5 Ways to Survive the Coming Medicare Premium Shock

If you think your health care costs are locked in once you reach 65, you’re living in a fantasy world.

A recent report highlighted by MarketWatch warns that average Part B premiums could nearly double over the next decade. Based on current projections, you could easily pay $5,000 a year for basic coverage in 2035.

And that’s just the basic level. If you’re diligent about saving and have a high income, you’ll be penalized with extra payments that push your monthly debt even higher.

Because Medicare Part B premiums are often deducted directly from your benefits, it’s a sad fact that they eat into your Social Security boost. You get a cost-of-living adjustment on paper, but Washington pays it back to cover the ongoing costs of outpatient care and higher insurance payments.

You can’t stop premiums from going up, but you can protect your retirement from the worst damage. Here’s how to fight back.

1. Defeat the IRMAA tax bomb

View income limits: If your income crosses a certain line, the government slaps an Income-Related Monthly Adjustment (IRMAA) on your Part B and Part D premiums. It’s a harsh penalty. If you make one dollar over the limit, you get a full year’s worth of extra charge.

You must plan ahead so that you are not blocked by Medicare payments. Since Medicare looks at your tax returns from two years earlier, a financial move you make at age 63 will put your premiums at 65.

Work with an accountant to optimize your income, avoiding large one-time withdrawals from traditional retirement accounts.

2. Do a Roth conversion of strategies

Convert before the IRS forces your hand: When you turn 73, the IRS forces you to start taking required minimum distributions (RMDs) from your IRA and 401(k) accounts. These mandatory withdrawals count as taxable income, which can easily put you in a higher tax bracket and increase your Medicare premiums.

While you’re in your 60s, start converting portions of your traditional accounts into a Roth IRA. You’ll pay taxes on the conversion now, but Roth withdrawals are completely tax-free later. Most importantly, those tax deductions don’t count toward the income limits that trigger Medicare payments.

3. Grow a life savings account

Build a tax-free castle: Many people wait until age 65 to figure out how they will pay for health care in retirement. By then, it’s too late. If you’re still working and enrolled in a high-deductible health plan, a health savings account (HSA) is your best weapon.

There are ways an HSA can improve your finances, but its triple tax advantage is not the same. Your contributions are tax-deductible, capital grows tax-free, and medical expense withdrawals are tax-free.

Finance it with limited funds and pay current medical bills out of pocket if you can. Let the investments compound so you have a pool of money to pay for those double premiums later.

4. Contribute your RMDs

Give to the poor, not the government: If you’re forced to withdraw money from your traditional IRA and you don’t actually need the cash to survive, those withdrawals will still increase your adjusted gross income. Mishandling this need is easily the most expensive mistake a retiree can make.

If you are charitable and are at least 73 years old, use a qualified charitable distribution. You can transfer money directly from your IRA to a qualified charity. This satisfies your RMD for the year, but the amount is not included in your taxable income.

You’re helping a good cause and keeping your Medicare premiums supported.

5. Buy recklessly your money every year

Stop automatically renewing your program: Insurers rely on your cooperation. They know many seniors automatically renew their coverage without checking the fine print. That way you end up in a plan that quietly increases its out-of-pocket maximums or lowers your primary care physician.

You need to understand the seven types of Medicare enrollment periods and treat the annual open enrollment period as a job.

Use the official Medicare Plan Finder tool to compare your current coverage with the new offerings. Look past the glowing zero-premium ads and calculate your estimated cost. Sometimes paying a predictable premium for Original Medicare (also known as traditional Medicare) and a Medigap policy is cheaper than getting hit with hidden fees later.