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Ask the Expert: Medicare premium surcharges

I know that my Medicare premiums are based on my income. I also know the formula that determines income includes tax-exempt dividends from investments. Are tax-free distributions from a Roth IRA also included in that formula?

No. Medicare premiums are based on your modified adjusted gross income (MAGI), which doesn't include distributions from a Roth IRA.

MAGI is the total of your earned income, taxable distributions from retirement accounts like traditional IRAs and 401(k) plans, the taxable amount of your Social Security benefit, plus your tax-exempt income (like interest from municipal bonds).

What you pay for Medicare every year is determined by the MAGI reported on your tax return two years earlier. (That's the most recent information available to the Social Security Administration.) In other words, your 2020 premiums are based on your 2018 tax return.

In 2020, single taxpayers with MAGI of $87,000 or more, and married couples filing jointly with MAGI of $174,000 or more pay more for Medicare Part B (for doctors' visits) and Medicare Part D (prescription drug coverage), in the form of a surcharge known as Income-Related Monthly Adjustment Amount, or IRMAA. IRMAA makes Medicare much more expensive. Most people currently pay $144.60 a month for Medicare Part B, for example. If you're subject to IRMAA, the Part B premium ranges from $202.40 a month all the way up to $491.60 a month.

But obviously your income can change a lot in two years. You should appeal to have the IRMAA surcharge waived if your 2020 income is smaller than your 2018 income due to a life-changing event like loss of a job, retirement, divorce or the death of a spouse.

The bottom line

Your Modified Adjusted Gross Income determines your Medicare premium.

More information

CORRECTION: An earlier version of this column gave incorrect information for MAGI as it applies to Medicare premiums.

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