What is IRMAA… and Why You Need to Know About It

What is IRMAA…and Why You Need to Know About It

IRMAA is a what and not a who and is one of the tax traps waiting for you in retirement. It is another arcane government acronym that can increase the cost of your Medicare premiums by 4 or 5 times.  IRMAA stands for Income-Related Monthly Adjustment Amount, and it is important to understand how this Medicare surcharge works.

IRMAA increases Medicare Part B and Part D premiums for high earners. But there are ways to reduce your MAGI and your IRMAA adjustments. Keep in mind that your income this year is what affects your IRMAA adjustments in two years. Speaking with a financial professional can help you decide on how to best manage your income in your retirement years.

The Important Highlights of IRMAA

  • The 2022 IRMAA rate is based on your Modified Adjusted Gross Income (MAGI) from 2020.
  • The Medicare Part B 2022 standard monthly premium is $170.10.
  • Updated IRMAA brackets for 2022 can increase Medicare Part B monthly premiums by as much as $408.20 and Medicare Part D by up to $77.90.
  • Reducing your Modified Adjust Gross Income will reduce or avoid IRMAA in future years.

What is IRMAA?

IRMAA (Income-Related Monthly Adjustment Amount) is a Medicare surcharge that affects certain beneficiaries. Medicare beneficiaries who earn more than $91,000 and are enrolled in Medicare Part B and/or Medicare Part D, are affected by IRMAA. IRMAA adds a surcharge to the Part B and Part D premiums.

If you file as an individual on your income tax return, the base premium for Part B of Medicare equates to $170.10 per month. However, when your modified adjusted gross income (MAGI) exceeds $91,000, Medicare premiums increase.

How the IRMAA Tax is Calculated

The Social Security Administration will let you know if you are being assessed IRMAA. Because IRMAA is based on income from two years prior, this two-year look back means you won’t know that you have triggered this surcharge until it is too late to do anything about it. For example, 2022 Medicare premiums are based on your 2020 income tax returns. This is calculated every year.   So, it’s important to plan ahead.

There are five MAGI brackets for Part B for those who are filing single or married.

Individuals: Individuals with a MAGI from $91,000 to $114,000 pay $238.10 for Part B premium. The premium for those in the $114,000 to $142,000 range is $340.20. Individuals who have a MAGI of $500,000 or more will pay a premium of $578.30. With IRMAA surcharges for Part D, the prescription drug benefit is also added to the regular premium for the enrollee’s plan.

Joint Returns: Part B premiums are $238.10 for those filing jointly with a MAGI of $182,000 to $228,000, or $340.20 for those with a MAGI between $228,000 and $284,000 to a maximum Part B premium of $578.30 for those with a MAGI of $750,000 or more.

There are also additions to your adjusted income that are Medicare-specific:

  • Tax-exempt interest. This is normally tax-free interest that Medicare includes in their calculation to trigger additional taxes to be paid on your Medicare premiums.
  • Interest earned from savings bonds used to pay for higher education
  • Earned income from U.S. citizens living abroad that was excluded from their income
  • Income earned from U.S. territories such as Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands

If you believe the calculation is not correct, or your income has dropped drastically, you can request an IRMAA reduction.

Financial Triggers that can increase your IRMAA

There are several instances in retirement which will cause IRMAA to increase:

  • Roth Conversions. Roth conversions reduce taxes in retirement, but the conversions are taxable in the year they take place which can drive up your taxable income and put you in a higher Medicare tier. If you have $120,000 in income during the first year of your retirement, but do a $100,000 Roth conversion, your MAGI is over $200,000. Two years later, you will have a Medicare Part B premium increase from $340.20 to $544.50. Therefore, Roth conversions should take the IRMAA calculation into account.
  • Required Minimum Distributions (RMD’s). When you are age 72, you must make annual withdraws in any tax-deferred retirement accounts each year, this required withdrawal percentage is known as a required minimum distribution. This can put you into a higher tax bracket and make you subject to IRMAA.
  • Death of a Spouse. If the surviving spouse is entitled to the pension or other money of the deceased, this could increase the survivor’s Medicare premium because the income thresholds for single taxpayers are lower than for married couples.

These life events show how important it is to tax plan for retirement before you are retired. It is best to speak with a retirement specialist to find out how to best avoid a high premium.

Ways to Reduce IRMAA

If you are concerned about having to deal with IRMAA surcharges, there are a few strategies you can use to reduce them.

Forward-Looking Tax Planning

You can control your tax bill and whether you will be impacted by IRMAA.  It may not be possible to avoid the IRMAA surcharges, but you can reduce them. 

Whenever you are selling an asset and there will be a gain on the sale, always consult your CPA and advisor to make sure you know what the implication will be for both the current tax year and IRMAA surcharges two years from now.

It might even make sense to defer the sale to another year or bunch your income into a single year for IRMAA purposes.

Contribute to a Tax Deductible Retirement: If you have wages or earned income, you can make tax-deductible contributions to a retirement account, such as:

  • Traditional IRA
  • Traditional 401k, 403b or 457 Plan
  • Solo 401k
  • Cash Balance Plan

Tax-Free Income: Some types of income are tax-free and are not counted in Medicare’s IRMAA formula. The following sources of income will not trigger IRMAA

  • Roth IRA,
  • Reverse Mortgage
  • Permanent Life Insurance
  • Medicare Savings Accounts (MSAs) work like an HSA

Tax-Efficient Investments: investing in growth-oriented investments that do not generate a lot of current income, such as interest or dividends, such as individual stocks and Exchange Traded funds that do not have high turnover. These investments give you the ability to choose when you will sell them.  This allows you to choose the year in which you will pay capital gains taxes on those investments and can plan for IRMAA accordingly.

Roth Conversions: Because Required Minimum Distributions can trigger IRMAA Surcharges, Roth IRA conversions are a way to proactively plan to avoid IRMAA.

Roth IRA’s allow you to transfer money from a Traditional IRA or 401k into the Roth IRA.  Once funds are in the Roth IRA, you can withdraw funds tax-free and these withdrawals do not trigger IRMAA.  Please note that there are rules that must be followed for Roth Conversions, so please see our blog that goes into more detail about them.

Charitable Giving: Charitable giving benefits the non-profits receiving money, but also reduces your MAGI for future IRMAA calculations. These strategies can reduce your taxable income and can be used with charitable giving:

  • Cash contributions
  • appreciated assets,
  • qualified charitable distributions
  • donor-advised fund

Cash contributions up to 60% of your Adjusted Gross Income (AGI) can be used as an itemized deduction in the current year to reduce overall income.

Capital Gains Strategy

Capital Gains tax rates can be 0% for single filers with income under $41,675 and $83,350 for married couples. 

If you pay ZERO taxes on capital gains, then you can avoid triggering IRMAA on these assets.

Medicare Savings Accounts (MSA’s)

MSAs are similar to HSA’s that you may have contributed to while you were working.  have two components:

  1. Medicare Advantage Plan (Part C). This includes a high deductible health plan and is only available to pay eligible expenses once the deductible is met.
  2. Medical Savings Account (MSA). These savings accounts must be established at a bank selected by the plan. Each year, Medicare contributes a specific amount to the account. You can use this account to pay for out-of-pocket medical expenses, including those that are not covered by Medicare.

And just like your old HSA account, your unused balance will be carried over into next year.

Because money contributed to the MSA by Medicare is not taxable to you, it will not trigger IRMAA.

Any withdrawals used for qualified medical expenses are tax-free

How to Appeal IRMAA if you think incorrect data was used to calculate the surcharge, you can make an appeal to Social Security to correct the error. In order to appeal IRMAA, Form SSA-44 is the form that you will need to file. The appeal must be made within a 60-day time period.

You can also appeal IRMAA if you have A Life Changing Event as defined by the Social Security Administration.

  • marriage
  • divorce or annulment
  • death of a spouse
  • work stoppage
  • work reduction
  • loss of income-producing property (beyond the beneficiary’s control), and
  • loss or reduction of pension income (plan failure or termination, or scheduled cessation)
  • employer settlement payment (as a result of an employer or former employer’s closure, bankruptcy, or reorganization.)

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This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax professional.

Echelon Financial is a member firm of The Fiduciary Alliance, LLC which is an Investment Adviser registered with the Securities and Exchange Commission. The Fiduciary Alliance’s business operations, services, and fees is available at the SEC’s investment adviser public information website or from The Fiduciary Alliance upon request.

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