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Let’s face it: retirement is expensive! Between lifestyle costs, taxes, and insurance, there’s a lot you have to plan for and coordinate in your spending plan.
While you may know that Medicare is a critical component of any retirement spending plan, there’s one expense that high-net-worth retirees in particular need to keep a close eye on—Medicare IRMAA.
What is Medicare IRMAA?
It’s a surcharge that increases your standard premium on Medicare part B, medical coverage, and part D, prescription drug coverage, if you earn above the annual threshold. Ultimately, IRMAA can increase your Medicare costs, making healthcare more expensive.
Read this article to learn how Medicare IRMAA impacts today’s retirees and some smart strategies to avoid carelessly paying too much.
What’s Medicare IRMAA?
IRMAA, or income-related monthly adjustment amount, can surprise new retirees because many don’t understand how it works and may not even know it exists.
As your income rises, IRMAA increases your monthly Medicare premiums. It’s important to note that a premium is different from a deductible. A premium represents the cost of maintaining coverage, and a deducible is your portion of the service or product expense.
The concept of IRMAA is very similar to how income tax brackets affect your tax bill when you file your annual tax return. If your taxable income pushes you into a higher tax bracket, you’ll owe more on a larger portion of your income.
For 2022, the base Medicare Part B premium is $170.10. This chart shows the Part B premiums for different income levels.
Individual | Joint | Monthly Premium |
$91,000 or less | $182,000 or less | $170.10 |
$91,000 – $114,000 | $182,000 – $228,000 | $238.10 |
$114,000 – $142,000 | $228,000 -$284,000 | $340.20 |
$142,000 – $170,000 | $284,000 – $340,000 | $442.30 |
$170,000 – $500,000 | $340,000 – $750,000 | $544.30 |
Greater than $500,000 | Greater than $750,000 | $578.30 |
Now, these income thresholds might not be what you actually make in a given tax year. Rather, the income measure Medicare uses to determine your premium payment is your modified adjusted gross income (MAGI).
For IRMAA, MAGI is your adjusted gross income plus:
Tax-exempt interest
Interest from US savings bonds used to pay for higher education expenses
Any income you earned abroad that’s not already included in your gross income
Other income you earned from specific foreign sources that aren’t otherwise included in your AGI
For most people, MAGI for IRMAA is going to be the same as their AGI, or with tax-exempt interest added.
But not so fast. You won’t use your current modified adjusted gross income to determine if IRMAA applies. Instead, Medicare bases your current premiums on tax records from two years earlier, meaning your 2022 premiums come from 2020 financial data.
Think of IRMAA like financial karma; the decisions you make now will impact what you pay in the future, making it even more critical to have a long-term comprehensive plan.
As with most other tax items, the income bands and subsequent IRMAA surcharges are updated each year for inflation as measured by changes in the CPI-U.
How Retirees Can Strategically Manage Their MAGI
Whether or not you have an IRMAA surcharge and how much it is, depends on your MAGI, so you should look for ways to strategically manage it. Doing so has the potential to save you thousands of dollars each year.
Strategic Roth Conversions
Roth conversions are a popular tax management strategy. But you need to consider how they may affect your MAGI. If you convert too much, you could increase your taxable income to the point of tipping you into a higher IRMAA bracket. And there is a significant difference between the brackets.
For example, if you’re married filing jointly and earned $285,000 instead of $284,000 in 2020, you’d be on the hook for an extra $102 a month in Part B premiums.
This is one reason why Roth conversions tend to be more advantageous early in retirement. Your income tends to be lower before you start taking Social Security, pension income, annuity payouts, and required minimum distributions (RMDs), giving you more wiggle room when converting.
Think about it like this: when you turn 65, Roth conversions will impact your MAGI, which is also when most people start Medicare.
Planning for Required Minimum Distributions (RMDs)
RMDs could create unexpected changes in your Medicare premiums because they increase your taxable income and, therefore, your MAGI.
However, if you don’t need all of your RMDs to cover living expenses, you could consider donating all or a portion via QCDs, or qualified charitable distributions. Using this giving strategy allows you to avoid including RMDs in your taxable income and, by extension, your MAGI. QCDs can be super beneficial for people who want to give more intentionally and strategically.
Remember, a fundamental feature (and benefit) of a Roth IRA is that the IRS doesn’t mandate RMDs from this account—yet another reason to start thinking about Roth conversions early.
Create a Custom Withdrawal Strategy
Your retirement portfolio likely consists of several types of portfolios—401k, traditional IRA, Roth IRA, brokerage account, etc.
Determining the most appropriate way for you to draw from each account can significantly impact your taxable income. For example, withdrawals from traditional accounts like 401k and IRA are taxed at your ordinary income rates, whereas selling assets in a brokerage account may trigger capital gains tax.
We can help you create a custom withdrawal strategy that aims to maximize your retirement income and minimize your tax liability long term. As we build this strategy, we’ll also consider which accounts you’ll pull from first, at what time, and how it will impact your IRMAA and larger health care costs.
Proactive Tax Planning
You can’t plan for retirement without considering your tax picture, and IRMAA considerations make it even more important if you’re close to income thresholds.
For example, if you hold investments in taxable accounts, you might consider focusing on keeping the most tax-efficient investments like ETFs. That way, you’re actively managing the ongoing capital gains within that account.
We’re passionate about the value that comprehensive tax planning brings to a retirement plan. By planning in advance, we have more control over the tax liability and take the “surprise” tax bills out of the equation, which ultimately can help insulate your nest egg long-term.
Plan For Social Security
One of the biggest and sometimes overlooked benefits of Social Security is its role as a tax-efficient income source.
At most, only 85% of your Social Security benefits is taxed, so maximizing this is a great way to reduce your taxable income per available dollar in retirement.
Coordinate With Your Spouse
If one spouse dies, the surviving spouse must consider the individual income limits when calculating IRMAA.
Depending on how pension funds, Social Security, and other income payouts adjust, the surviving spouse may find that they suddenly have a much higher IRMAA charge.
Keeping Medicare IRMAA At Bay Throughout Retirement
Given the toll it can take on your monthly spending, Medicare IRMAA is certainly something those with higher income should consider each year. It’s also important to be cognizant of ways to reduce or avoid IRMAA expenses when possible.
But for high-earners, IRMAA may always be something you’re contending with, so be sure to build it into your health insurance, income, and tax planning processes.
Keep your team aware of any significant life-changing events because you can use these to contest a surcharge via Form SSA-44. Retirement is a perfect example!
Because of the nuance involved, working with a firm specializing in high-net-worth retirement planning is essential.
Our entire business is built on creating tax-managed retirement plans for high-net-worth families who have over $1 million. We would be happy to meet with you and discuss your tailored plan for addressing IRMAA.
Set up a call today!
Megan Waters, CMFC®, AAMS®
Megan is a fiduciary, fee-only associate financial advisor at Covenant Wealth Advisors serving clients across the United States. She specializes in helping women aged 50 plus create, implement, and protect a personalized financial plan for retirement.
Disclosures:
Covenant Wealth Advisors is a registered investment advisor with offices in Richmond and Williamsburg, VA. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.
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