Navigating Medicare can sometimes make retirees or near-retirees feel like they are deciphering a foreign language. One of the trickier parts is understanding IRMAA. If you’ve heard this term thrown around and felt a bit lost, don’t worry. We’re breaking it down in a way that’s easy to digest. So grab a coffee, and let’s dive in.

What Is Medicare IRMAA?

IRMAA stands for Income-Related Monthly Adjustment Amount. Essentially, it’s an extra charge that gets added to your Medicare Part B and Part D premiums if your income is above a certain level. This isn’t a flat fee. Rather, it’s a sliding scale based on your income. In other words, the more you make, the more you pay.

How Does Medicare IRMAA Work?

Let’s start with the basics. When they enroll in Medicare, most people pay a standard premium amount for Part B (which covers medical services like doctor visits) and Part D (which covers prescription drugs). However, if your income exceeds a certain threshold, you’ll have to pay more than the standard premium. This extra amount is what we call IRMAA.

The Social Security Administration determines whether you owe IRMAA based on your modified adjusted gross income (MAGI) from two years prior. So, for 2024, they’ll look at your 2022 tax return. Your MAGI includes your adjusted gross income plus any tax-exempt interest income. While we do a fair amount of tax planning for our clients here at Flagstone, we’re not accountants, CPAs, or tax preparers. So you’ll want to use this information while discussing the issue with your tax expert.

Income Thresholds and Premiums

The income thresholds are divided into different brackets. Here’s a simplified breakdown for 2024, which is based on 2022 MAGI:

Important Things to Know

As you think about how Medicare IRMAA might make a difference for you, remember these factors:

1. Two-Year Lookback

Remember, IRMAA is based on your income from two years ago. If your income has significantly dropped due to retirement or other reasons, you can appeal the IRMAA decision. However, there’s no guarantee the appeal will be accepted.

2. Life-Changing Events

If you’ve experienced a life-changing event that affects your income, such as retirement, divorce, or the death of a spouse, you can request a new initial determination. This can potentially lower your IRMAA charges.

3. Filing an Appeal

If you believe your IRMAA is incorrect or if your income has changed, you can appeal. The process involves submitting an SSA-44 form along with documentation of your changed circumstances.

How to Avoid or Minimize IRMAA

While you can’t always avoid Medicare IRMAA, there are some strategies to potentially minimize its impact:

  • Tax Planning: Work with a financial advisor and a tax advisor to manage your income sources strategically. Multiple income sources like pension income, social security benefits, and IRA withdrawals provide some options on timing, so you may be able to craft an income strategy that considers IRMAA thresholds.
  • Understand MAGI: Be aware of what counts towards your MAGI and plan accordingly. Some sources of income, like tax-exempt interest, might be included even though they aren’t taxable.
  • Stay Informed: Keep an eye on your income and be proactive if you anticipate changes that might push you into a higher IRMAA bracket.

Real-Life Example

Let’s say Jane is 67 and retired. Her income in 2022 was $110,000, which includes her pension and some investment income. According to the IRMAA brackets for 2024, she falls into the $103,001–$129,000 range. This means she’ll pay the standard Part B premium plus an additional $69.90 each month, and her Part D premium will also increase by $12.90.

Now, if Jane decides to sell a property in 2024 and realizes a significant capital gain, this could bump her 2024 income up substantially. If this happens, her IRMAA for 2026 could be higher unless she can manage her income or appeal if there is a qualifying life-changing event.

A Note on Roth Conversions and Medicare IRMAA Charges

One IRMAA-related issue that consistently comes up with our clients is related to Roth conversions. Because of the potential tax benefits, many retirees are using Roth conversions during the gap years before social security income or Required Minimum Distributions (RMDs) begin. IRMAA charges can increase because of Roth conversions, so some folks are hesitant to go through with Roth conversions. It certainly is a factor to consider. In many cases the projected benefits of a Roth conversion outweigh the cost of IRMAA, so rather than not doing a Roth conversion altogether, we tend to work with a client’s tax preparer to convert an amount that might creep up to (but not exceed) a specific IRMAA income threshold. That’s not always the case, but it’s an example of how IRMAA charges should be considered when retirees are doing tax planning or income planning.

Final Thoughts

Understanding IRMAA is crucial for retirees to effectively manage their healthcare costs and make wise retirement planning decisions. While the additional premiums might seem daunting, being aware of how they work and planning your finances can help mitigate their impact.

Take the time to review your income and plan ahead. Consider consulting with a fee-only financial advisor and a tax advisor who can help navigate the nuances of IRMAA. With help, you can ensure your retirement years are as smooth and financially secure as possible.

Medicare can be complex, but with a bit of knowledge and planning, you can steer clear of surprises and enjoy your retirement with peace of mind. Remember, the goal is to stay informed and proactive, so you’re always ahead of the curve. Contact us if you’re not already a client and would like to form a retirement plan that considers the impacts of IRMAA.