Created in 1965, Medicare is the nation’s leading 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 or over.
Of those enrollees, approximately 56% – or 36 million individuals – participate in Original Medicare, the traditional paid health insurance program 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 free Part A, half of Original Medicare that provides coverage for hospital admissions, surgery, skilled nursing and other “big ones” health care services.
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Although Medicare Part A is not entirely free and still includes other cost-sharing expenses such as deductibles and coinsurance, there are no monthly premiums associated with this part of Medicare, hence the name.
Understanding Medicare Part B Monthly Premiums
However, Part B works a little differently. Regardless of how long you’ve worked, you’ll still have to pay a monthly premium for this other half of Original Medicare. As usual, deductibles and coinsurance costs apply in addition upon payment of the monthly premium.
Medicare Part B complements Part A, paying for outpatient visits, preventative care services (such as flu vaccines, cancer screening, and annual wellness checkups), mental health care, clinical research, medical equipment, and other outpatient services that are needed from the point of view doctor.
In 2022, the standard Part B premium is $ 171.10 per month or $ 2,053.20 for the full year. You become eligible for Medicare Part B when you turn 65 and the cost of your monthly premiums will automatically be deducted from your Social Security benefit payments. If you’re not yet getting Social Security, you’ll receive an invoice for Part B charges instead.
All about the monthly income adjustment amount (IRMAA)
Although most retirees will pay the standard Part B monthly premium, you will be charged an additional Monthly Income Adjustment (IRMAA) amount if you earn above a certain threshold. IRMAA supplements are significant and can increase the cost of their premiums up to $ 578.30 per month or $ 6,939.60 per 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 window. They calculate your MAGI as Adjusted Gross Income (AGI) plus tax-free interest income, which includes distributions received from funds such as Vanguard tax-free bond ETF.
For example, in 2022, your MAGI 2020 will be used to determine if you will be rated an IRMAA.
Fortunately, if you are married and earned less than $ 182,000 (or are single and earned less than $ 91,000) in 2020, you will not be assessed an IRMAA and will pay the standard Part B award.
However, retirees should crucially note that, as withdrawals from traditional IRA and 401 (k) plans count as taxable income (and thus increase AGI), those withdrawals want increase your income for Medicare purposes and put you in danger of being evaluated for an IRMAA supplement.
On the other hand, because Roth contributions are made using after-tax dollars – and because qualifying distributions are tax-free – withdrawals from Roth accounts he will not increase your income for the purposes of the IRMAA calculation.
For these reasons, if you have large traditional or 401 (k) IRA account balances, you may want to consider doing Roth conversions or structuring the minimum required distributions (RMD) 401 (k) in a way that puts your income below the IRMAA threshold.
Part B cost-sharing fees
Similar to Part A, Medicare Part B also includes cost-sharing fees, including a deductible and coinsurance division.
For 2022, the annual deductible is $ 233. You will need to meet your deductible before Medicare begins to cover anything. Unlike Medicare Part A, Part B deductible is not calculated based on benefit periods and instead you are charged a single deductible for the entire year.
After you meet 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 Jennifer is a Medicare Part B-registered retiree. She did not meet her deductible for the year and recently incurred a $ 1,500 bill for a new wheelchair.
First he will pay a deductible of $ 233. 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, his direct costs for his wheelchair are $ 486.40.
If he were to then purchase a $ 500 CPAP machine in the same year, another deductible would not be owed. Medicare would cover 80% of the entire cost, or $ 400, while you would have the remaining 20%, or $ 100.
All in all, assuming Jennifer pays the standard Part B premium, her combined out-of-pocket costs (premiums, deductibles, and coinsurance charges) for the year would amount to $ 2,627.60.
While this is just one example, it illustrates that direct costs in Part B alone can easily cost up to several thousand dollars a year. Thankfully, being aware of these costs is a great first step towards planning and budgeting wise for all of your retirement healthcare needs.
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