Countless seniors rely on Medicare for health coverage in retirement. But knowing when to sign up can help you make the most of your benefits while avoiding needless penalties.

Your coverage under Medicare kicks in at exactly 65, but you don't need to wait until your 65th birthday to sign up. Rather, your initial enrollment window starts three months before the month you turn 65 and ends three months after the month in which you turn 65. So, all told, you get a solid seven months to sign up.

Now if you miss that initial enrollment window, you can still sign up during Medicare's general enrollment period that runs from Jan. 1 through March 31 each year. But not signing up during your initial enrollment period could end up costing you a higher Part B premium -- for life.

The problem with missing your enrollment deadline

Most Medicare enrollees don't pay a premium for Part A, which covers hospital visits. However, they do pay for Part B, which covers preventative care and diagnostic services. Currently, the standard Part B premium is $134 (though it could be higher). If you don't sign up for Medicare during your initial enrollment window, you'll face a 10% increase in your Part B premiums for every year-long period you're eligible for coverage but don't enroll. Therefore, it generally pays to sign up for Medicare at 65 -- unless you happen to qualify for one major exception.

When you still have health coverage at 65

If you're still working by the time you turn 65, and your employer offers health insurance, you don't need to sign up for Medicare at that time -- and you don't have to worry about the aforementioned Part B penalty, either. As long as your company employs 20 people or more, you can hold off on Medicare and stay on your company's group plan for as long as it remains available to you.

That said, you might as well sign up for Medicare Part A because doing so won't cost you anything. Even if you have health coverage through your employer, it can act as a secondary form of insurance in case you need it. However, if you're eligible for a health savings account and intend to take advantage of one, you'll want to hold off on enrolling even in Part A.

So what happens once your group health coverage runs out, either because your company stops offering it or you stop working there? At that point, you'll get a special enrollment window to sign up for Medicare that will last for eight months. As long as you enroll during that time, you'll get the coverage you need without having to worry about penalties.

Incidentally, the same rules apply if you're married and are covered through your spouse's group health plan. It doesn't matter that you're not the one who's actually working.

Finally, if you sign up for Social Security prior to age 65 (technically, you can file as early as 62), you'll be automatically enrolled in Medicare Parts A and B once you reach 65. You'll then have the option to cancel Part B if you're receiving coverage through a group health plan and don't need Medicare just yet.

If you don't have group health coverage come age 65, then it absolutely pays to sign up for Medicare during your initial enrollment window. Doing so could save you money on your long-term premium costs, not to mention ensure that your healthcare needs are covered.