How IRMAA Can Increase Your Medicare Premiums In Retirement

Many assume they will be free of health insurance premiums once they reach Medicare age. Others think that everyone pays the same Medicare premiums for the same coverage. Unfortunately, many retirees are shocked to find out that their Medicare premiums are tied to their income in retirement. Knowing this could lead many people to make different retirement-planning choices leading up to becoming eligible for Medicare.

You might think that you will no longer have an income once you stop working. However, your Medicare Part B premiums are based on your household income. There is a two-year look-back period, and what is included in this income calculation may shock you. However, you have options when dealing with the sticker shock of Medicare premiums in retirement.

The Basics Of IRMAA

Higher-income retirees may be surprised to find themselves getting hit with Medicare surcharges based on their income levels. The income-related monthly adjustment amount (IRMAA) is a surcharge that increases your Medicare premiums. The income levels are subject to IRMAA, which is luckily adjusted for inflation each year. Remember that the IRMAA surcharges are based on your income from two years ago. So, if you hit age 65 in 2024, your premiums this year will be based on your income from 2022. If you were fully employed in 2022, your income that year may be higher than in 2024.

When beginning Medicare, the Social Security Administration will send a notice called an initial determination if the SSA determines that the client owes an IRMAA. The notice will also contain information about requesting a new determination if the client has experienced a specific life-changing event, which could help reduce the sting of IRMAA surcharges.

The IRMAA surcharge amounts are added to your monthly Medicare Part B and Part D premiums. It is your responsibility to ensure that the surcharges are paid even if your employer covers your Part D costs.

2024 IRMAA Amounts

The larger your income, the greater your IRMAA surcharges will be. Similarly, the higher your IRMAA surcharges will be, the more valuable Medicare surtax planning will be for you.

In 2024, the IRMAA for single taxpayers with incomes greater than $103,000 and less than or equal to $129,000 (between $206,000 and $258,000 for joint returns) will be $69.90 for Part B and $12.90 for Part D coverage.

For single taxpayers with incomes greater than $129,000 and less than or equal to $161,000 (between $258,000 and $322,000 for joint returns), the IRMAA is $174.70 for Part B and $33.30 for Part D.

For single taxpayers with incomes greater than $161,000 and less than or equal to $193,000 (between $322,000 and $386,000 for joint returns), the IRMAA is $279.50 for Part B and $53.80 for Part D coverage.

For single taxpayers with incomes greater than $193,000 and less than $500,000 (between $386,000 and $750,000 for joint returns), the IRMAA is $384.30 for Part B and $74.20 for Part D coverage.

For single taxpayers with income greater than or equal to $500,000 ($750,000 for joint returns), the IRMAA is $419.30 for Part B and $81.00 for Part D coverage.

How To Reduce IRMAA Surcharges

Some people may need to notify Medicare that their income has dropped since they retired, or perhaps you have implemented some smart tax-planning strategies, and you expect your income this year to be much lower than it was two years ago.

You can inform Medicare of your new income levels by submitting Form SSA-44, “Medicare Income-Related Monthly Adjustment Amount Life-Changing Event,” to the Social Security office. Both “work reduction” (think phased or semi-retirement) and “work stoppage” (could be retirement or just a break from working) should qualify as life-changing events that can allow your IRMAA to be reassessed. Marriage, divorce, or death of a spouse are also eligible.

Skipping the step of notifying Medicare of your life-changing event could cost you thousands of dollars in extra Medicare premiums for no additional benefit. That being said, it’s imperative for you to pay attention to your taxable income in all future years to avoid another IRMAA surcharge. A well-laid-out retirement income strategy can help you pay less in taxes over your lifetime; it can also help you minimize or avoid IRMAA surcharges. Tax-free income sources, like a Roth IRA or Cash Value Life Insurance, can help those with the highest income needs avoid hitting the top IRMAA brackets.

If you expect that your income levels will remain relatively high even during retirement, consider investigating strategies to reduce modified adjusted gross income levels before they become eligible for Medicare. You may want to take advantage of tax-preferred retirement accounts to reduce modified adjusted gross income (MAGI) — contributing to a 401(k) can reduce adjusted gross income (AGI) by $23,000 in 2024, plus a catch-up of $7,500 for clients aged 50 and older.

Health savings accounts and Roth individual retirement accounts can also provide sources of tax-free income during retirement. Roth conversion before reaching Medicare age can increase your future tax-free income. If you have reached age 70.5, you can make qualified charitable distributions from your IRA and potentially reduce your MAGI by up to $100,000.

Work with your tax-planning-focused Certified Financial Planner to ensure you aren’t overpaying your taxes on retirement income. This will help you avoid also overpaying for Medicare as you age.