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Understanding Medicare Premiums

Understanding Medicare Premiums

August 03, 2020
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Once attaining age 65, you are generally eligible for Medicare and should consider enrolling as soon as possible. Specifically, if you or your spouse worked for at least 10 years in Medicare-covered employment - you paid "into the system" for 40 quarters, or have End-Stage Renal Disease (ESRD), Amyotrophic Lateral Sclerosis (ALS), or a Social Security-qualified disability and meet certain SSA requirements - you are eligible. When we say Medicare, we are referring to "Original Medicare" which is comprised of Medicare Parts A & B.

Additional Content Alert! See our attached "A Summary of Medicare Mind Map" at the bottom of the page for a better overall understanding of Medicare.

Part A

Medicare Part A is the hospital insurance component of Medicare. Most people have met the eligibility requirements for Medicare by age 65 and therefore Medicare Part A basically free, aka no premiums are due (you've essentially paid "into the system" throughout your working years). However, Part A does have an annual deductible to be met first. The deductible is $1,408 for 2020 and typically increases annually.

If you have not worked for 40 quarters paying "into the system", you will have to pay a premium for Part A. The current Part A premium for those "uninsured" can be up to $458 each month in 2020, and typically increases annually.

For more information, see our article: Signing Up for Medicare Parts A & B.

Part B

Medicare Part B is your medical insurance and therefore covers almost everything else. Please be aware that it does not cover absolutely everything. It will not cover things like your prescription drugs, or your dental/vision needs for example. Medicare Part B is a co-insurance, it covers 80% of eligible costs and you cover the other 20%.

Medicare Part B does have monthly premiums - even if you have "paid into the system". The base premium amounts typically increase annually for inflation and are $144.60 for 2020. Note that there can be permanent penalties that are tacked onto this premium if you sign up too late. Part B also has its own annual deductible that must be met for services which is $198 in 2020. If you receive Social Security payments, the Part B premiums are automatically deducted from those payments, otherwise they bill you quarterly for it.

For more information, see our article: Signing Up for Medicare Parts A & B.

Part C (Medicare Advantage) & Medicare Supplements (Medigap)

Medicare Part C, otherwise known as "Medicare Advantage" is not required to have as it is just another way of going about obtaining coverage - it is a private alternative to Parts A & B. Medicare Advantage plans have their own separate premiums, sometimes even $0 premiums - although there are usually multiple caveats to those plans - and they must be paid in addition to Part B premiums.

These plans often include prescription drug coverage. If that is the case with your Medicare Advantage plan, you do not need to sign up and pay for Medicare Part D.

There are also Medicare Supplement Plans which are used instead of Medicare Part C - usually for those that want more comprehensive coverage. These plans are used in conjunction with Medicare Parts A, B & D, and cover the 20% coinsurance owed by you when incurring costs covered by Part B; This is why Medicare Supplement plans are sometimes referred to as "Medigap" because they help fill that gap in coverage. These plans also have their own premiums based on age and zip code.

For more information, see our article: Medicare Part C or Medicare Supplement?

Part D

Medicare Part D is your prescription drug coverage. These are the "at home" drugs. Some drugs prescribed in certain outpatient care situations can be covered by Part B. Prescription drugs may not be necessary when you first sign up for Medicare (maybe you don't take any drugs), but they will likely be needed sometime in the future. Therefore you should consider signing up when you sign up for Part B since there will be permanent penalties for signing up late. Note that prescription drug coverage is included in some Medicare Advantage Plans (Part C plans), and in those cases you wouldn't need Part D.

Medicare Part D has its own premiums based on the drugs you need and zip codes, the base premiums currently average anywhere from $32-$40 per month. Again, remember that there will be permanent penalties tacked on to your premiums for signing up late.

For more information, see our article: Signing Up For Medicare Part D.

Income-Related Monthly Adjustment Amount (IRMAA)

There is a "surcharge" that applies to Medicare Part B and D premiums called the income-related monthly adjustment amount or IRMAA. This surcharge is for those with "higher incomes". The Social Security Administration publishes updated tables each year that determine if your Modified Adjusted Gross Income causes you to have an increase in Medicare premiums. Specifically, how you file taxes and your MAGI from 2-years prior is what determines where you fall in the table.

For more information on IRMAA and planning opportunities to avoid it, see our article:  Prevent Your 401(k) From Causing Your Medicare Premiums to Skyrocket.

The Bottom Line

Understanding Medicare premiums is a very important aspect of retirement planning. It is also important to understand what types of health benefits your employer will or will not offer you once reaching age 65 - when you become eligible for Medicare. If you are a higher income earner, it is crucial to plan early to try and stay away from or mitigate IRMAA surcharges, as these can cause substantial increases in healthcare costs in retirement. For advice on how to structure and plan for your retirement, reach out to a professional who understands comprehensive retirement planning.


Cameron Valadez is a CERTIFIED FINANCIAL PLANNER™ in Riverside, California


Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.


Waddell & Reed does not provide tax or legal advice. This information has been obtained from sources believed to be reliable but Waddell & Reed does not guarantee the accuracy or completeness of the information. The information is for educational purposes and it is not financial advice or a specific recommendation of any kind. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (08/20)