How RMDs Can Cost Retirees a Ton in Medicare Surcharges
By Space Coast Daily // September 5, 2022
Too much money in tax-deferred retirement plans could lead to you paying hundreds of thousands more in Medicare premiums in retirement. Some couples could even see a $1 million hit.
How Medicare Premiums Work
Part A of Original Medicare services include Parts A (hospital, doctor, and prescription drug) coverage. Many retired people mistakenly believe Medicare is free since they have paid Medicare taxes throughout their work.
For most retirees, Part A is the only one that’s free. Part B and D are subject to monthly premiums. These premiums are usually deducted from Social Security checks.
My white paper shows that Medicare Part B costs increased 8.8% annually from 1970 to 2019. This is a staggeringly high rate for such a long period. This is similar to the inflation rates we have been experiencing in 2022 but over 49 years. This can lead to a catastrophic effect over time due to high compound inflation rates.
The government subsidizes Medicare costs by setting a base premium of 25% of projected per-capita costs. This means that the government covers the remaining 75% for most, but not all, retirees.
Despite the subsidies, significant cost increases have been passed on to retirees. From 1966 to 2019, the base Medicare Part B premiums grew 7.5% annually (from $3.00 per month to $135.50 per month). Comparatively, the core annual inflation rate (at most through 2019) was about 2.3%.
Medicare faces even greater solvency problems than Social Security. To improve Medicare’s solvency, you must increase taxes, decrease benefits, or incur greater deficits. This is not a political statement.
It’s math. It’s math. That’s why Medicare trustees in 2019 expected Medicare Part B premiums to increase by 5.17% annually between 2020 and 2027, according to their estimates.
What is Medicare Testing?
The government began reducing the subsidy for those with high incomes in 2003, forcing them to pay higher premiums on Part D and Part B from 2007. These premiums are called Income-Related Monthly Adjustment Amount (IRMAA), surcharges, or “means testing.”
Therefore, 2022 rates will use income starting in 2020. The premiums for the highest and lowest earners are 3.4x higher for Part B and 4.4x higher for part D. Higher income levels reduce the federal subsidy per capita, which means that retirees will have to pay a larger portion of the cost.
The base premium grew by 3.1% per year between 2007 and 2019, while the Medicare premiums for means-testing tiers rose from 5.0% to 8.6% each year. It shouldn’t be a surprise that means testing is being discussed. The best way to improve Medicare finances is to make people who are more wealthy pay more. All signs indicate that testing will get more severe in time.
Between 2009 and 2019, income brackets weren’t indexed for inflation. Some years saw income brackets being reduced by the government. Over time, more people were being entrapped by means testing.
Inflation adjustments were made to income brackets starting in 2020. This was good news for retirees. However, the government could stop inflation adjustments to balance Medicare’s books.
RMDs and Medicare Means Testing
If a couple has $500,000 in pre-tax retirement accounts, they continue to max out their pre-tax contributions up until age 65. Tax-deferred retirement accounts for the couple reach $11.9 million at 72 when they take their first taxable RMD, $435,820. The RMD increases in size, reaching $1.3 million of taxable income by age 90.