Individuals who have worked much or all of their adult lives count on reaping the benefits they’ve worked so hard for such as Social Security and Medicare. As pre-retirees consider enrolling in Medicare, it’s reasonable to consider how investments will affect their Medicare premiums among other concerns what as what to expect from your welcome to Medicare visit. 

Many things affect Medicare – age, income, length of employment, assets, and investments. Your assets and investments can affect your entitlements to federal programs when you reach retirement age. The impact on your Medicare premiums depends on your tax filing status and income. Your income doesn’t have an impact on all parts of Medicare – just Parts B and D. 

Understanding Terms That Affect Medicare Premiums

The topic of how and whether your investment portfolio affects your Medicare premiums will be easier to comprehend if you understand the following terms:

Net investment income – Investment income such as interest, capital gains, dividends, and other investment income.

Net income investment tax (NIIT) – The net investment income tax (NIIT) refers to an IRS code that describes who must pay taxes on their investments. 

Modified adjusted gross income (MAGI) – Your adjusted gross income after accounting for certain deductions and tax penalties. In simple terms, it’s the amount of income you earned before subtracting deductions. 

Medicare Income-Related Monthly Adjustment Amount (IRMAA) – An additional amount certain individuals must pay for Medicare Parts B or D if their income is over a certain threshold. 

What Does Net Investment Income Include? 

To determine what your net investment income is, you need to understand what types of investments and income the IRS considers as net investment income. 

The IRS does not include the following types of income as net investment income:

• Wages

• Self-employment income

• Nonpassive income

• Social Security benefits

• Alimony

• Unemployment compensation

• Tax-exempt interest

• Distributions from qualified plans – 401(a), 403(a), 403(b), 408, 457(b) 

Net investment income does include:

• Interest

• Dividends

• Rental income

• Royalty income

• Non-qualified annuities

• Capital gain distributions from mutual funds

• Capital gains from the sale of real estate including the sale of a second home

• Gains from the sale of interests in partnerships and S corporations (IRS)

When your IRMAA exceeds a certain threshold, your Medicare premiums will go up.

How the IRS Calculates IRMAA

Remember that Medicare looks back at your income for two years to determine your income so the Medicare premiums for 2023 are based on your income from 2021. 

IRMAA is also based partly on your income and partly on your marital status. The chart below shows how your Medicare premiums could change based on your income including your investment income:

Example of How Investments Can Impact Medicare Premiums

Let’s say that a married couple filing jointly is at the full retirement age and both partners have enrolled in Medicare. 

Here’s what their financial picture looks like:

• They receive a combined Social Security income of $50,000 annually.

• They have a non-qualified account that brings in $70,000 in dividends annually. 

• They have municipal bond interest that generates $30,000 annually.

• They are receiving the required minimum distribution from an IRA that generates $50,000. 

• These amounts total $200,000 which is their MAGI. 

In looking at the chart above under premium change for married couples filing jointly, you can see that their monthly Medicare premium for Part B will be $230.80 and their Part D premium will be $12.20 plus the plan premium which is over the standard Medicare premiums. 

Forward-Thinking Minimizes the Impact of Medicare Premiums

If we consider the example above, the decisions this couple makes about their finances now will have an impact on the rates they will have to pay for Medicare Parts B and D in two years. 

If they want to avoid an increase in their Medicare premiums, they might decide to do a Roth IRA conversion or gift some stocks. A financial planner is the best person to answer questions and guide individuals and couples as they make decisions that impact their Medicare premiums and retirement income.