Is There Any Downside Resulting from the Decrease of Medicare Part B Premiums During 2023?
Edward A. Zurndorfer
For the year 2023, Social Security recipients received an historic 8.7 percent cost-of-living adjustment (COLA), the highest in 40 years. Meanwhile, Medicare Part B (medical insurance) premiums (linked to prices and utilization across the health care system) moved surprisingly down. The standard monthly premium for Medicare Part B decreased from $170.10 a month during 2022 to $164.90 a month during 2023. Income-Related Monthly Adjustment Amounts (IRMAA) are capped at $560.50 a month during 2023, down from a peak of $578.30 a month during 2022.
This column discusses any downsides resulting from the decrease in Medicare Part B premiums during 2023. Also discussed is how the recent high inflation that resulted in the 8.7 percent Social Security COLA has opened up an opportunity over the next three years for Roth IRA conversions.
Why Medicare Part B Monthly Premiums Decreased During 2023
As the Center for Medicare and Medicaid Services (CMS) explained: “The 2022 Medicare Part B monthly premiums included a contingency margin to cover projected Part B spending for a new drug for treating Alzheimer’s disease called Adulheim. However, lower than projected spending on both Adulheim and other Part B items and services resulted in a boost for Medicare Part B preserves, allowing for a Medicare Part B premium pullback.”
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The decrease in Medicare Part B premiums during 2023 is likely an aberration. Medicare Part B costs will likely increase in the future as more Baby Boomers come of age and enroll in Medicare and require Medicare services. The Medicare Part B standard premium and IRMAA premiums will resume increasing in the near future, which has been the long-term trend over the past 15 to 20 years.
Another consideration is that the Social Security and Medicare trustees reported continuing financial stress in the Social Security and Medicare trust funds during 2022. Social Security’s Old Age and Survivor (OAS) trust fund (which pays retirement and survivor benefits) was projected to be depleted by 2034. Medicare’s Hospital Insurance (HI) trust fund, which helps pay for services including inpatient hospital care was projected to be depleted by 2028. Bottom line: Someone will have to pay keeps these programs going. For the Medicare Part B trust fund, one likely way of sustaining the fund will come from high-income senior citizens paying higher IRMAA Medicare Part B premiums.
Roth Conversions Could Lower the Risk of Paying Higher IRMAA
Since an individual’s Medicare Part B monthly depends on the individual’s modified adjusted gross income (MAGI), the higher the individual’s gross income the higher the individual pays in Medicare Part B premiums. Included in the individual’s gross income is interest, dividends, capital gains, Social Security, CSRS and FERS annuities, traditional TSP and traditional IRA withdrawals, net-income from self-employment and rental income.
What is not included in gross income are Roth IRA withdrawals. This means that those employees and retirees who own traditional IRAs may want to consider converting the traditional IRAs to Roth IRAs over a period of time, ideally before they enroll in Medicare. Those federal employees ages 59.5 and older and federal retirees may want to consider performing a series of traditional TSP transfers to Roth IRAs. The next three years may be an excellent time to perform these conversions and transfers to Roth IRAs. This is because federal tax rates are expected to rise sharply, effective January 1, 2026, due to the fact that the current lower individual federal income tax rates (resulting from the passage of the Tax Cuts and Jobs Act of 2017) will cease as of December 31, 2025. Effective January 1, 2026, individual tax rates will revert to 2017 individual tax rates, inflation adjusted.
The recent high inflation has resulted in the IRS raising marginal tax bracket limits at record amounts for 2023. This could allow for Roth IRA conversions at relatively low tax rates. For example, for married couples filing jointly the top of the 22 percent marginal tax bracket went from taxable income of $178,150 in 2022 to $190,750 in 2023. The top taxable income for the 24 percent marginal tax bracket went from $340,100 in 2022 to $364,200 in 2023.
Moving money into a Roth IRA can service many purposes including no minimum required distributions and thereby possible holding down the income reported for IRMAA purposes. If the money stays in a traditional IRA (and/or in the traditional TSP) then when RMDs start at 72, 73 or age 75 (depending on when the IRA owner or federal annuitant was born), increasing the amount of taxable and reportable income could lead to higher marginal tax rates and perhaps triggering higher IRMAA premiums.
It is recommended that traditional IRA owners start conversions “earlier than later” (ideally when they are in their 40’s and early 50’s) in order to perform a series of partial Roth conversions at a time of lower federal marginal tax rates. Ideally, conversions will begin before a traditional IRA owner is younger than age 63 in order to generate income that will not affect IRMAA premiums.
Finally, federal annuitants with modest incomes who perform Roth IRA conversions may be able to reduce the amount of income reported on future tax returns and therefore decrease the amount of the taxable portion of their Social Security benefits. In short, the more money federal employees and retirees move to the Roth side, the less the impact of RMDs and potentially the less they will be paying in Medicare Part B premiums for the rest of their lives.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
