There's a reason many people push themselves to max out their IRAs or 401(k)s every year, or to get as close as possible. It's a great thing to be able to retire with a lot of money in savings.
In fact, some people would rather make sacrifices in the near term to allow for a higher retirement income. Plus, some people want the protection of having robust retirement savings because they know full well that healthcare costs can rise to an extreme as they age.
If you're nearing retirement and are anticipating a generous income, you may be really excited about it. But there's one drawback to being a higher earner that you should know about.
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You might get stuck paying more for Medicare
Medicare eligibility begins at age 65, and many retirees end up signing up for Medicare at some point in time. Medicare Part A, which covers hospital care, generally doesn't charge enrollees a premium. But Part B, which covers outpatient care, and Part D, which covers prescription drugs, both charge premiums on a monthly basis.
There's a standard monthly premium for Part B that changes every year. Right now, it's $174.70. There's no standard monthly premium for Part D because seniors can choose from a host of different plans.
If you're a higher earner, though, you can expect to face a surcharge on your Part B and Part D premiums. It's called an income-related monthly adjustment amount, or IRMAA, and it's based on your modified adjusted gross income (MAGI) from two years prior.
IRMAAs are also tiered, which means the higher your income is, the higher a surcharge you might face. As an example, this year, if you're single with a MAGI of $120,000, you'll face a surcharge of $69.90 on your Medicare Part B premiums. If you're single with a MAGI of $190,000, your IRMAA will be $279.50.
These surcharges aren't set in stone. First of all, they can change from year to the next. They're also based on income, so if you have a year when your income drops, you may not face an IRMAA two years later. But all told, Medicare surcharges are a sneaky expense to watch out for if you're a higher earner in retirement.
One way to avoid paying more
In some cases, IRMAAs can be unavoidable -- they're a byproduct of having more money, the same way higher taxes often come as a result of higher earnings. But there is one step you can take to potentially avoid Medicare surcharges, or minimize them, and it's to house your retirement savings in a Roth account.
MAGI includes income that comes in the form of Social Security benefits, earnings from a job, or traditional retirement plan withdrawals. But Roth IRA or 401(k) withdrawals aren't taxable and therefore don't count toward calculating your MAGI. So opting for a Roth savings plan could really work to your benefit.
You can also try to be strategic with investments as a retiree to lower your income. This could include deferring capital gains and selling assets at a loss strategically.
Just as being a higher earner can be a mixed bag during your working years, so too can it come back to haunt you in retirement in the context of Medicare. So in the course of your retirement planning, make sure to keep IRMAAs in mind, and do what you can to avoid them if possible.
