Downsizing? Here’s how to make sure you don’t get dinged with a Medicare premium surcharge

Retirement can be a time of newfound freedom and relaxation, with no more work deadlines or stressful commutes. However, for retirees who are not aware of a specific rule regarding Medicare, selling the family home could lead to an unpleasant surprise.

The rule in question is the Medicare premium surcharge, also known as the income-related monthly adjustment amount (IRMAA). This rule affects what some retirees pay for Medicare Parts B and D. Making significant financial decisions, such as selling the family home, can trigger steep premium increases that catch seniors off guard.

While the average age for downsizing is around 55, many individuals wait until later in life to make this move. Unfortunately, delaying downsizing can result in a drastic increase in Medicare premiums for years to come.

To understand how Medicare works, it’s essential to know that standard Medicare (Part A) is generally free for Americans over the age of 65, as most individuals pay into the program during their working years. Part A covers services such as inpatient care at the hospital, hospice, and some home health services.

On the other hand, Part B covers visits to doctors and other outpatient medical care, and this is where income becomes a factor. The standard Part B premium for 2026 is $202.90 per month. However, the IRMAA surcharge is calculated on a sliding scale with five income brackets, reaching up to $500,000 for individual filers and $750,000 for married couples filing jointly. Part D prescription drug coverage also carries its own IRMAA surcharge.

Selling the family home can significantly impact a retiree’s income, especially if they have built up substantial home equity over the years. Seniors in high-cost-of-living areas like California and Florida may easily exceed the $500,000 yearly income threshold just by selling their homes. Additionally, the premium increase has a two-year look-back period, meaning that what you pay in 2026 depends on what you earned in 2024.

To avoid or prepare for premium increases, retirees have several options. One way to sidestep IRMAA is to sell the home before the two-year lookback window affects Medicare eligibility. Timing the sale before the age of 63 can prevent the gains from impacting premiums once enrolled at 65.

The IRS allows individuals to exclude up to $250,000 in profit for single filers or $500,000 for married couples from the sale of a primary home if they have lived there for at least two of the last five years. If gains fall within this range, it may be possible to avoid triggering IRMAA.

For those past the age of 63 and not needing to sell, staying put or renting out the home can help protect Medicare premiums. If selling is inevitable, retirees should be prepared for the impact on premiums and set aside enough funds to cover the surcharge for two years.

Navigating the complexities of the IRMAA rule, including capital gains, Social Security income, and retirement account distributions, can be challenging. Consulting a retirement-focused financial planner can help retirees understand the full financial implications and strategically time their home sale.

Ultimately, downsizing can still be a beneficial move in retirement, but it’s crucial to be aware of any potential impacts on Medicare premiums. By being proactive and informed, retirees can make sound financial decisions that support their retirement goals.