Created in 1965, Medicare is the nation's premier government-funded health insurance program. Today, Medicare covers nearly 64 million Americans, or about 18% of the population — most of whom are retirees aged 65 and older.
Of these enrolled, about 56% — or 36 million individuals — participate in Original Medicare, the traditional fee-for-service health insurance program that's managed and administered directly by the federal government. Original Medicare consists of two parts, Part A and Part B.
Retirees who work and pay payroll taxes for more than 40 quarters (10 years) will qualify for premium-free Part A, the half of Original Medicare that provides coverage for inpatient hospital stays, surgeries, skilled nursing care, and other “big” healthcare services.
Though Medicare Part A isn't entirely free and still comes with other cost-sharing charges like deductibles and coinsurance, there are no monthly premiums associated with this portion of Medicare — hence its name.
Understanding Medicare Part B's monthly premiums
However, Part B works a bit differently. No matter how long you've worked, you'll still need to pay a monthly premium for this other half of Original Medicare. As usual, deductibles and coinsurance charges apply in addition to your monthly premium payments.
Medicare Part B complements Part A, paying for doctor's office visits, preventative care services (like flu shots, cancer screenings, and annual wellness visits), mental healthcare, clinical research, medical equipment, and other medically necessary outpatient services.
In 2022, the standard Part B premium is $171.10 per month, or $2,053.20 for the entire year. You become eligible for Medicare Part B when you turn 65, and the cost of the monthly premiums will be automatically deducted from your Social Security benefit payments. If you're not receiving Social Security yet, you'll receive a bill for your Part B charges instead.
All about the Income Related Monthly Adjustment Amount (IRMAA)
While most retirees will pay the standard Part B monthly premium, you will be assessed an additional Income Related Monthly Adjustment Amount (IRMAA) if you earn above a certain threshold. IRMAA surcharges are significant and can raise the cost of their premiums to as much as $578.30 a month, or $6,939.60 a year.
To calculate your income for IRMAA purposes, Medicare will calculate a variant of your modified adjusted gross income, or MAGI, using a two-year look-back window. They calculate your MAGI as adjusted gross income (AGI) plus tax-free interest income, which includes distributions received from funds like the Vanguard Tax-Exempt Bond ETF.
For instance, in 2022, your 2020 MAGI will be used to determine whether you will be assessed an IRMAA.
Luckily, if you're married and made under $182,000 (or are single and made less than $91,000) in 2020, you won't be assessed an IRMAA, and you will pay the standard Part B premium.
However, retirees should crucially note that because withdrawals from traditional IRA and 401(k) plans count as taxable income (and therefore increases AGI), such withdrawals will raise your income for Medicare purposes and put you in danger of being assessed an IRMAA surcharge.
On the other hand, because Roth contributions are made using after-tax dollars — and because qualified distributions are tax-free — withdrawals from Roth accounts will not raise your income for IRMAA calculation purposes.
For these reasons, if you have large traditional IRA or 401(k) account balances, you may want to consider performing Roth conversions or structuring 401(k) required minimum distributions (RMDs) in a manner that puts your income under the IRMAA threshold.
Part B's cost-sharing charges
Similar to Part A, Medicare Part B also comes with cost-sharing charges, including a deductible and a coinsurance split.
For 2022, the annual deductible is $233. You will have to meet your deductible before Medicare begins to cover anything. Unlike Medicare Part A, your Part B deductible is not calculated based on benefit periods, and you are instead charged a single deductible for the entire year.
After you satisfy your annual deductible, Medicare Part B will pay 80% of all subsequent costs for covered services, and you will be responsible for the remaining 20%.
For example, suppose that Jennifer is a retiree enrolled in Medicare Part B. She has not met her deductible for the year and recently incurred a $1,500 bill for a new wheelchair.
She will first pay a $233 deductible. Of the remaining $1,267, Medicare will cover 80% of the cost, or $1,013.60. Jennifer is billed the remaining $253.40, or 20%, in excess of her deductible. In total, her out-of-pocket costs for her wheelchair total $486.40.
If she were to then purchase a $500 CPAP machine in the same year, she would not owe another deductible. Medicare would cover 80% of the entire cost, or $400, while she would owe the remaining 20%, or $100.
All told, assuming Jennifer pays the standard Part B premium, her combined out-of-pocket costs (premiums, deductibles, and coinsurance charges) for the year would total $2,627.60.
While this is only an example, it illustrates that out-of-pocket costs under Part B alone can easily cost upwards of several thousand dollars a year. Thankfully, being aware of these costs is a big first step toward planning and budgeting wisely for all your healthcare needs in retirement.
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