What is IRMAA and How Does It Work?

What is IRMAA and How Does It Work? High-income earners, be aware: your Medicare premiums could see an increase due to the Income-Related Monthly Adjustment Amount (IRMAA). However, with careful and strategic financial planning, you can effectively navigate this potential rise in costs. In this video, Amy Shepard defines “What is IRMAA And How Does it Work?” and shares key strategies and tips to minimize the impact of IRMAA on your Medicare premiums, ensuring you maintain financial stability without compromising on healthcare quality.

Navigating IRMAA: Essential Strategies for Medicare Planning

For higher-income individuals, you can expect higher Medicare premiums thanks to IRMAA — unless you plan strategically.

By Amy Shepard

The Income-Related Monthly Adjustment Amount, or IRMAA, simply put, results in higher Medicare premiums for those with higher incomes.

Medicare premiums, thus IRMAA, are calculated based on your tax return from two years prior. For example, your 2024 premiums are based on your 2022 tax return. Your 2025 premiums will be based on your 2023 tax return, and so on. 

Modified Adjusted Gross Income, or MAGI, is the key factor in this calculation. MAGI is your Adjusted Gross Income, or AGI, plus any tax-exempt interest income, such as interest from municipal bonds. Tax-exempt interest is listed on Form 1040 line 2a.

If your income from two years prior is above certain thresholds, you may be required to pay higher Medicare premiums. This impact is most notable in higher Part B premiums, but IRMAA also affects Part C and D premiums.

There are six income “tiers” for calculating IRMAA. For 2023, the monthly Part B premium ranges from $164.90 to $560.50. These figures represent monthly premiums per person.

If you are subject to IRMAA, there is good news: It’s not permanent. It’s recalculated annually, always looking back at your tax return from two years prior. You’ll know if you are subject to IRMAA when you receive a notice in the mail, typically in November, informing you about IRMAA for the upcoming calendar year.

Avoiding IRMAA involves strategic tax planning. Managing your MAGI to stay within the thresholds is key. This may mean taking less from tax-deferred accounts like IRAs or strategically calculating the amount of a Roth conversion to avoid inadvertently triggering IRMAA.

You can also appeal an IRMAA determination due to a life-changing event using Form SSA-44. There are eight categories for appeal, including marriage, divorce/annulment, death of a spouse, work stoppage, work reduction, loss of income-producing property, loss of pension income and employer settlement payment. The form asks for proof of income changes but allows for a signed statement if no proof is available. This is often the case for retirees whose lower-income won’t be “official” until a future tax return is filed.

Common real-life examples of being subject to IRMAA include retirement, deferred compensation payouts, receiving a large severance package, selling a rental property, gambling winnings, and more.

While IRMAA can be daunting, sometimes it makes sense to intentionally pay it. Building a comprehensive retirement plan that estimates your income, expenses and taxes throughout retirement is crucial. 

For those with substantial retirement savings, IRMAA may become relevant later in life, especially when Required Minimum Distributions, or RMDs, begin in their 70s. Early retirement withdrawals, even if they trigger IRMAA, can reduce future RMDs and subsequently reduce or eliminate IRMAA in later years. This is particularly important for married couples with large tax-deferred assets, as the surviving spouse will eventually file as a single taxpayer, subject to lower income thresholds for both income tax and Medicare.

In summary, IRMAA planning is a vital component of any solid financial plan. We hope you can now answer the question, What is IRMAA and How Does it Work? Understanding the rules empowers you to avoid surprises related to Medicare costs.

About the author: Amy Shephard, CFP, RMA, BFA

Amy Shepard, CFP®, RMA®, BFA™ is a financial planner with Sensible Money.

For more finStream videos featuring Amy Shepard, please click on this link: https://www.finstream.tv/featured/amy-shepard/