What Is IRMAA? (How Your Income Affects Your Medicare Premiums in Retirement)
When planning for healthcare in retirement, you may have come across the Medicare “Income-Related Monthly Adjusted Amount,” or “IRMAA” for short. It’s a fancy way of referring to the extra monthly premium amounts that you might pay on your Medicare Part B and Part D coverages.
Those extra monthly premium amounts are basically “surcharges” on your Medicare premiums, and they can apply to those with Standard Medicare and Medicare Advantage plans. Whether IRMAA applies to you and other Medicare beneficiaries is determined by your modified adjusted gross income (MAGI) from two prior tax years.
While you obviously want to maximize your income in retirement, in some cases this can lead to those additional surcharges on your Medicare coverage. If your income exceeds a certain amount each year, then you may have to pay the monthly adjustment amount on top of any taxes that you owe.
This surcharge is also in addition to the monthly premiums that you will pay for Medicare Parts B and D, which cover doctor visits and prescription drug coverage. IRMAA can raise the cost of Medicare by hundreds or even thousands of dollars per year for those whose incomes are high enough.
It’s a big but little-known issue, to say the least. In this article, we will go over the basics of IRMAA, how it works with Medicare and retirement in general, and some possible strategies that can help keep them and other healthcare costs at bay.
How Does IRMAA Work in Medicare?
If your income exceeds a certain threshold (which is indexed annually for inflation), then you will have to pay IRMAA along with your other Medicare premiums. IRMAA doesn’t cover any specific types of medical benefits or services. It’s just a surcharge added onto your Parts B and D premiums.
IRMAA is also based on your MAGI reported to the IRS from two years ago. MAGI is basically your total income before federal income tax deductions, apart from “above the line” deductions. If your income was above the threshold at that point, then you will pay IRMAA for this year. If your income has dropped substantially over the past two years, then you can apply to have the IRMAA payments waived.
How Is IRMAA Generally Calculated?
As briefly mentioned, IRMAA is based on your modified adjusted gross income that you reported on your taxes from two years ago. MAGI includes items such as earned income, taxable retirement plan distributions, investment income such as dividends, interest, and capital gains, and the taxable portion of your Social Security benefits.
If this amount exceeds the threshold, then IRMAA will be applied to your Medicare premiums.
What Is Medicare Part B IRMAA?
Part B IRMAA is the surcharge that can apply for Medicare Part B coverage. In 2023, the maximum amount that IRMAA could charge you for your Medicare Part B premiums is almost $400. But only a small percentage of all Medicare recipients have incomes high enough to warrant charging this amount.
According to the Medicare Trustees report, roughly 7% of Medicare Part B beneficiaries paid for IRMAA.
Can Losing Your Spouse Trigger IRMAA?
In some cases, the answer is yes. The income threshold for married couples is twice that of individuals.
So, say that you and your spouse were well below the income limit for married couples and then your spouse passes away. Then your remaining income may still be high enough for you to have to pay IRMAA by yourself.
What Are Some Strategies for Relief from IRMAA?
You can do several things to reduce or eliminate how much in Medicare surcharges you owe on top of your Medicare premiums. Some of these strategies include:
IRMAA Relief Strategy #1: Harvesting Tax Gains
If you hold securities that have gone up in value in taxable accounts, you could sell them to realize the gains while you are still working. Then you will buy them back immediately.
This increases the cost basis so that you can have less capital gains tax when you might sell those holdings for good after you retire.
IRMAA Relief Strategy #2: Roth Conversions
If you have traditional IRAs or qualified plans from your employer laying around, consider converting them to Roth IRAs. By doing so, you won’t have to count your distributions from them in your MAGI.
Of course, you will have to pay the tax on your conversion upfront, but you would be taxed on it anyway when you draw it out if you leave your money in a traditional account or plan. That being said, this tax strategy shouldn’t be used lightly. Your financial advisor and tax advisor can help you with weighing the pros and cons in light of your overall situation.
IRMAA Relief Strategy #3: Increase Your Retirement Plan Contributions
What if you are still working when you become eligible for Medicare? You can increase your contributions to your traditional retirement plan or IRA to lower your MAGI for the year.
Remember that you must have at least as much earned income as the amount of your contributions for the year.
IRMAA Relief Strategy #4: Tax Loss Harvesting
Say that you own securities in a taxable account and they had fallen in value. They could be sold, and then once 30 days had passed, they could be bought back to satisfy the IRS “Wash sale.”
You can realize up to $3,000 worth of capital losses each year from doing this. You can also net your losses against any capital gains reaped during the year. However, this strategy shouldn’t be pursued lightly.
Just as with other tax-planning strategies, it’s prudent to talk to your financial advisor and tax advisor about this. They can help you consider the pros and cons for your personal situation.
IRMAA Relief Strategy #5: Delay Taking Distributions From Retirement Accounts
If you don’t need to draw from your retirement accounts for income, then wait until you must start required minimum distributions. This will also give your retirement accounts more time to grow.
IRMAA Relief Strategy #6: Charitable Distributions
The IRS allows you to take out up to $100,000 from your retirement accounts each year and donate that money directly to a qualified charity. These distributions therefore won’t count as MAGI for the purpose of the IRMAA calculation.
IRMAA Relief Strategy #7: Defer Taking Social Security
If you can wait until age 70 to start collecting Social Security benefits, then you could effectively lower your MAGI in the meantime. This can make a big difference, as those who will have 85% of their Social Security benefits taxed are most at risk for owing IRMAA.
You will also increase your overall monthly benefit by as much as 32% if you don’t start drawing benefits until you reach your maximum retirement age.
IRMAA Relief Strategy #8: Dispute the Surcharge
If your income has dropped greatly in the past two years, then you can appeal the amount of IRMAA that you owe. If you have had a major life change in the recent past, such as a death, divorce, retirement, or lost pension, then the IRMAA board may be willing to reduce or eliminate your surcharges.
The Bottom Line on IRMAA and Retirement Planning
IRMAA won’t apply to most Medicare recipients. However, if you do have to pay these surcharges, there are several things you can do to improve your situation.
Consult your financial advisor for more information about IRMAA, how it affects you, and what you can do to fight it. If you are looking for an experienced financial professional to help you, many independent financial professionals are available here at SafeMoney.com. They can listen to your situation, offer a variety of strategies and options from multiple financial services companies, and aren’t beholden to one parent company for their business.
If that sounds like a good fit for your goals, use our “Find a Financial Professional” section to connect with someone. You can request an initial appointment to discuss your goals, concerns, and financial situation. Should you need a personal referral, please call us at 877.476.9723.