Last week, I wrote about the differences between Medigap and Medicare Advantage plans. In writing that, I realized there are many Medicare FAQs that I hear so often. When do you need to enroll? How do you enroll? What does it cover? What is not covered? What is it going to cost? Will IRA distributions affect your Medicare premiums? And so on.
Instead of searching all over the web trying to find answers to these questions, I thought it would be helpful to consolidate these answers to one place you could reference when making the Medicare decision.
I tried to title each section clearly so you can get the answers that you need quickly. Feel free to skip sections as you see fit. If you are 55 or older, this article will still be of interest to you due to some of the ways in which the Medicare premium is calculated. If this is you, there are certain actions you can take starting at age 55 or so that can have a positive impact on your overall Medicare costs in retirement. That’s why planning is so important. I hope you find this to be a useful resource. Let’s get started.
Who is Covered by Medicare?
Before we get to the basics of Medicare, it’s important to know who is eligible for Medicare coverage. Medicare covers:
- People who are 65 or older.
- Younger people that qualify for SSDI for 24 months.
- People that have End-Stage Renal Disease.
For the purposes of this article, I’ll be referring only to people age 65 or older.
When do you need to enroll?
There is a seven-month window to enroll in Medicare without penalty. It is the three months prior to your birth month, your birth month, and the three months following your birth month. For example, if you were born on July 4th, then your enrollment period would be from April to October of the year in which you turn age 65.
There is an exception to this rule, and that is if you are still actively working and covered by an employer-sponsored health plan, which Medicare refers to as a Special Enrollment Period. This is an eight-month period that begins with the month your group health coverage ends or the month your employment ends, whichever comes first. Please note that this eight-month window does not apply if your employment or employer-sponsored health coverage ends during your initial enrollment period.
For those still working beyond their initial enrollment period: It may be worth considering and evaluating whether you should enroll in Medicare Parts A & B, and the plan of your choice (Medigap & Part D or Medicare Advantage) and dropping your health coverage through your employer. It is possible that the benefits are better utilizing Medicare and may potentially cost less than your traditional employer plan. You may want to verify with your employer that you can discontinue your coverage once you are enrolled in Medicare. In many cases, employers are happy to take your family off their health insurance roll. Please note, however, if your spouse is not yet 65 or have minor children, continuing with your employer plan may be best.
For those already receiving Social Security benefits: You will automatically be enrolled for Part A and B upon reaching age 65.
How do I Enroll in Medicare?
Medicare makes the process of enrolling quite easy. You can enroll for Part A and/or Part B benefits in the following ways:
- Online at www.socialsecurity.gov
- By calling Social Security at 1-800-772-1213 Monday-Friday, from 7 AM – 7 PM. TTY users should call 1-800-325-0778.
- Go to your local Social Security office to enroll in person.
- If you are already receiving Social Security benefits, you should be automatically enrolled in Parts A and B. It’s always smart to confirm this with the Social Security Administration when you turn 65.
What is NOT covered by Medicare and the supplemental plan of your choice?
There are a few items that are not covered by Medicare:
- Long-term care.
- Custodial Care.
- Nursing Home Care.
- Alternative medicine.
- Most care received outside of the United States.
- Most cosmetic surgery – generally only covered if needed to improve the function of a malformed part of the body.
- Most dental care.
- Most vision care.
- Hearing aids.
**Some of the items above may be covered, but you will want to check based on the plan you are considering.
How much does it cost?
Part A is free for most people, Part B is based on your income. The higher costs are due to Medicare’s income-related monthly adjustment amount (IRMAA.)
Part B Premiums
The table below shows the premiums due for Part B based on your modified adjusted gross income from two years ago (2017 tax year):
**If you pay a late enrollment penalty, the above amounts may be higher.
The above costs are per person and do not include the cost of your Medigap plan or Medicare Advantage plan.
If you do not receive Social Security benefits, you will be directly billed for your Part B premiums or you can set it up through the Medicare Easy Pay program. Here is a link to the Medicare site where you can download the form for Easy Pay.
If you are receiving Social Security benefits, your Part B premiums will be automatically deducted.
If you have questions about your Part B premiums, call Social Security at 1-800-772-1213.
Part D – Prescription Drug Plan Premiums
Just like Part B, Medicare Part D premiums are based on your income. Below is a table showing the premium adjustment (IRMAA charges) due for Part D that is based on your modified adjusted gross income from two years ago (2017 tax year):
Will IRA distributions and capital gains impact your premium?
Because Part B and Part D premiums are based on modified adjusted gross income from two years prior (the tax year in which you turn 63 if you plan to enroll at 65), planning for Medicare may actually start at age 62 or earlier. For instance, if you have a portfolio with large capital gains or are completing Roth IRA conversions, you may want to consider revisiting your portfolio and legacy strategies while it can still make a difference for your future checkbook.
For example, over the last 8-10 years, we’ve seen significant gains in many taxable accounts, most of which are unrealized. So, if you were considering making some portfolio changes that might require some of those gains to become taxable, you may want to do that prior to the year in which you turn 63. You may also consider realizing some of those gains prior to age 63 if you are intending to use this portfolio for income purposes in retirement. Otherwise, you may run the risk of having higher Medicare premiums as a result.
This is the same story for folks that are planning to pass along as many IRA dollars as possible to their heirs that are taking advantage of IRA conversions. When converting your Traditional IRA to a Roth IRA, this is a dollar-for-dollar increase in your taxable income assuming an IRA basis of $0. Many investors and their advisors just focus on the conversion part and the tax bill to follow without considering the impact it could have on your future Medicare premiums.
If one of the two above situations fits your scenario, it’s important to note that this two-year lookback is an annual event, so your premiums could very well drop in future years once these gains leave the premium calculation.
Eventually, your Required Minimum Distributions (starting at age 70.5) may have an impact as well. So, if you are someone that may not need those distributions for income purposes, you may consider taking advantage of a strategy to reduce those future distributions via conversions in the early years, thereby possibly reducing your Medicare premiums in the process. This would all be dependent on your financial situation as well as where you fall on the Medicare premium chart above.
Can You Use a Health Savings Account for Medicare Costs?
For many individuals that have been in high deductible plans and saving in their HSAs to prepare for health expenses in retirement, it is important to know a few things.
For one, as soon as you start receiving any benefits from Medicare (even just Part A), you are no longer eligible to contribute to your HSA.
Secondly, you can use your HSA dollars to pay your premiums in retirement for Parts A, B, D and for your Medicare Advantage plans. You can also, of course, pay for your deductible, co-pays and other qualified expenses.
Even if your Medicare premiums are automatically deducted from your Social Security benefits, you can withdraw money from the HSA to reimburse yourself for the Part B premium.
Please note: You are NOT able to use your HSA dollars to pay your Medigap premiums.
What Can Military Retirees Expect from Medicare?
First of all, thank you for your service! TRICARE for Life is a Medigap policy specifically offered to military retirees. For many military retirees that are still working at age 65, you’ll actually have to enroll in Part A and B in order to continue receiving benefits from TRICARE regardless of whether or not you are covered by an employer plan. In that case, you might actually consider leaving your work plan and just using Medicare and TRICARE for Life since you must be enrolled to receive benefits from TRICARE for Life anyway. On the upside, it’s likely that for many participants, you will likely see your healthcare costs fall significantly (due to not having to pay for employer-sponsored health insurance). You will want to consider your family circumstances and verify with your employer that you can drop your health coverage.
I love reader questions, so if you have any, please feel free to reach out anytime! Hope this helps in your research!
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I am a Financial Advisor in Pittsburgh and a CERTIFIED FINANCIAL PLANNER™ professional with Shorebridge Wealth Management. I enjoy helping clients and readers find sensible answers to retirement’s big questions. If I can answer any questions for you, feel free to Contact Me or if you think you might be a fit for our practice, see Who We Serve.