The 2020 Medicare Part B premium has been announced by the Centers of Medicare and Medicaid Services (CMS). The base premium for Medicare Part B, which covers doctors' fees and outpatient services, will increase to $144.60 per month in 2020, up from $135.50 this year – a 6.7% increase over 2019.¹
The annual deductible for all Medicare Part B beneficiaries will also increase next year, rising from $185 in 2019 to $198 in 2020.
CMS attributed the increase in Medicare Part B premiums and deductibles to rising spending on physician-administered drugs. But despite the 6.7% increase in the base premium for 2020, the Cost of Living Adjustment (COLA) for Social Security recipients is only 1.6%². Apparently, other important expenses incurred by retirees must be declining enough to lower the overall COLA to 1.6%.
¹ Many recipients fall under “hold harmless provision” which may not increase their premiums a full 6.7%.
² Department of Labor's Consumer Price Index (CPI-W)
"The law requires CMS to pay the average sales price for a drug and also pays physicians a percentage of a drug's sales price," the press release noted. "This incentivizes drug companies to set prices higher and for physicians to prescribe more expensive drugs because that lead to a higher Medicare payment."
In addition to the base premium, Individuals with modified adjusted gross income of $85,000 or more, and married couples with joint MAGI of $170,000 or more, are subject to IRMAA surcharges in 2020. MAGI includes adjusted gross income plus any tax-exempt interest from municipal bonds. (See Chart).
Strategies to lower the higher surcharges would involve strategies to lower taxable income. The Medicare B Premiums for each individual will depend on the reported taxable income from the individual's income tax return from two years earlier. For example, the 2020 Medical B Premium will be based on that individual's taxable income in 2018. The following are some ideas designed to lower taxable income, and eventually, lower Medicare premiums.
- Roth IRA distributions
Converting a Traditional IRA to a Roth IRA would allow tax free withdrawals once the account owner is over 59½, and the account has been opened for five years. Compared to a traditional IRA, the tax free Roth withdrawals would lower taxable income and lower Medicare B Surcharge premiums. The potential benefit of lowering Medicare surcharge premiums would be an added benefit to the core analysis of determining whether a Roth IRA should be opened. View Carr Wealth Blog: “The Roth IRA After Tax Reform - Does It Make Sense Now?"
Opening up a new Roth (non-conversion) at older ages would most likely fail to accumulate enough earnings (contribution limit: $6,000 to $7,000 per year) to make the Medicare premium reduction a meaningful factor in the Roth/No Roth decision.
- Health Savings Account
A health savings account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). Contributions to HSA’s in 2020 are limited to $3,550 for single coverage, and $7,100 for married couples. A “catch-up” amount of $1,000 is available to individuals over the age of fifty-five. Qualified contributions are deductible from gross income, resulting in lower taxable income.
- Shifting Investments Between Qualified and Non-Qualified Accounts
Individuals who have both qualified (i.e., IRA) accounts and non-qualified (i.e., taxable brokerage accounts) have an opportunity to achieve lower taxes while maintaining their overall investment allocation according to their risk tolerance. For instance, placing income producing investments (i.e., bond interest, real estate, and high-dividend stocks) into qualified accounts (tax-deferred) can lower taxable Income. Growth assets (capital appreciation), which generally pay lower dividends, should be placed into the non-qualified taxable accounts.
As you can see, many financial decisions facing retirees today have many moving parts linked together - taxes, investments, distributions, and estate planning. We feel at Carr Wealth Management, LLC, that our knowledge and personal service to each of our clients is superior. We invite you to explore our website, and the educational resources we are continually striving to improve and expand. Please contact us if you have a question, or would like to schedule a no-charge initial consultation.