24 May Avoiding the Medicare Surcharge: What You Need to Know About IRMAA
Reaching Medicare eligibility solves one of the most expensive problems for many retirees: healthcare. The convenience and affordability of Medicare is one of the benefits of turning 65 – after you cipher through the various parts & plan options. However, Medicare is means-tested. If you make over a certain amount of income, surcharges on the Medicare Part B and Part D premiums kick in.
Making it a little more painful, it’s not a flat increase. The surcharges go up as incomes get higher and at the highest level can amount to hundreds of dollars a month in additional costs.
The key to avoiding or minimizing the surcharge is to control income levels. In early retirement, this may be reasonably easy to do. But if you’ve amassed a retirement nest egg in a traditional tax-deferred 401(k) or IRA, once required minimum distributions (RMDs) kick in at age 72, you could find yourself with a very hefty bill.
What is the IRMAA?
Medical insurance (Part B) and prescription drug insurance (Part D) are paid by a combination of the federal government (75%) and a premium paid by a Medicare enrollee (25%.) The IRMAA, which stands for Income-Related Monthly Adjustment Amount, is a surcharge applied to the Part B and Part D premium.
It’s calculated by the social security administration, using the most recent data available from the IRS. The social security administration will notify you if your income level triggers a surcharge. The cooperation between these two government agencies means a two-year look back, as the SSA gets data directly from the IRS and builds in a lag time to allow for returns to be processed. In practice, your 2024 Medicare IRMAA is based on your 2022 income.
Right away, you can see that some problems might arise. If you work right up until Medicare begins at age 65, your income from work might trigger the surcharge before your income drops in retirement.
There is a remedy. You can request a “new initial determination” to get the SSA to recalculate your surcharge. There are five qualifying instances for this:
- An amended tax return since the original filing
- Correction of IRS information
- Use of two-year-old tax return when SSA used IRS information from three years prior
- Change in living arrangement from when you last filed taxes (e.g., filing status is now “married filing separately,” but you previously filed jointly)
- Qualified life-changing event(s)
Number five, the “qualified life-changing event,” would be the one that would cover a work stoppage.
Managing Retirement Income With an Eye to IRMAA
The IRMAA is calculated on your Modified Adjusted Gross Income, which is your AGI plus certain interest income. Since income in retirement comes from investment distributions & dividends for many people, that’s the first place to think about managing the IRMAA.
Unfortunately, there’s not a one size fits all recommendation about how to manage your distributions to lower your MAGI. This is where an experienced financial advisor comes in. A full-service advisor who can incorporate both tax & retirement planning into their advice can illustrate how tax strategies like Roth Conversions will impact your Medicare premiums.
At HCO, we provide clients with a clean, two-page tax return analysis that shows future Medicare premium surcharges. We take a detailed look at these thresholds when evaluating Roth Conversions, distribution strategies, and even charitable giving goals.
The Bottom Line
Medicare is a great way to access healthcare in retirement, but your annual premiums depend on a few moving pieces like your income.
Proactive thought and harmonizing your retirement & tax planning can help you maintain the income you need while minimizing the Medicare surcharges you experience.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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