Understanding and Avoiding Medicare Surcharges
Retirement planning often involves a lot more than just making sure your nest egg is large enough to sustain your lifestyle. It also requires a strong focus on income taxes and remaining nimble as tax laws change over time. One crucial aspect to consider is how to avoid Medicare surcharges, specifically the Income-Related Monthly Adjustment Amount (IRMAA), during retirement.
In this article, I’ll cover the basics of IRMAA, who pays it and and how you can avoid it through proper tax planning.
An Overview of IRMAA
What is IRMAA?
IRMAA is essentially a surcharge tacked onto Medicare premiums for higher-income retirees and it can significantly impact healthcare costs in retirement if not managed correctly. The surcharge can affect your premiums for both Medicare Parts B and D.
Understanding IRMAA and being proactive & forward looking in retirement could potentially save you thousands of dollars over the course of your lifetime.
Below, I’ll cover some of the basics of IRMAA, who’s affected, and most importantly, I’ll discuss some different ways you can avoid or minimize its impact on your retirement finances.
Who is Affected by IRMAA in Retirement?
The Income Related Monthly Adjustment Amount for Medicare kicks in when your income exceeds a certain threshold which is based on your Modified Adjusted Gross Income (MAGI) from 2 years ago.
This is a major reason why IRMAA catches so many retirees off guard. Decisions you make today can affect what you pay for Medicare Part B & D premiums 2 years from today!
For instance, in 2024, IRMAA kicks in for single individuals with MAGI in 2022 exceeding $103,000 and married couples with MAGI over $206,000. These surcharges increase from there as the household’s income increases.
The Income Related Monthly Adjustment Amount in 2024 for Medicare Part B premium could range anywhere from $244.60 to $594 per month; contrast this with the standard Medicare Part B premium of $174.70 per month.
Keep in mind that there are also surcharges assessed on Part D premiums as well.
Be Aware of RMDs!
You may be thinking “I don’t have to worry about IRMAA, there’s no way my income will be that high in retirement!” but if you have pre-tax retirement accounts (e.g. Traditional IRA, 401k, etc.), you’ll need to consider how Required Minimum Distributions, or RMDs, may affect your future income and taxes.
Required Minimum Distributions are mandatory annual withdrawals that you must start taking from pre-tax retirement accounts once you reach a specific age (usually 73 or 75). Here’s an article the provides more background on RMDs if you’re curious.
Once you’re required to start taking RMDs, they must continue every single year until you have no more remaining pre-tax accounts or you pass away (RMDs will still continue if you have a surviving spouse).
Depending on your retirement income and your pre-tax account balances, RMDs could push your income high enough to cross into the IRMAA threshold.
How to Avoid IRMAA
These surcharges can be avoided by being proactive in your retirement planning to help keep your income below the IRMAA thresholds. As I mentioned above, this needs to be done thoughtfully as the surcharges are based on your income from 2 years prior.
However, if you find yourself in a situation where you’re subject to IRMAA, there are various “Life Changing Events” which you may qualify for to have some or all of your surcharges waived.
Life Changing Events to Reduce or Waive IRMAA
The Social Security Administration realizes that your income can change due to certain situations beyond your control. The following is a list of Life Changing Events which could cause your household income to decrease substantially.
- Death of Your Spouse
- Marriage
- Divorce
- Work Stoppage
- Loss of Pension or Income-Producing Property
You can notify the Social Security Administration if any of these apply and they will review your situation to see if all or some of your IRMAA surcharges are eligible to be waived.
If you meet any of these Life Changing Events then you can work with your financial advisor to complete the necessary documents to file your IRMAA waiver request.
Avoiding IRMAA Through Tax Planning
There are other ways to avoid IRMAA even if you don’t qualify for any of the Life Changing Events listed above.
One way to avoid these IRMAA surprises is to have a well-designed tax plan. If your current retirement plan hasn’t considered the impact of taxes then you’re in a perfect position to be caught by surprise come Medicare age!
Here are some tax planning concepts that can help you avoid IRMAA:
Have a Tax-Efficient Withdrawal Plan
Just as important as the decision on which account(s) to contribute to before retirement, deciding which account(s) to withdrawal from in retirement is a huge consideration.
There are 3 main types of accounts you may have the ability to withdraw from – taxable, pre-tax, and tax-free.
The order in which you withdraw money from these accounts will have a direct impact on your tax situation and, as mentioned above, your Modified Adjusted Gross Income from 2 years prior can cause you to pay more for Medicare so it’s extremely important to have a well thought out withdrawal plan.
Your financial advisor should proactively work with you to identify the best account(s) to withdraw from first throughout your retirement.
Consider Roth Conversions
Recall above the discussion on Required Minimum Distributions (RMDs). If your future RMDs are expected to be large enough to cause IRMAA to kick in, there’s something you can do!
You have the ability to “convert” money from your pre-tax accounts into a Roth account. Money invested in a Roth IRA is NOT subject to RMDs and any money you withdraw from a Roth is tax-free (as long as you’ve had your Roth IRA open at least 5 years and you’re age 59 1/2+)!
By converting money from pre-tax to Roth, you are reducing your future RMDs and building a tax-free bucket of money that can be used for any purpose in the future.
However, be aware that any money converted to a Roth IRA is considered taxable income in the current year so it’s important to fully analyze your tax circumstances to determine if it makes sense to complete a Roth conversion (and how much).
Also, remember that the Social Security Administration looks at your income from 2 years prior when determining IRMAA. A poorly planned Roth conversion can also cause issues with IRMAA if you’re within 2 years of starting Medicare (or if you’re already on Medicare).
Feel free to reach out if you have any questions. We are retirement and tax planning experts who specialize in working with folks approaching retirement and those already retired.
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About the Author
Cody Lachner, CFP®, EA is a fee-only financial planner based in Lafayette, IN serving clients locally and virtually nationwide. Cody works with families approaching retirement and takes a tax-focused approach to retirement planning. His goal is to help families retire with confidence while lowering their lifetime tax bill.
