Medicare's Hidden Cost: Uncovering the Impact of Your Past Earnings
Are you aware of the potential financial implications of your income from two years ago? It's time to delve into the world of Medicare enrollment and uncover the secrets that could affect your retirement plans.
Medicare enrollment for 2026 is just around the corner, and here's a crucial question: Do you know the impact of your 2024 earnings on your Medicare journey? It's a complex topic, but one that could significantly influence your financial well-being.
The Medicare Surcharge: A Costly Surprise
Your taxable income from 2024 will determine whether you'll be facing the Medicare surcharge, also known as the Income-Related Monthly Adjustment Amount (IRMAA), in the coming year. If your income exceeds certain thresholds, you, as a Medicare or Medicare Advantage beneficiary, will be required to pay this additional fee on top of the standard premiums. And here's where it gets controversial: IRMAA isn't just for health coverage; it also applies to prescription drug coverage.
Medicare premiums are expected to rise sharply next year, potentially eating into the Social Security Cost-of-Living Adjustment (COLA) that many older Americans rely on. IRMAA can more than double your standard monthly health coverage premium and almost double your drug coverage premium. It's a painful reality, as John Jones, an investment adviser at Heritage Financial, puts it: "Medicare is taken out of Social Security, so it can be very painful. Social Security could do nothing but pay for Medicare."
The Growing Number of Surcharge Payers
Currently, only about 8% of Medicare enrollees, or 5.1 million people, pay the Medicare Part B surcharge. However, this number has been steadily increasing since the surcharge was introduced in 2007 to help fund Medicare. The Medicare Trustees Report predicts that the number of people paying IRMAA will rise to 8.6 million by 2034. Similarly, the number of Americans paying the Part D drug plan surcharge is increasing, with forecasts suggesting it will reach 7.7 million by 2034.
Understanding IRMAA Income Thresholds
While the IRMAA income thresholds for 2026 haven't been finalized yet, the Medicare Trustees Report provides some estimates. In addition to the expected standard $206.50 monthly Medicare premium and various plan premiums for prescription drug coverage, high earners can expect to pay the following IRMAA amounts:
- Individuals earning $109,001 to $137,000 or couples filing jointly with income of $218,001 to $274,000: $82.60 monthly for health coverage, plus $14.50 for drug coverage.
- Single filers with income between $137,001 and $171,000 or joint filers between $274,001 and $342,000: $206.50 more monthly, and $37.50 for prescription drug coverage.
- Individuals earning $171,001 to $205,000 or joint filers between $342,001 and $410,000: an extra $334.40 each month, plus $60.40 for prescription drug coverage.
- Single filers with incomes of $205,001 to $500,000 or couples filing jointly between $410,001 and $750,000: $454.30 monthly IRMAA, and $78.60 for prescription drug coverage.
- Individuals earning at least $500,001, or joint filers earning at least $750,001: $495.60 more per month plus $85.80 for a prescription drug plan.
Avoiding Medicare Surcharges: Planning for Retirement
Many Americans, focused on saving for retirement, often overlook IRMAA and end up with unpleasant surprises. Michael Chuah, an attorney at Paxterra Law, emphasizes the importance of planning: "People need to plan. Since IRMAA is a two-year lookback, what you do today affects what premiums look like tomorrow."
The ideal retirement plan involves saving throughout your life. This includes beginning with allowances as a child, maximizing retirement plans and company matches as an adult, and taking advantage of lower-income years during life events like layoffs or staying home to have children to do Roth conversions.
Roth conversions, which move money from traditional pre-tax accounts to post-tax Roth accounts, can help keep future income lower and reduce IRMAA. However, it's crucial to plan strategically, as amounts converted from tax-deferred retirement funds into Roth accounts count as taxable income. Conversions also require cash to pay taxes at the time of conversion.
As you approach retirement, asset location becomes critical. Nick Bour, the chief executive of Inspire Wealth, suggests contributing up to 1/3 of your money to Roth accounts before retirement and considering Roth conversions early in retirement when income is lower.
Early Planning for Flexibility
Early planning allows for more flexibility in managing your tax brackets throughout adulthood. For example, if your individual income is $70,000 and your marginal tax rate is 22%, you can "fill up" your 22% tax bracket by doing enough Roth conversions to reach but not exceed the next tax bracket, which starts at $105,700 in 2026.
Starting Late? It's Not Too Late
If you're already approaching age 65, when you can enroll in Medicare, it's not too late to take action. Advisers suggest working less to lower your income and doing some Roth conversions if you can afford it. While a year or two might not be enough time for major shifts, you can still mitigate IRMAA through retirement planning.
You can also consider a more aggressive approach, as Bour suggests: "If you can't avoid IRMAA, then shorten the time you pay it" by doing most of your Roth conversions in a couple of years and paying IRMAA for only a short period.
Another option is to appeal IRMAA. Life-changing events like marriage, divorce, the death of a spouse, loss of income, or an employer settlement payment that reduces your household income may qualify you for a reduced surcharge, according to the Social Security Administration.
Final Thoughts and a Call to Action
Medicare enrollment and the associated surcharges are complex topics, but with the right planning and understanding, you can navigate these financial challenges. Have you considered the impact of your past earnings on your Medicare journey? What steps are you taking to ensure a financially secure retirement? Share your thoughts and experiences in the comments below, and let's spark a conversation about this important topic.
