Who over there has heard of IRMAA?

Probably not a lot. When I hold seminars and ask who has heard of IRMAA, few people raise their hands. For those who haven’t and are getting closer to Medicare eligibility (65 is the earliest, unless you have a disabling medical condition), it’s worth paying attention. The IRMAA – Monthly Income Adjustment Amount – is one of those nasty surprises you may face as you approach retirement or in the early stages of it.

For Medicare beneficiaries who earn over $91,000 and are enrolled in Medicare Part B and/or Medicare Part D, it is important to understand IRMAA. This is a supplement added to the bounties of parts B and D.

This is how it works. If you are a single filer on your tax return, the base premium for Medicare Part B is $170.10 per month in 2022. But as soon as your modified adjusted gross income (MAGI) exceeds $91,000, your Medicare premiums will start going up.

For single filers in the MAGI range over $91,000 to $114,000, that means your Part B premium is $238.10. For those between $114,000 and $142,000, the premium is $340.20. IRMAA supplements for Part D (Medicare’s prescription drug benefit) are also added to the enrollee’s regular plan premium.

You will receive notice from the Social Security Administration if you are assessed IRMAA. What is really confusing is that the IRMAA is determined based on your income two years ago. In other words, for your 2022 Medicare premiums, your 2020 tax return is used. The amount is recalculated annually.

There are five IRMAA-related MAGI brackets for Part B for those filing alone as well as those who are married filing jointly. In this last filing scenario, Part B premiums are $238.10 for couples with a MAGI over $182,000 to $228,000; $340.20 for couples filing jointly with MAGI over $228,000 to $284,000; and so on up to a maximum Part B premium of $578.30 for married persons 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 think the calculation was wrong. Also, if you have experienced a life-changing event and your income has decreased, you can use Form SSA-44 to request an IRMAA discount.

People can enjoy a great retirement and never hear from IRMAA until they receive notice. Here are some reasons why you might encounter it:

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-exempt when money is withdrawn after age 59½. But the conversions themselves are taxable in the year they occur, which increases your taxable income and possibly puts you in a higher tier of Medicare.

For example, you might have an income of $120,000 in your first year or two of retirement, but then you make a Roth conversion of $100,000. Your MAGI then exceeds $200,000, and two years later you receive notice that your IRMAA has increased your Medicare Part B premium from $340.20 per month to $544.50.

To avoid this, your Roth conversions must be managed intelligently, over a series of years to fit your tax return while taking into account your IRMAA calculation. A retirement planner can help you figure out how much Roth you can convert without upgrading to a higher IRMAA level.

The death of a spouse

In this scenario, let’s say the surviving spouse is entitled to the deceased’s full pension. This, coupled with Social Security and any ancillary income, could increase the survivor’s MAGI and increase their Medicare premium.

Required Minimum Distributions (RMD)

Starting at age 72, you must 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 subjecting you to IRMAA. This underscores the importance of retirement tax planning long before you retire, and more specifically, of doing Roth conversions – albeit in a systematic and limited way, as mentioned earlier.

The most important thing you can do to limit or avoid IRMAA is to educate yourself about it before it affects your health insurance premiums. Have your pension professional do an analysis to avoid a nasty surprise in the form of a costly surcharge.

Dan Dunkin contributed to this article.

Securities offered by CFD Investments, Inc., registered broker, member FINRA & SIPC. Kurt Supe and Brian Quick provide advisory services through Creative Financial Designs, Inc., Registered Investment Advisor. Creative Financial Group is a separate, unaffiliated company. CFD companies do not provide legal or tax advice.