What is the Medicare Premium Surcharge, and How Do I Avoid It?
Upon turning age 65, most people qualify for Medicare Parts A, B and D. We generally recommend that our clients select traditional Medicare and not the Medicare Advantage program (more on this next month). We tell our clients that the best birthday card they will ever receive is when they turn 65 and get their Medicare card!
The Medicare premium for Part B, which pays for doctors’ visits and outpatient services, increased 14.5% in 2022 to $170.10 for most seniors. Seniors subject to the high-income surcharge will pay from $238.10 to $578.30 for payment each month if they have high adjusted gross income two years earlier. You are subject to a Medicare premium surcharge in 2022 if your modified adjusted gross income in 2020 exceeded $91,000 for a single person and $182,000 for a married couple filing jointly.
The Medicare premium is based on your “modified adjusted gross income” from two years ago. However, if you can show that a “life-changing event” will lower your current income, you can reduce your current premium surcharge. This may be because (1) you and/or your spouse are retired and your income is lower, (2) your spouse has died, (3) you have gotten a divorce, or (4) your previous income was higher because of a sale of a farm or business.
What if you decide to do a Roth conversion, or to take a large IRA distribution? Unfortunately, the decision to convert funds from a regular IRA to a Roth IRA, or to take a large, income-taxable IRA withdrawal is not a “life-changing event.” However, Social Security analyzes your income every year (but has a two-year delay for Medicare surcharges). This means that a one-time conversion to a Roth or a large IRA withdrawal won’t result in a surcharge for more than one year.
You will receive a notice from Social Security of a proposed surcharge, based on your higher adjusted gross income. You can, and should, appeal this surcharge using form SSA-44 if you have had a drop in income. If you just retired, send in a letter from your employer stating you have retired and your tax return for the prior year (remember the two-year lag before the surcharge happens). When your income is lower because of the death of a spouse (especially the higher income spouse, based upon lifetime earning records) send in a copy of the death certificate.
Here are some other handy tips to avoid a surcharge:
- Instead of doing one large conversion to a Roth, spread it out over several years.
- Take advantage of charitable gifts from your IRA if you are over 72, thereby receiving a qualified charitable distribution so your IRA minimum required distribution does not increase your modified adjusted gross income.
- Continue contributing to a 401(k) or other retirement account to reduce your adjusted gross income if you have earned income. Please remember you can now fund a retirement account each year after age 70 if you have employment income.
Keith P. Huffman