The Effect of Retirement Income on Your 2021 Medicare Premiums [And How to Save]

The Effect of Retirement Income on Your 2021 Medicare Premiums And How to Save 1

All of your life, everyone has advised you to save your money – as much as you possibly could! It started when you were little with just a piggy bank and some coins. Later, those savings became the source of your income during retirement with IRAs, 401(k)s, interest-bearing savings accounts, and stock market investments. 

But did you know your retirement income can affect your Medicare premiums? Even just a couple of cents over the defined income brackets can cost hundreds of dollars more in additional expenses for the year – sometimes thousands!

Well, we’ve got good news for you. When the Medicare system calculates your premiums using your income, there are several considerations. Therefore, if your money lives in the right places, you won’t get faulted for making over a certain threshold. 

First, let’s do a brief overview of Medicare’s parts, in case this is your first year qualifying. Then, we’ll also explain how Medicare calculates their premiums and the income brackets for 2021. Finally, we’ll show you some steps you can take to avoid penalizing yourself with extra costs. These include making charitable donations, requesting special consideration from the government, or converting your money into Roth IRAs.

What Are the Four Parts of Medicare?

Medicare consists of four parts: Medicare Part A, which is your hospital insurance, Medicare Part B, which is your regular medical insurance, Medicare Part C (or Medicare Advantage), which is an alternate way to receive benefits, and Medicare Part D, which covers prescription drugs.

  • Part A covers inpatient care at the hospital as well as nursing facilities. Most people would get this for free if they paid into Medicare through working for at least ten years, and enrollment is usually automatic. 
  • Part B is the coverage of medical supplies and services that are necessary to treat you. These include outpatient care, preventative services, rehabilitation, ambulatory services, and medical equipment. To receive Part B’s benefits, you must enroll and pay a premium, which we will discuss below.
  • Part C is a combination of parts A and B, but usually administered privately and often covers additional items. 
  • Part D is your prescriptions. Part D’s monthly costs are based on your income and are on top of the Part B premium costs. These range from $0 extra to an additional $77.10 per month. You can find these brackets here.

For now, let’s talk about the principal Medicare premium: Part B, and how it is calculated.

How Are Part B Medicare Premiums Calculated?

Each year, there is a standard Part B premium amount. For 2021, this amount is $148.50 per month. Many people will pay only this amount. 

Medicare bases this premium on your retirement income; specifically the Modified Adjusted Gross Income (MAGI) from your tax return from two years prior. Therefore, you can determine the amount you will pay in 2021 by calculating your MAGI from 2019.

How To Calculate Your Modified Adjusted Gross Income (MAGI)

TurboTax explains, “to calculate your modified adjusted gross income, take your adjusted gross income (AGI) and add back certain deductions. Many of these deductions are rare, so it’s possible your AGI and MAGI can be identical.”

For example, if you have rental losses deducted on your tax return, they would be added back into your income for the MAGI calculation.

The Medicare Part B Income Brackets

The chart below shows what your monthly payment will be for Medicare Part B for each income bracket.

2021 Medicare Part B premiums
Note: There are separate brackets for those that are married filing separately.
Data from

So if you are an individual making $88,000 or less, you’ll pay only the standard premium. Individuals earning between $165,000 and $111,000 will pay an additional $59.40 per month, which equates to another $712.80 per year.

As you can see, every penny counts! If a couple has a MAGI of $222,020, they will pay $297 per month per person, which is $2,138.40 more per year for having just $21 of income over the previous threshold. 

If one person passes away in that same couple, the other is left with the higher of their two social security checks. Add in any other income, pensions, and required minimum distributions (RMDs) from their tax-deferred retirement accounts and the widow could potentially still make $170,000. 

This income would put the single person in the second-highest bracket for individuals, and now their monthly premium is $475.20. This amount is 60% more per month than they were previously paying.

Luckily, there are ways you can lessen your premiums. While it’s not possible for everyone, below are three steps that may help.

Make a Qualifying Charitable Distribution (QCD)

Donating directly from your tax-deferred account can reduce your income that Medicare uses to determine your bracket. 

A QCD allows you to donate up to $100,000 per year directly from your IRA. These donations will not only be excluded from your income, but they also count toward your RMD, giving you double the benefit.

Both you and your spouse can benefit from QCDs from your IRAs if you qualify. These rules and requirements are:

  • The funds must come directly from the IRA to the charitable organization. As the account holder, you should never have the money in your possession.
  • You must be at least 70 1/2 years of age.
  • The charitable organization cannot be private. They must be a qualifying charity.
  • There is a $100,000 limit per year.

For example, Dan is a 74-year-old man who donates $40,000 to Boys & Girls Clubs of America each year. After retiring from many years in the workforce, he and his wife have a substantial amount of money in Dan’s traditional IRA. 

Coincidentally, the amount that the government requires Dan to withdraw and pay taxes on each year is also $40,000. If Dan sends funds directly from his IRA to Boys & Girls Clubs of America, it bypasses his bank account and is not included as income. So the donation Dan would have already made now also satisfies his RMD.

Request Government Relief

Since the government looks at your income from two years ago, a drastic change may have occurred between then and now. Life events can and do happen that lower your income, and basing your premium on a higher income from two years ago can be detrimental to your wallet.

By filing a simple form, which you can find here, you can request that the government base your Medicare premiums on your expected 2021 income rather than your income from 2019. According to Page 5 of the form, some of the life-changing events that the government considers for relief are:

  • Marriage
  • Divorce/Annulment
  • Death of Your Spouse
  • Work Stoppage or Reduction
  • Loss of Income-Producing Property
  • Loss of Pension Income
  • Employer Settlement Payment

The government is usually pretty good about allowing relief for the above situations; however, there are other particular circumstances they may not accept. It’s best to contact the Social Security Administration through their online services with any questions.

Convert From a Tax-Deferred Account to a Roth IRA

The government mandates that you take your first RMD from tax-deferred accounts in the year in which you turn 72.

Retirees in an upper-income level often pay more expensive Medicare premiums because of their higher RMDs. The best way to avoid these high RMDs is to reduce the amount of funds in your tax-deferred accounts before you turn 72. You can calculate your RMD by using these worksheets provided by the IRS.

Converting to a Roth IRA requires income taxes to be paid but will reduce the balance in your tax-deferred accounts and lower your RMD. 

Roth IRAs do not require you to take the minimum distributions that traditional IRAs require. So you’re left with assets in your Roth but less income that’s counted from the previously mandated distributions. This conversion, in turn, can decrease your Medicare premium by moving you to a lesser income bracket.

No matter which way you look at it or which path you wish to take, it is vital that you understand how to manage your money and truly comprehend what may or may not count against you. 
For true peace of mind, you can easily avoid penalizing yourself financially by enlisting the help of a trusted financial planner like the professionals at Castle Wealth Management.

Melissa Gannon photo resized

Melissa Gannon, CDFA®, CFP®

Melissa Gannon joined the firm in October 2016 as a Financial Planner. In 2021, she became a Principal of the firm and the Manager Financial Planning. Melissa is a member of the Wellington Chamber of Commerce, the National Association of Divorce Professionals, and the Financial Planning Association.

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