Here’s a tale from the retirement belt about Medicare costs.

My neighbor turns 65 this fall and has spent the better part of the last nine months trying to understand Medicare and the multiple options available. To say it’s a confusing, jumbled mess is a gross understatement.

But his persistence paid off. He finally found an insurance agent in Florida who took the time to sit down with him and explain the ins and outs, the options, and the costs.

And that’s where his real trouble started.

Just when it was all beginning to make sense, the ceiling fell in. Based on his income, the insurance agent informed him that his total Medicare costs (including parts B and D) would be almost $800 per month.

It seems his income was above the threshold for the highest rates, and unless he could find a way to lower his adjusted gross income, his rates would stay that high.

My friend has worked hard and has done well. But he (and anyone else who has experienced the shocking reality of what the program is really about) finds it hard to believe that after years of paying income and Medicare taxes, Medicare can cost more than most private insurances.

In the lower income brackets, Medicare is quite reasonable. For modified adjusted gross incomes of $170,000 and lower, the monthly fee per spouse for part B is $134. Part D varies by provider, but it isn’t bad.

But if your modified adjusted gross income is just a dollar over $170,000, part B increases by $53.50 per month per spouse. That’s an annual premium increase of $1,284 per year… just for part B.

If you’re in the higher income brackets, the premium increase is $2,424 per year.

And there are new higher Medicare income thresholds coming in 2019 that will increase annual premiums even more.

The income the government uses to calculate your premium includes tax-free income and any money distributed from traditional retirement accounts. That’s a whole other problem for retirees.

When the required minimum distributions (RMDs) come due at age 70 1/2, how much you withdraw from your nest egg is out of your hands. There is a set formula for the withdrawals, and you have to take all of it. There’s a 50% penalty on the amount not distributed if the minimum isn’t met.

Two ways to reduce your income to stay under these premium increases is to give your money away in the form of qualified charitable contributions or to convert your retirement account to a Roth IRA.

Roth IRAs do not have RMDs (until the owner of the account passes away). That will eliminate one source of income and give you some control over premium increases.

And while giving away our money to limit Medicare costs isn’t anyone’s first choice (believe me), it’s better than the alternative.

No one wants an $800-per-month surprise like my friend got. Make sure you take a hard look at what your health insurance will cost you after you step away from the work world.

Good investing,

Steve