Understanding & Avoiding Medicare Surcharges (IRMAA)

While familiarizing yourself with IRMAA is a good idea, doing so prior to retirement is even better!

IRMAA—"income-related monthly adjustment amount”—is the additional sum you may need to pay alongside your Medicare premiums. Why? Because Medicare imposes surcharges on higher-income beneficiaries.

If you’ve never heard of IRMAA or are unaware of Medicare surcharges and how they work, don’t worry—you’re not alone! This post is here to help, not only explaining these surcharges but also offering tips on how to avoid them.

How Medicare IRMAA is calculated

After the Centers for Medicare & Medicaid Services (CMS) calculates IRMAA and publishes this amount in the Federal Register (on an annual basis), the Social Security Administration is then responsible for determining whether or not you must pay more than the standard premium. Note that Medicare benefits remain the same for everyone, even those who ultimately pony up additional money due to surcharges.

The surcharge is calculated based on tax returns reported from two years prior: meaning your 2024 income determines your IRMAA in 2026, your 2025 income determines your IRMAA in 2027, and so on. For those unaware of IRMAA, the two-year lag can create unpleasant surprises when you first enroll in Medicare—especially if your income declines substantially after you retire.

IRMAA can also creep up again later in life when you begin taking RMDs, as the additional amount is reevaluated every year based on your previous two years of income.

More specifically, Medicare surcharges are triggered when your modified adjusted gross income exceeds $206,000 (for married taxpayers filing jointly) or $103,000 (for individual taxpayers). You’ll receive a written notice if required to pay the surcharge.

How much you’ll pay in IRMAA surcharges

As these monthly surcharges join your “normal” original Medicare premiums for Medicare Part B and Medicare Part D coverage, you may end up paying several hundred dollars more per month than what you had originally planned for. In 2024, these monthly charges break down as follows:

·      If you’re single with an income between $103,000 and $129,000 or married with a joint income between $206,000 and $258,000, you’ll pay an extra $69.90 for Part B and $12.90 for Part D.

·      If you’re single with an income between $129,000 and $161,000 or married with a joint income between $258,000 and $322,000, you’ll pay an extra $174.70 for Part B and $33.30 for Part D.

·      If you’re single with an income between $161,000 and $193,000 or married with a joint income between $322,000 and $386,000, you’ll pay an extra $279.50 for Part B and $53.80 for Part D.

·      If you’re single with an income above $193,000 but below $500,000 or married with a joint income above $386,000 but below $750,000, you’ll pay an extra $374.20 for Part B and $74.20 for Part D.

·      If you’re single and earn $500,000+ or married and earn $750,000+ jointly, you’ll pay an extra $515.10 for Part B and $81.00 for Part D.

If you’re married and lived with your spouse at some point during the taxable year but filed a separate tax return, additional monthly charges break down as follows:

·      Individuals who earn more than $103,000 (up to $396,999) will pay an extra $480.70 for Part B and $74.20 for Part D.

·      Individuals who earn $397,000+ will pay an extra $515.50 for Part B and $81.00 for Part D.

How to avoid Medicare surcharges

Worried about these extra fees? Don’t panic! The good news is that you can mitigate or even avoid Medicare surcharges altogether.

One approach is to utilize proper tax-planning strategies, ideally a few years before turning 65. You should consult your tax advisor or financial advisor before implementing these strategies, however, noting the approach might include Roth conversions or funding a health savings account. Withdrawals from either of these accounts aren’t included in gross income and therefore don’t generate IRMAAs.

Another mitigation strategy is to utilize qualified charitable distributions (QCDs), direct transfers from your IRA to a qualified charity—thus reducing your taxable income when executed properly.

One additional approach you can employ to mitigate or even avoid Medicare surcharges is to file an appeal, especially in the wake of a life-changing event that may qualify for IRMAA reconsideration such as:

·      The death of a spouse

·      Marriage

·      A divorce or annulment

·      A reduction (or complete cessation) of hours worked

·      A reduction in or loss of pension income (due to a default, scheduled cessation, etc.)

·      The loss of income-producing property beyond beneficiary control (such as a disaster, theft, or similar circumstance)

·      An employer settlement payment wherein you or your spouse receive a settlement from an employer (or former employer) due to said employer’s bankruptcy or reorganization

The quickest and easiest way to file an appeal is via online filing form SSA-44 through the Social Security web site, but you can also do so over the phone (800-772-1213) or by contacting your local Social Security office. Note that you should appeal only after receiving notice that your Medicare premiums for Part B and Part D (prescription drug coverage) include IRMAA.

Final thoughts on Medicare surcharges

Understanding healthcare costs is critical for successful retirement planning. While jumping into a higher tax bracket is a good problem to have, doing so can unfortunately trigger these Medicare surcharges and thus require you to pay hundreds of extra dollars a month. Fortunately, the various strategies we just outlined can minimize (or even avoid!) these fees altogether.

Still have questions about Medicare surcharges? Schedule a FREE Discovery call with one of our CFP® professionals.

FAQs

• How can I find out if IRMAA applies to me?

  When you enroll in Medicare, you’ll initially be charged standard premiums until Social Security receives your income data from the IRS. If your income does in fact reach the IRMAA threshold, Social Security will automatically mail you a predetermination notice detailing how this determination was made and how to proceed if the information is incorrect or your situation has changed (see the above information regarding IRMMA appeals).

• How do I pay for IRMAA surcharges?

  If you’re already receiving benefits from Social Security (or Railroad Retirement Board benefits) and Medicare Part B and D premiums are deducted from your benefit check, your IRMAA will be deducted automatically in the same manner.

  If your Social Security check isn’t large enough to cover IRMAA or Medicare premiums aren’t automatically deducted from your benefit check, you’ll receive a bill for Part B and Part D IRMAAs.

• If I choose a Medicare Advantage plan, is IRMAA still applicable?

  Surcharges apply regardless of how you receive Medicare coverage, meaning that if you enroll in a Medicare Advantage plan, you’re still subject to the Medicare Part B premium plus any IRMAA surcharges.

• Do IRMAA surcharges last forever?

  Fortunately, Medicare premiums are recalculated on an annual basis; so if your income drops, your IRMAA status can as well.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.