To be 65 years old? Here’s what to know about Medicare Part B

Established in 1965, Medicare is the nation’s first government-sponsored health insurance program. Today, Medicare covers nearly 64 million Americans, or about 18% of the population, most of whom are retirees age 65 and older.

Of those enrollees, about 56% — or 36 million people — participate in Original Medicare, the traditional paid health insurance program that is run 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 be eligible for Part A with no premium, half of the original Medicare which covers hospital stays, surgeries, skilled nursing and other “big” health care services.

Although Medicare Part A is not completely free and still has other cost-sharing charges like deductibles and coinsurance, there are no monthly premiums associated with this part of Medicare – hence its name.

Understanding Medicare Part B Monthly Premiums

However, Part B works a little differently. No matter how long you’ve worked, you’ll still have to pay a monthly premium for that other half of the original health insurance. As usual, deductibles and co-insurance charges apply in addition to your monthly premium payments.

Medicare Part B supplements Part A, paying for doctor visits, preventive care services (like flu shots, cancer screenings, and annual wellness visits), mental health care , clinical research, medical equipment and other medically necessary outpatient services.

In 2022, the standard Part B premium is $171.10 per month, or $2,053.20 for the whole year. You become eligible for Medicare Part B when you turn 65, and the cost of monthly premiums will be automatically deducted from your Social Security benefit payments. If you are not yet receiving Social Security, you will receive a bill for your Part B fees instead.

All about the income-related monthly adjustment amount (IRMAA)

While most retirees will pay the standard Part B monthly premium, you will be assessed an additional monthly income-related adjustment amount (IRMAA) if you earn above a certain threshold. IRMAA surcharges 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 look-back window. They calculate your MAGI as adjusted gross income (AGI) plus tax-free interest income, which includes distributions received from funds like the Vanguard Tax-Exempt Bond ETF.

For example, in 2022 your MAGI 2020 will be used to determine if you will be assessed for an IRMAA.

Fortunately, if you’re married and earning less than $182,000 (or single and earning less than $91,000) in 2020, you won’t receive an IRMAA and you’ll pay the standard game bonus. B.

However, retirees should definitely note that because withdrawals from traditional IRA and 401(k) plans count as taxable income (and therefore increase AGI), these withdrawals will be increase your income for Medicare purposes and put you at risk of being assessed an IRMAA supplement.

On the other hand, because Roth contributions are made using after-tax dollars—and because qualified distributions are tax-free—withdrawals from Roth accounts Won’t do increase your income for IRMAA calculation purposes.

For these reasons, if you have large IRA or traditional 401(k) account balances, you may want to consider performing Roth conversions or structuring 401(k) Minimum Required Distributions (RMDs) to put your income under the IRMAA threshold.

Part B Cost Sharing Fee

Similar to Part A, Medicare Part B also includes a cost-sharing fee, including a deductible and coinsurance split.

For 2022, the annual deductible is $233. You will need to meet your deductible before Medicare will start covering anything. Unlike Medicare Part A, your Part B deductible is not calculated based on benefit periods, and instead you pay 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 retiree enrolled in Medicare Part B. She hasn’t reached her deductible for the year and recently incurred a $1,500 bill for a new wheelchair.

She will first 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%, over her deductible. In total, his disbursements for his wheelchair amounted to $486.40.

If she then had to buy a $500 CPAP machine that same year, she wouldn’t owe another deductible. Medicare would cover 80% of the total cost, or $400, while it would owe the remaining 20%, or $100.

In total, assuming Jennifer pays the standard Part B premium, her combined out-of-pocket costs (premiums, deductibles, and co-insurance charges) for the year would total $2,627.60.

Although this is just an example, it shows that disbursements under Part B alone can easily cost upwards of several thousand dollars per year. Fortunately, being aware of these costs is an important first step toward planning and budgeting wisely for all of your retirement healthcare needs.