By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
For many retirees who are living on a fixed income, annual cost-of-living adjustments can be highly anticipated. If you are collecting Social Security, the 2.5% adjustment to benefits for 2025 may be disappointing given it will equate to about $50 a month for the average Social Security recipient. When you combine a moderate Social Security bump with a nearly 6% increase in Medicare premiums, it may feel like you are not gaining much traction.
If you are planning to or are already enrolled in Medicare, you’ll likely be looking for ways to keep your Medicare costs as low as possible. Medicare is available to individuals aged 65 or older. Medicare Part A, which covers hospital stays and limited-skilled nursing facility care, is free for most people. However, there are costs associated with Medicare Part B, which covers doctor visits, medical tests and other physician services, and the premiums are deducted from Social Security benefit payments. For 2025, the standard monthly Medicare Part B premium will increase to $185.00 from $174.70.
Premium costs for Medicare Part D–prescription drugs–are connected to the plan you select. However, both base premium costs are impacted by how much income you have. That is where “IRMAA” comes into play. It stands for “Income-Related Monthly Adjustment Amount.”
IRMAA is a surcharge added to Medicare’s base or standard premium costs. The key to planning for your future Medicare costs is first understanding that your modified adjusted gross income (MAGI), determines the amount you pay for Medicare. Because your most recent income tax return filed was for tax year 2023, the income you reported for 2023 determines the 2025 Medicare costs you will pay. Income you report on this year’s income tax return, which you will file in April of next year, will determine the Medicare costs you pay in 2026. Next, it’s important to note that tax-exempt interest income, which is not included in your adjusted gross income (AGI) for income tax purposes, is included for IRMAA. For example, if your AGI is $100,000 and you have $7,000 in municipal bond interest income, your MAGI for IRMAA is $107,000.
How much additional cost you will pay in 2025 is already locked in and is based on which income tier you fall into:
| 2023 Married, Filing Jointly, MAGI | 2023 Single MAGI | 2025 Part B Monthly Premium Amount | 2025 Part D Monthly Premium Amount |
| $212,000 or less | $106,000 or less | Standard Premium = $185.00 |
Your plan premium
|
| Above $212,000 up to $266,000 | Above $106,000 up to $133,000 |
Standard Premium plus $74.00 Total Premium = $259.00 |
Premium plus $13.70 |
| Above $266,000 up to $334,000 | Above $133,000 up to $167,000 |
Standard Premium plus $185.00 Total Premium = $370.00 |
Premium plus $35.30 |
| Above $334,000 up to $400,000 | Above $167,000 up to $200,000 |
Standard Premium plus $295.90 Total Premium = $480.90 |
Premium plus $57.00 |
| Above $400,000 up to $750,000 | Above $200,000 up to $500,000 |
Standard Premium plus $406.90 Total Premium = $591.90 |
Premium plus $78.60 |
| $750,000 or above | $500,000 or above |
Standard Premium plus $443.90 Total Premium = $628.90 |
Premium plus $85.80 |
However, there are some steps you can take before the end of this year that could impact your AGI and help to keep your 2026 Medicare costs under control. Here are three strategies to consider:
- Using Roth savings for retirement income. If you have a Roth IRA or Roth account balances in your 401(k), 403(b) or 457(b), and you have had those accounts for at least five years, withdrawals are income tax free if you are also over the age of 59 ½ (although you have to also be separated from service or retired in most cases to access workplace retirement plan balances). Because Roth accounts can provide tax-free income during retirement, they are a good way to provide retirement income without increasing your AGI. Keep in mind, however, that if you are planning to fund a Roth IRA by converting pre-tax retirement account balances, a conversion will increase your taxable income and AGI in the year of the conversion. The increase in AGI would be only for the year of the conversion.
- Take advantage of tax-loss harvesting to reduce capital gains taxes. Another common strategy to reduce income taxation, and in turn your AGI, is to review your portfolio for opportunities to sell investments that have losses to offset capital gains on others. When selling investments for a loss, it is the trade date–not the settlement date–that determines if your transaction is long term or short term. When netting capital gains and losses, you first net short-term gains and short-term losses, then net long-term gains and long-term losses, and then net short-term against long-term. You can also deduct up to $3,000 of excess losses against ordinary income and carry over any remaining losses to use in future tax years.
- Using QCDs for RMDs if you are charitably inclined. If you are aged 70 ½ or older, qualified charitable distributions (QCDs) provide a tax-free way to withdraw IRA assets while gifting to your favorite charity(ies). The QCD must be made directly from the IRA to the charity and is limited to $105,000 in 2024 (increasing to $108,000 in 2025). QCDs also count toward any required minimum distributions (RMDs) you have if you are aged 73 or older. Also, a one-time gift in an amount up to $53,000 can be made to a charitable split-interest entity.
Another useful strategy for dealing with future health care costs in retirement is taking advantage of Health Savings Accounts (HSAs). If you are covered by a high-deductible health care plan, you can save in a tax-advantaged way using an HSA. Contributions to HSAs are tax deductible and can be made until age 65 (Medicare enrollment age); the earnings on your investments grow tax-deferred; and when used for qualified health care expenses, the withdrawals are income tax free. Qualified withdrawals include using HSAs to pay for Medicare Part B, Part D and Medicare Advantage plan premiums, deductibles, copays and coinsurance.
As you look at wrapping up 2024, talk to your financial and tax advisor to see if any of the strategies above will be helpful for you to safeguard against IRMAA and in lowering your Medicare premiums.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.