Medicare – health insurance that kicks in at 65 — is not free. Nor are premiums fixed. You can unwittingly send your Medicare Part B premium – the part that covers certain doctors, outpatient care and preventive care — sky-high by poorly planning your income beginning at age 63.
Here are five financial moves you have control over that are likely to increase your Medicare premiums for a full year:
Converting your traditional IRA or 401(k) to a Roth IRA
Selling your business
Turning company stock options into cash
Selling your home and having a large capital gain
Taking an extra-large withdrawal from your retirement account
Medicare part B premiums are determined by the income you had two years ago, so your 2019 income determines your 2021 premiums, and your income this year will determine premiums in 2023. The good news is that these increases in Medicare Part B premiums aren’t permanent.
There are currently six income brackets (three for married couples filing separate returns). Those earning up to $88,000 a year ($176,000 for a couple filing jointly) pay the lowest rate of $148.50 each month per person.
But individuals who earned at least $500,000 in 2019 or couples who earned $750,000 or more in 2019 and filed jointly are paying $504.90 per person each month – more than triple the base rate.
Because the premium can vary by as much as $356.40 a month, this means that you save over $4,200 a year with good planning — and double that for a couple.
You may want to consider these numbers when making big financial decisions that generate a lot of income. Your accountant, Certified Financial Planner or investment advisor may have suggestions on ways to save on taxes and Medicare premiums.
For example, a person could opt to do a Roth conversion in the same tax year as selling a business. That might push Medicare premiums to the limit for one year – but if the two transactions were done in separate years, the premium could be elevated twice. Of course, your tax rate might be higher by combining the two in one year, but Medicare premiums should be part of your decision process.
Remember that distributions from a traditional IRA or 401(k) are taxed as regular income, so cashing out your account to buy a dream retirement home also could boost your Medicare premiums for a year. Would it make more sense to get a mortgage and pay it off quickly? Or are the fees higher than the temporary bump in Medicare premiums? That’s something else to weigh in your decision making.
If you are 62 or younger, consider making your large financial moves now. By doing a Roth conversion in 2021 instead of the year you turn 63, for example, your premiums will be lower the first year you pay for Part B.
Equally, this is a great year to sell your home and downsize given that demand – and housing prices – are high. But if you’ll be on Medicare in 2023, be sure to set some of those capital gains aside for the additional premiums you will be paying then.
To be clear, these considerations only affect Part B premiums. Medicare Part A is free to those that have earned their 40 credits of work (either themselves or qualify through a spouse or ex-spouse, just like with Social Security). This “hospital insurance” covers hospital stays, surgeries, and long-term skilled nursing care.
Part B premiums don’t cover everything. Much like any insurance, there are deductibles and out-of-pocket expenses. And they do go up most years; in 2021, the monthly base premium rose $3.90.
However, to protect Social Security recipients from a decline in benefits due to a Medicare part B premium increase, there is a “hold-harmless” clause that prevents Social Security recipients from seeing their monthly Social Security benefit decline from year to year if there is a rise in Medicare premium costs. As long as you receive Social Security benefits and have your Part B premium deducted from your monthly benefits, you qualify for this provision of Social Security.
This rule protects by one estimation about 30% of Medicare members who do not pay the full $148.50 premium in 2016.
There’s one last decision you can make that can increase your Medicare premiums – and unlike these other cases, it’s permanent. It’s missing your sign-up deadline to sign up for Medicare through the Social Security Administration. That sign-up period is the three months before the month in which you turn 65, the month you turn 65 and the following three months – a total of seven months.
After that, each month that you qualify and do not join, you are subject to penalties that last the length of your enrollment. Overlooking this requirement when reaching age 65 could cost you for the rest of your life.
CD Moriarty is a Certified Financial Planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.