Medicare enrollees pay a monthly premium for “Part B,” which covers doctors’ visits, lab tests, surgeries and other costs, but higher-income retirees pay larger premiums for the same level of care.
“The base premium for 2015 is $104.90 a month but starts to go up for couples with income over $170,000 [$85,000 for single filers],” says Tim Steffen, Robert W. Baird's director of financial planning. “Once their income reaches $428,000, couples hit the maximum premium of $335.70 a month.”
If both spouses are on Medicare, both pay the higher premium.
Paying a few hundred dollars a month extra might not seem like a major concern for clients with such income. However, there are reasons for financial advisors to mention this issue.
“Part B premiums should be included in planning for clients approaching or enrolled in Medicare. Otherwise, advisors may hear from clients who want to know why their Social Security checks have suddenly been cut,” says Michael Repak, vice president and senior estate planner at Janney Montgomery Scott LLC.
“That’s often how this subject comes up, and explaining after the fact can be embarrassing,” he says.
Most Medicare enrollees have Part B premiums subtracted from their direct-deposit Social Security checks, so a rise in income could cause Social Security income to fall from, say, $3,000 to $2,800 a month.
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Moreover, the gap between normal and excess Part B premiums is likely to swell.
“For 2016 premiums, the Medicare trustees project premiums to range from $159.30 to $509.80 a month, a 52% increase,” Steffen says.
“However, if there is no inflation adjustment to Social Security for 2016 [some projections show that could be the case], that 52% increase in total premiums would have to be covered by just 30% of retirees” or those with high incomes, he says.
Also, the Medicare Access and CHIP Reauthorization Act of 2015, enacted last April, calls for even higher Part B premiums for seniors with high incomes, starting in 2018.
Part B planning comes with a two-year lag: Income in 2016, reported on a tax return filed in 2017, will determine the 2018 premium.
Converting a traditional IRA to a Roth IRA might be helpful, Steffen says.
“Income will spike in the year of conversion causing an increase in Part B premiums two calendar years later,” he says.
“Future Roth withdrawals, however, will not be considered, meaning premiums may fall dramatically in subsequent years and then stay low, Steffen says. “If someone does a Roth conversion at least two calendar years before beginning Medicare [typically at age 65], the conversion income will never have an effect on premiums.”
Donald Jay Korn is a New York-based financial writer who contributes to On Wall Street and Financial Planning.
This story is part of a 30-day series on retirement planning strategies.