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Why Might Your Medicare Premiums Go Up In Retirement?

Dec 9, 2024

3 min read

Summary/TL;DR

IRMAA is a surcharge on Medicare Part B and Part D premiums that fall on taxpayers who have Modified Adjusted Gross Income (MAGI) above certain thresholds. They’re commonly encountered by retirees (especially single taxpayers) with high income, a high portfolio, or both. Proactive tax planning strategies, such as Roth conversions to promote tax diversification, can help you avoid these often unexpected and steep hikes to your Medicare premiums.


Introduction

During this time of year, the Social Security Administration (SSA) will usually send out letters of “initial determination” notifying taxpayers that their Medicare premiums will be going up by a large amount. This is due to a little-known surcharge known as IRMAA. If you have a large portfolio, a high income, or both, then you are likely to fall victim to IRMAA surcharges at some point during your retirement.


What IRMAA is, common reasons for falling victim to it, and strategies for avoiding it altogether are the topics of today’s post.


The IRMAA Brackets

The Income Related Monthly Adjustment Amount (IRMAA) is a surcharge on Medicare Part B and D premiums that fall on taxpayers who have Modified Adjusted Gross Income (MAGI) above certain thresholds. The higher your MAGI, in other words, the higher your Medicare Part B and D premiums will be. There are five income brackets within IRMAA which are different from the ordinary income tax brackets that most taxpayers are familiar with.


In the year before they become effective, you’ll be mailed a letter by the SSA notifying you that you’ll be subject to IRMAA surcharges. However, if you’ve experienced a “life-changing event” that has reduced your income, then the SSA might reduce or waive the surcharge. This is in place to protect those who have experienced income reductions from having to pay higher premiums based on an income tax return from prior years. According to the SSA, life-changing events include marriage, divorce, the death of a spouse, loss of income, or an employer settlement payment. If the SSA denies your request, there are further appeal processes available.


Finally, there is a two-year lookback on IRMAA surcharges, meaning that your MAGI this year will be used to determine your IRMAA surcharges two years from now.

 

2025 IRMAA brackets
Source: Kiplinger.com

 

Using the tables above, consider the example of a retired widow with $48,000 in social security and $150,000 in additional income between pensions and required minimum distributions. Their annual tax liability for 2024 would be just over $35,000, and their IRMAA surcharge on Medicare Part B and Part D premiums would be $4,235 for 2025. The surcharge, therefore, can be interpreted as an additional 2% tax on their total income.


Common Reasons For Hitting Higher IRMAA Brackets

IRMAA can easily be overlooked when making decisions that have impacts on taxable income, such as Roth conversions or realizing a large capital gain. When MAGI returns to “normal” levels after the “windfall” has passed, then the surcharge will disappear.

In many instances, such as the one discussed above, the IRMAA surcharges could become a permanent part of one’s circumstances unless some planning is done. This is more common with widowed taxpayers who have inherited a high social security income, pensions, and pre-tax retirement portfolio from their spouse, subjecting them to higher income relative to their IRMAA brackets.


Avoiding the IRMAA Brackets

By promoting tax diversification, you give yourself the ability to better control your taxable income in retirement, an invaluable tool for avoiding the IRMAA brackets as well as a host of other common tax traps. Roth conversions, made in the years leading up to or during early retirement, are key to pursuing tax diversification. If started early enough, using an employer sponsored retirement plan (401k, 403b, etc) as a tax planning vehicle while still working will certainly minimize your lifetime tax liability.


While dipping into IRMAA brackets certainly isn’t ideal, sometimes it is necessary in order to achieve a specific objective. I’ve walked many clients through a tax plan that involved going into the higher IRMAA brackets for a year or two in order to achieve better tax diversification for the rest of retirement. As mentioned above, this could have been avoided entirely had they worked with a planner earlier to get ahead of their tax planning and is another reason why you shouldn’t wait to work with someone like myself.

 

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