old. Moreover, being in a lower tax bracket can help lower IRMAA surcharges.
IRAs and 401(k)s also both have required minimum distributions (RMDs) beginning at age 72, meaning account holders are required to withdraw a certain amount of money each year determined by their age and total balance of their account. These withdrawals could boost taxable income enough to push the account holder into one of the IRMAA brackets. Roth IRAs, however, are not subject to RMDs. Using a multi-year ROTH conversion strategy could position you for much more tax-free income and possibly lower average future Medicare premiums as well.
It’s worth noting, however, that any money converted from an IRA or other qualified tax deferred account to a Roth IRA is considerable taxable income and can affect IRMAA in the years following the conversion.
Smartly Manage Capital Gains
Capital gains and dividends from mutual funds, which are often unexpected year-end expenses for investors, are both included in the IRMAA calculation. Holding exchange-traded funds (ETFs) as opposed to mutual funds is a good strategy to help lower taxable income due to the way they’re structured.
“With mutual funds, you don’t have a whole lot of control because they have to pass the gains on to you,” noted Barbara O’Neill, a certified financial planner and CEO of the financial education company Money Talk, in an interview with CNBC. “The problem is you don’t know how big those distributions are going to be until very late in the tax year.”
The sale of individual assets, such as stocks or other investments in a brokerage account, can also help minimize taxable income and potentially reduce IRMAA surcharges. Tax-loss harvesting, for example, is a way to offset losses or reduce gains in the sale of other assets. Investors can subtract as much as $3,000 each year from their regular income if losses from their brokerage account transactions exceed capital gains.
Make Charitable Donations
Making charitable donations via an IRA is another way to lower taxable income and potentially decrease added IRMAA charges for Medicare. For people over 70.5 years old, all qualified charitable contributions (QCDs) from their IRA are directed tax-free to their nonprofit of choice and excluded from their income. Each person in a couple can donate as much as $100,000 per year in QCDs. This not only helps with IRMAA but can also offset RMDs.
Apply for an Exemption of Reduction
There are cases in which the SSA has erred in the amount of additional IRMAA charges people have to pay, either because of inaccurate tax returns or outdated information. Similarly, individuals can ask for a review of their IRMAA charges due to life-changing events, including a work stoppage, illness, divorce, or death of a spouse. This can be done by filling out Form SSA-44 (“Medicare Income-Related Monthly Adjustment Amount — Life-Changing Event”).
