Medicare Income Planning in Retirement

Without smart planning, distributions from other sources of retirement income can drive up your Medicare costs. The author provides an explanation.

It’s important to keep your Medicare costs in check while taking distributions from your TSP, IRA’s and other retirement plans. This includes timing of Roth conversions too. Without smart planning for retirement, distributions from TSP, IRA’s and other plans can cause higher Medicare costs.

Medicare Basics

To understand how distributions can impact your Medicare costs, you need to understand some basics about how Medicare works.

Medicare was established in 1965 to provide a basic level of care for older people. (My philosophy now is that 65 is the new 45). When you reach age 65, you become eligible to enroll in Medicare. Below are the different parts:

  • Part A covers hospitalization, skilled nursing home and hospice care. It is free to anyone who has paid the Medicare payroll tax for at least ten years.
  • Part B covers doctor visits, lab work, x-rays, some preventative care and outpatient costs.
  • Part C provides Medicare Advantage plans, which are all-inclusive plans offered by private insurers. Details of paying for Part C vary by plan.
  • Part D was launched in 2006 and is Medicare’s prescription drug program.

Individuals can also purchase Medigap insurance plans to cover the gaps left in Medicare coverage.

Important Medicare Information for Federal Employees

Part A

I recommend enrolling in Medicare as soon as you are eligible at age 65, whether you are still working or not.

Part B

This is a tough decision for many federal employees because of the greater costs when combining premiums for Federal Employee’s Health Benefits (FEHB) and Medicare Part B. 

  • As an example, Blue Cross Basic and Medicare premiums for an individual are $3,542.88 a year, for a couple $8,010.72.
  • Medicare becomes the primary payor, and your physician may not accept Medicare.
  • “Means Testing” with Medicare Part B – $135.50 to $ 460.50 based on income from previous two years.
  • You are required to enroll in Part B if you are enrolled in TriCare

Part C

This is private coverage and is an option for an individual that does not enroll in Medicare to choose a private plan instead.

Very rarely do federal employees enroll in Part C if they have FEHB Medicare Part B. However, there are Medicare savings programs available to beneficiaries that meet certain conditions related to income or special needs, which can allow a FEHB enrollee to suspend FEHB to enroll in Part C, and later re-enroll in FEHB if you cancel your Medicare Coverage during an Open Season. Please view these links to resources for more information:

Part D

There is a monthly premium for Part D coverage. Most Federal employees do not need to enroll in the Medicare drug program, since all FEHB plans will have prescription drug benefits that are at least equal to the standard Medicare prescription drug coverage.

Still, you may want to be aware of the benefits Medicare is offering, so you can make informed decisions. If you have limited savings and a low income, you may be eligible for Medicare’s Low-Income Benefits. For people with limited income and resources, extra help in paying for a Medicare prescription drug plan is available. Information regarding this program is available through the Social Security Administration.

FEHB plan documents state that if they ever discontinue the prescription drug plan, you will be eligible to enroll in Part D with no penalties.

Medicare – Part B Premiums 2019

Beneficiaries who file
individual tax returns with income:
Beneficiaries who file
joint tax returns with income:
Income-related monthly adjustment amount Total monthly premium amount
Less than or equal to $85,000 Less than or equal to $170,000 $0.00 $135.50
Greater than $85,000 and less than or equal to $107,000 Greater than $170,000 and less than or equal to $214,000 $54.10 $189.60
Greater than $107,000 and less than or equal to $133,500 Greater than $214,000 and less than or equal to $267,000 $135.40 $270.90
Greater than  $133,500 and less than or equal to $160,000 Greater than $267,000 and less than or equal to $320,000 $216.70 $352.20
Greater than $160,000 and less than $500,000 Greater than $320,000 and less than $750,000 $297.90 $433.40
Greater than or equal to $500,000 Greater than or equal to $750,000 $325.00 $460.50

As the above chart shows, standard Medicare Part B premiums are increased by surcharges imposed on upper-income individuals, those with Modified Adjusted Income (MAGI) exceeding $85,000 on an individual return or $170,000 on a joint return.

The extra amount higher income individuals must pay is called an Income Related Monthly Adjustment (IRMAA). For IRMAA purposes, MAGI is defined as Adjusted Gross Income (AGI) plus tax exempt interest and untaxed foreign income. The MAGI amount is usually used for a year that is reported on the federal tax return that was filed two years previously.

When Income Falls

An individual’s current-year income may have fallen to a level much lower than was reported on the tax return filed two years previously. In that case, it may be unfair to incur IRMAA surcharges on income that no longer exists.

It is possible to ask to have the IRMAA income amount adjusted downward. Do this by submitting Form SSA-44, Medicare Income-Related Monthly Adjustment Life-Changing Event”, to the Social Security Administration.

Life Changing Events

  • Marriage
  • Divorce or Annulment
  • Death of a spouse
  • Ending employment
  • Significant reduction in work hours
  • Loss of income-producing property due to a disaster or similar circumstance
  • Loss of pension income due to termination or reorganization of a pension plan
  • The income reported on the prior year’s tax return resulted from a settlement with a former employer related to the employer’s bankruptcy or reorganization

As listed above, the end of employment is a qualifying “life changing event” that should be considered for anyone who retires at age 65 or later. If an IRMAA surcharge will result from high salary income reported on a return filed two years earlier, but that salary no longer exists, relief from the surcharge may be readily available.

Delaying Medicare Enrollment

I often find higher earning individuals that decide not to enroll in Medicare Part B because their prior employment income may cause them to incur a large surcharge on their premiums. Penalties will occur in the form of higher premiums if you don’t apply when eligible.

Medicare eligibility occurs as follows: (1) If you retire before age 65, you have a 7 month window (3 months before your turn 65, the month of your 65th birthday and 3 months after the month you turn 65) and (2) If you retire later than age 65 you have an 8 month window (the month your retire and seven months after the month you retire).

For every year you delay enrolling in Medicare since you first became eligible, you will pay a permanent 10% penalty, which means paying 10% more. For example, if you decide to enroll in Medicare Part B five years after your eligibility date, then your premium will be 50% higher for as long as you live.

It is important to be aware that as you approach Medicare eligibility years it is very important to make good planning decisions and seek out professional help. The earlier you include Medicare planning in your overall financial plan, the more strategies you’ll be able to apply.

There can be a ripple effect when it comes to retirement planning. You may have done a commendable strategy of saving wisely for your retirement years but find yourself paying for unforeseen consequences such as higher Medical costs. A qualified financial advisor can assist you with careful planning with retirement accounts to help minimize the bitter bite of Medicare costs. Strategies such as Roth conversions, Health Savings Accounts (HSAs), and Qualified Charitable Deductions (QCDs) are all strategies that you may want to consider.

Some information contained within this article is Copyright © 2018 of IRA Help, LLC and Reprinted with permission. IRA Help, LLC takes no responsibility for the current accuracy of this information.

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About the Author

Carol Schmidlin, Certified Financial Fiduciary®, MRFC® is the President of Franklin Planning and has been advising clients on how to grow and preserve their wealth for 25 years. In addition to her financial planning practice, she is the founder of FedSavvy® Educational Solutions, which provides Financial and Retirement Literacy Programs for Federal Employees. She is passionate about helping families with all phases of Wealth Management and is a member of Ed Slott’s Master Elite IRA Advisor Group. Her practice maintains a home office in Sewell, NJ along with a satellite office in Washington, DC. Carol can be reached at (856) 401-1101.