A Medicare Surcharge That Might Surprise You If You’re Not Careful – IRMAA
You could get hit with much higher Medicare premiums today because of something that boosted your income two years before.
Who out there has heard of IRMAA?
Likely, not many. When I hold seminars and ask who’s heard of IRMAA, few people raise their hands. For those who haven’t and are getting closer to Medicare eligibility (age 65 is the earliest unless you have a disabling medical condition), it’s worth your while to pay attention. IRMAA — income-related monthly adjustment amount — is one of those unwelcome surprises that can confront you as you near retirement or are in the early stages of it.
For Medicare beneficiaries who earn over $91,000 and who are enrolled in Medicare Part B and/or Medicare Part D, IRMAA is important to understand. It’s a surcharge added to the Part B and Part D premiums.
This is how it works. If you are a single filer on your income tax return, the base premium for Part B of Medicare is $170.10 per month in 2022. But as soon as your modified adjusted gross income (MAGI) goes over $91,000, your Medicare premiums are going to start going up.
For those single filers in the MAGI range of over $91,000 to $114,000, that means your Part B premium is $238.10. For those in the over $114,000 to $142,000 bracket, the premium is $340.20. IRMAA surcharges for Part D (the Medicare prescription drug benefit) are also added to the regular premium for the enrollee’s plan.
You’ll receive a notice from the Social Security Administration if you’re being assessed IRMAA. What’s really confusing is that IRMAA is determined based on your income from two years earlier. In other words, for your 2022 Medicare premiums, your 2020 income tax return is used. The amount is recalculated annually.
There are five IRMAA-related MAGI brackets for Part B for those filing single as well as for those who are married filing jointly. In the latter filing scenario, Part B premiums are $238.10 for couples with a MAGI of over $182,000 to $228,000; $340.20 for couples filing jointly with a MAGI of over $228,000 to $284,000; and so on up to a maximum Part B premium of $578.30 for those married filing jointly with a MAGI of $750,000 or more. For single filers, the highest Part B premium is $578.30, which is for those with a MAGI of $500,000 or more.
You can appeal your IRMAA determination if you believe the calculation was erroneous. Also, if you’ve had a life-changing event and your income has gone down, you may use Form SSA-44 to request an IRMAA reduction.
People can be enjoying a nice retirement and never heard of IRMAA until they get a notice. Here are some reasons you might encounter it:
Excessive Roth conversions in one year
Doing Roth conversions to reduce taxes in retirement is a good idea. Unlike traditional IRAs and 401(k)s, Roth IRAs and Roth 401(k)s are tax-free when the money is withdrawn after age 59½. But the conversions themselves are taxable in the year they happen, driving up your taxable income and perhaps putting you in a higher Medicare tier.
For example, you might have $120,000 in income during your first year or two of retirement, but then you do a $100,000 Roth conversion. Your MAGI is then over $200,000, and two years later you get a notice that your IRMAA caused your Medicare Part B premium to increase from $340.20 a month to $544.50.
To avoid that, your Roth conversions should be handled in a smart way, over a series of years to fit your tax return while taking into account your IRMAA calculation. A retirement planner can help you determine how much you can convert to a Roth without jumping up to a higher IRMAA tier.
The death of a spouse
In this scenario, let’s say the surviving spouse is entitled to the full pension of the deceased. That, coupled with Social Security and any ancillary income, could boost the survivor’s MAGI and raise their Medicare premium.
Required minimum distributions (RMDs)
Starting when you reach age 72, you are required to withdraw a certain percentage from your tax-deferred retirement accounts each year. This is called a required minimum distribution and can push you into a higher tax bracket, potentially making you subject to IRMAA. This points to the importance of tax planning for retirement well before you’re retired, and specifically, doing Roth conversions — albeit in a systematic, limited way, as mentioned earlier.
The most important thing you can do to limit or avoid IRMAA is to get educated about it before it can affect your Medicare premiums. Ask your retirement professional to do an analysis so you don’t receive an unwelcome surprise in the form of a costly surcharge.
Dan Dunkin contributed to this article.
Securities offered through CFD Investments, Inc., registered broker-dealer, member FINRA & SIPC. Kurt Supe and Brian Quick offer advisory services through Creative Financial Designs, Inc., Registered Investment Adviser. Creative Financial Group is a separate unaffiliated company. The CFD Companies do not provide legal or tax advice.
About the Author
Senior Partner, Creative Financial Group
Brian Quick is a senior partner and financial adviser for Creative Financial Group. Growing up with a stockbroker father and lifelong teacher for a mother, he developed a love for the financial markets at an early age. With over 30 years of experience in the financial services industry, Quick focuses on tax diversification planning through tax-efficient/tax-free income strategies, comprehensive financial planning and financial security planning focused on risk management. He earned a bachelor's in business administration from Indiana Wesleyan and continued with the American College of Financial Services to earn his professional designations as a Certified Life Underwriter and Chartered Financial Consultant in 2001.
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