When people plan for retirement, their focus is often on generating the necessary monthly income to pay their expenses with an eye towards limiting taxes. One area often overlooked is that retirement income can have an impact on your Medicare premiums. Many seniors see their premiums increase dramatically because they did not understand something called IRMAA.
The purpose of this post is to help you understand IRMAA, how it is calculated and some points to keep in mind as you prepare for retirement.
What is IRMAA?
Medicare was established in 1965 to provide basic health insurance for older Americans. Over the years the program has been modified and expanded.
When a person goes on Medicare they pay Part B monthly premiums of $164.90 (in 2023), which covers 25% of the actual cost of Part B. As the country has aged (and continues to do so) there are less workers paying in to the system and the costs have grown (due to inflation and more seniors on Medicare).
One of the ways Congress tried to shore up Medicare’s finances was through the Medicare Modernization Act of 2003. This established the Income-Related Monthly Adjustment Amount (IRMAA) – requiring higher earning seniors to pay more for their Part B premiums.
In 2011, IRMAA was expanded via the Affordable Care Act to include Medicare Part D premiums as well.
How Does IRMAA Work?
IRMAA is calculated using your Modified Adjusted Gross Income (MAGI), which is not found anywhere on your tax return. You take your Adjusted Gross Income (AGI – line 11 on your 1040), and add back in any tax-exempt interest (line 2a of your 1040). Depending on your situation, your MAGI could be your AGI.
To make it even more confusing, IRMAA uses your income tax information from two years ago. For example, the cost of your 2024 Medicare premiums are determined by your 2022 tax return information.
IRMAA applies if your MAGI is over the following thresholds (for 2024):
|Beneficiaries who file individual tax returns with MAGI:
|Beneficiaries who file joint tax returns with MAGI:
|Part B Monthly Premium
|Part D Monthly Premium
|Less than or equal to $103,000
|Less than or equal to $206,000
|Greater than $103,000 and less than or equal to $129,000
|Greater than $206,000 and less than or equal to $258,000
|Plan Premium + 12.90
|Greater than $129,000 and less than or equal to $161,000
|Greater than $258,000 and less than or equal to $322,000
|Plan Premium + 33.30
|Greater than $161,000 and less than or equal to $193,000
|Greater than $322,000 and less than or equal to $386,000
|Plan Premium + 53.80
|Greater than $193,000 and less than $500,000
|Greater than $386,000 and less than $750,000
|Plan Premium + 74.20
|Greater than or equal to $500,000
|Greater than or equal to $750,000
|Plan Premium + 81.00
These thresholds are adjusted each year to take into account inflation. However, they tend to not change very much (see more on this later).
There are two important points to note:
- The additional premium for IRMAA is applied per person. If you are married, you will each pay the higher rate
- If your MAGI is $1 over any of those thresholds, you pay the rate of that bracket
Is IRMAA Permanent?
Thankfully, IRMAA is not a permanent increase to your Medicare premiums, it gets recalculated every year. If you are below the threshold on your next tax return, then your Medicare premiums will decrease (two years later).
The Social Security Administration (SSA) receives your tax information directly from the IRS. If your MAGA is above the thresholds, the SSA will mail you a letter in November notifying you of your higher premiums.
There are two ways to appeal your IRMAA determination. First, if there was an error on your tax return or if your tax information is out of date. Second, if you have one of the following Life-Changing Events that has significantly reduced your income:
- Death of Your Spouse
- Work Stoppage
- Work Reduction
- Loss of Income-Producing Property
- Loss of Pension
- Employer Settlement Payment
To file an appeal, you will want to contact the SSA.
If you are working in a high paying job when you retire, It is very important to remember to file the appeal when you stop working.
Why Does IRMAA Matter?
According to the 2023 Medicare Trustee Report, between 7-8% of Medicare recipients are impacted by IRMAA. Though that seems like a small number, it has been increasing over time. I expect it to continue to grow as Medicare tries to find funding to keep afloat. There are two ways that this is happening already:
- MAGI has not been increasing with inflation – The brackets are indexed for inflation, but that was just restarted recently. The MAGI figures did not change from 2009-2019 (there was no price inflation in 2009 and 2010. 2011 through 2019 MAGI stayed the same due to a provision in the ACA). Since 2020 they have been indexed for inflation, but the highest bracket will not be adjusted for inflation until 2028. The bottom line is that slowing the growth of MAGI for the IRMAA thresholds, means that more seniors will be impacted.
- Those subject to IRMAA are paying more – The IRMAA brackets have been modified over the years (particularly by laws passed in 2015 & 2018), requiring high income seniors to pay more of their Medicare premiums. As noted earlier, if you pay the regular Part B monthly premium of $164.90 (in 2023), you are only paying 25% of the actual cost of Medicare. The highest IRMAA bracket is now paying 85% of the actual cost. The percentage continues to increase as adjustments are made to IRMAA.
How to Limit IRMAA’s Impact
The main way to limit IRMAA is to reduce your MAGI. This can be challenging as precisely calculating income during the year isn’t always easy. However, examining your tax return at the end of tax season is really important. It will tell you how close you are to IRMAA, and help you make decisions going forward.
Here are a few tips to help:
- If You Are Still Working – reduce your taxable income
- Contribute to Your Traditional Retirement Plan – if you are still working and your employer provides a retirement plan (401k, 403b etc), contributing to the Traditional option will reduce your taxable income
- Max Out Your HSA –if you have access to a Health Savings Account (HSA) through your employer (and are not receiving Medicare benefits), you can reduce your MAGI by contributing to an HSA. An extra benefit of an HSA is that the money is not taxed when used for qualified health expenses
- Give From Your IRA – when you turn 73 (or 75 in 2033) you need to start taking Required Minimum Distributions (RMD) from your retirement accounts. If you have money in a Traditional IRA, you are able to give up to $100,000 a year directly to charity using a Qualified Charitable Distribution (QCD). The QCD lowers your taxable income and helps a charity
- Delay Starting Social Security – for higher income seniors, up to 85% of your Social Security benefit is included in the MAGI calculation. By delaying the start of your benefits, it reduces your taxable income. However, it also allows your benefit to grow, which may create issues later in retirement
- Selling Investments – if you need to sell investments (stocks etc) that would produce a large capital gain and push you into IRMAA, it may be best to sell them all in one year, so you are only impacted by IRMAA for one year. If you were to sell them over a few years, that may push you into IRMAA for multiple years. This all depends on how large the gain is, and how close you are to the IRMAA threshold. Talking with your tax advisor before making any decisions would be a wise move
- Coordinating Investment Decisions – many people work with multiple financial advisors. If Advisor A & B both sell investments for a large gain, that could push you into IRMAA. However, if Advisor B knows what Advisor A is doing, they could sell an investment for a loss to potentially keep you below IRMAA’s threshold
Ultimately, IRMAA is a tax, it just isn’t called that. It charges more for those who have greater income, to help those who have less income. Paying extra because you live in a country that provides many financial opportunities is a reasonable trade-off in my mind. No one likes paying extra taxes, but If you plan wisely, IRMAA may only have a minimal impact on your finances.