Medicare is a federal health insurance program that provides coverage for American citizens and permanent legal residents aged 65 and older, as well as some younger people with qualifying illnesses and disabilities. As of 2021, there were approximately 62.7 million people enrolled in Medicare, which amounts to more than 19 percent of the total US population.
Because most of us will rely on Medicare (at least to some extent) to help cover our healthcare costs as we age, it’s a good idea to develop an understanding of the program, how it works, and what expenses are covered so we know what to expect when the time comes for us to enroll.
How does Medicare work?
The Medicare program is overseen by the Centers for Medicare & Medicaid Services (CMS), a branch of the Department of Health and Human Services (HHS). It’s funded through a combination of payroll taxes, premiums paid by beneficiaries, taxes paid on social security benefits, and other funds as authorized by Congress.
The best time to sign up for Medicare is during your Initial Enrollment Period, which starts 3 months before you turn 65 and lasts for a total of 7 months. If you fail to sign up during this time, you may be forced to pay a monthly late-enrollment penalty, which will increase the longer you wait to sign up. In some cases, you may qualify for a Special Enrollment Period (if you’re still working and are covered by an employer-sponsored health plan when you turn 65, for example). That being said, it’s important to do your own research and make sure you understand the rules in order to avoid paying any unnecessary fees.
What are the parts of Medicare?
Medicare is separated into 4 parts: Part A, Part B, Part C, and Part D. When you first sign up (and again during certain times of the year), you’ll be asked to choose how you receive your Medicare coverage. There are 2 main options: Original Medicare (Part A and Part B) and Medicare Advantage (Part C). Some people also choose to get Medicare Prescription Drug Coverage (Part D) and/or Medicare Supplemental Insurance (Medigap) to help cover additional costs.
Medicare Part A
Medicare Part A helps cover inpatient hospital stays, care in a skilled nursing facility, hospice care, and certain home healthcare.
Medicare Part B
Medicare Part B helps cover doctors’ visits, outpatient care, medical supplies, and certain preventative care.
With Part B, you’ll pay a monthly premium, which is automatically deducted from your benefit payment if you receive Social Security, Railroad Retirement Board, or Office of Personnel Management benefits. Otherwise, you’ll receive a bill. Most people pay the standard premium, but if your modified adjusted gross income is above a certain amount, you may pay extra.
It’s important to take these premiums into account when considering annual tax strategies such as roth conversions, capital gain/loss harvesting, distribution planning, selling of properties, etc. For married couples filing jointly, these additional premiums can amount to a difference of a few thousand dollars in their overall tax burden.
Medicare Premium Planning
If your yearly income in 2020 (for what you pay in 2022) was
You pay each month (in 2022)
File individual tax return
File joint tax return
File married & separate tax return
$91,000 or less
$182,000 or less
$91,000 or less
above $91,000 up to $114,000
above $182,000 up to $228,000
above $114,000 up to $142,000
above $228,000 up to $284,000
above $142,000 up to $170,000
above $284,000 up to $340,000
above $170,000 and less than $500,000
above $340,000 and less than $750,000
above $91,000 and less than $409,000
$500,000 or above
$750,000 or above
$409,000 or above
Together, Part A (Hospital Insurance) and Part B (Medical Insurance) are known as “Original Medicare.” You pay for services as you receive them and start each new year off with a deductible. In most cases, you’ll be responsible for paying 20 percent of the cost of Medicare-covered services once you reach your deductible, and the program will pay for the remaining 80 percent. This is known as coinsurance.
With Original Medicare, you can go to any doctor, hospital, or clinic that accepts Medicare, and you typically don’t need a referral to see a specialist.
Medicare Part C
Medicare Part C is known as “Medicare Advantage.” These are private, Medicare-approved plans that serve as all-in-one alternatives to Original Medicare. These plans bundle Part A and Part B together and often include Part D (prescription drug coverage) as well.
Medicare Advantage plans may have lower out-of-pocket costs than Original Medicare and sometimes offer additional benefits, such as vision, hearing, and dental services.
In most cases, you’ll be limited to doctors and hospitals that are in your plan’s network and you may need a referral to see a specialist.
Medicare Part D
Medicare Part D helps cover the cost of prescription drugs, including many recommended shots and vaccines. Part D is included in most Medicare Advantage plans, while Original Medicare beneficiaries can choose to add a separate Part D plan if they wish to have prescription drug coverage.
If you have Original Medicare, you have the option to buy a Medicare Supplemental Insurance (Medigap) policy to help cover your out-of-pocket costs (such as your 20 percent coinsurance). If you have a Medicare Advantage plan, you aren’t allowed to buy Medigap.
Set Yourself Up for a Comfortable Retirement with Chatterton & Associates
Healthcare costs are an important consideration when it comes to effective retirement planning, and Medicare often represents a key piece in that puzzle. At Chatterton & Associates, we work with our clients to develop strategic retirement plans that take each client’s specific goals, preferences, risk tolerance, and timeline into consideration.
Let us help you ensure your medical and financial needs are met in retirement. Contact us today to get started.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc., nor its registered representatives, offer tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.