We will stay with the healthcare-related theme for the third part of our retirement tax traps and opportunities series and talk about IRMAA. You can learn about the first two parts (Medicare Late Enrollment Penalty and Premium Tax Credits) by following those links.
Whenever I think about IRMAA, I can’t help but remember the closing theme song and scene to The Flintstones when Fred gets locked out of their house, bangs on the door, and yells “Wilmaaaa!” at the top of his lungs. As you learn more about it, you might feel the same way.
You can click the link on the image to see the closing song/scene.
Like the Medicare Late Enrollment Penalty, this “tax” is not a direct hit on a retiree’s tax return but rather an increased Medicare insurance cost based on their income level.
Since the U.S. uses a progressive tax system where higher incomes have higher tax rates, it makes sense that other government benefits/credits are income-driven as well. Social Security, Medicaid, Premium Tax Credit, child credits, Roth contributions, and education credits are benefit programs that fall in this bucket. Medicare IRMAA is no different.
What Is Medicare IRMAA?
IRMAA is an acronym for Income Related Monthly Adjustment Amounts, and it conveniently rhymes with Fred Flintstone yelling “Wilmaaaa!”. As the name says, IRMAA is an additional cost to Medicare Part B and D premiums directly related to their income.
To make things even more complicated, Medicare uses the income tax return from the two years prior for IRMAA determination. For example, the 2022 IRMAA is determined in 2021 based on the 2020 tax return. But a lot can happen in two years, right? We’ll get to that in a minute.
The Medicare Part B “standard” premium is $170.10 per person per month. However, if a couple’s income rises above $182,000, they will pay at least $68 more per person. When a retiree couple’s income reaches $228,000, their Medicare Part B premium doubles. Medicare Part D premiums depend on the plan you select, so Medicare determines the additional amount based on the same income brackets as Part B.
See the below table based on Medicare’s website for the different income breakpoints, Part B premium amounts, and Part D premium adjustments. Social Security Administration also has a page explaining Medicare premium IRMAA.
As you can see, the cost of Medicare can increase significantly for higher-income people. For example, a married couple with $350k of income will pay over $10,000 more per year than a couple that makes $180k. So how might someone go about reducing the cost of IRMAA?
IRMAA Reduction Ideas
1 - Request a new IRMAA determination from the Social Security Administration (SSA).
The most common reason to request a new IRMAA determination is a “work stoppage or reduction”. Since the SSA uses the tax return from two years ago (2020 income determines 2022 IRMAA), a first-year retiree may have significantly lower income due to a "work stoppage". SSA may reduce or eliminate IRMAA by excluding wages that no longer apply by following the redetermination process.
In fact, there are seven life-changing events (LCEs) that the SSA will consider – marriage, death, divorce, work stoppage/reduction, loss of property, loss of pension, employer settlement. A retiree may also request a new determination for incorrect or more recent tax return information.
To request a new determination, you can either call the SSA (800-772-1213) or complete form SSA-44 using this link.
2 - Make strategic decisions that could reduce income.
One of the best tax benefits available to higher-income taxpayers is tax-deductible contributions to their 401(k) or other retirement plans.
On the other hand, one of the biggest headaches for higher-income taxpayers is taking money OUT of tax-deferred retirement plans in retirement – for living expenses or required distributions.
The reason why taking money out can be a headache is that distributions are generally 100% taxable. If you want or are required to take out $150,000 from an IRA, it is usually all taxable income. This situation can put people into a tax torpedo of higher taxes on retirement plan distributions, Social Security income, and IRMAA.
While it may be painful in the short term, taxpayers may want to take distributions from their IRA, either regular or Roth conversions, early in their retirement (5-10 years) to benefit from lower taxable income later in retirement (20-30 years).
Retired taxpayers may also be able to pulse income up or down every few years such that IRMAA does not affect them every year. Someone may pulse income up with retirement plan distributions or capital gains, or down by batching charitable contribution deductions.
While on the surface, Medicare is a more straightforward health insurance system than work-provided insurance, where employees need to figure out networks, deductibles, HMO vs PPO, etc. Fewer options can be a good thing!
However, IRMAA is a sneaky additional cost that may complicate retirement income planning and cause some retirees to yell “IRMAAaa!” The good news is that some affected retirees can make plans to reduce or eliminate IRMAA in their first year or throughout their retirement.