If you’re reading this article, you might be wondering why you’re paying more in Medicare premiums than you used to. The reason for that would be IRMAA—Income-related monthly adjustment amount. We previously wrote a shorter article on IRMAA, and we’ve discussed how a life-changing event might allow you to lower your Medicare premiums.
However, this article will explore IRMAA in a little more depth. We’ll cover:
How IRMAA is determined
Why is this happening to you
Why you might want to know about IRMAA well before you start Medicare
Why the timing of your IRMAA determination is important
What you can do about your IRMAA in the current year
What you might be able do to keep your IRMAA lower in the future
How is IRMAA determined?
IRMAA, otherwise known as Income-related monthly adjustment amount, is calculated by the Social Security Administration (SSA). The SSA does this by calculating a modified version of your adjusted gross income (AGI). This is known as modified adjusted gross income (MAGI).
MAGI is calculated by using the following two line items from your IRS Form 1040:
Line 2a: Tax-free Interest
Line 7: Adjusted Gross Income (AGI)
If your income is above a certain threshold, then IRMAA applies. In other words, IRMAA is a surcharge on top of your Medicare premiums, based solely upon your income.
There is an additional consideration, for wealthier people who try to manage their taxable income through municipal bonds. The add-back of tax-free interest specifically prevents this from being used to avoid IRMAA.
Because of how this information is gathered, each year’s IRMAA determination is made based upon the information from previous tax years (usually, 2 tax years back). For example:
Many people received their 2020 IRMAA determination notices in fall of 2019.
2019 tax information isn’t available until tax returns are filed, which cannot happen until 2020.
The most recent reliable information is probably going to be from 2018 tax returns.
If SSA determines that you must pay IRMAA, then you can expect to see these charges to Medicare Part B and Part D premiums. If you receive Social Security, you should see this on your Social Security statement with the IRMAA surcharges deducted in addition to your normal Medicare premiums.
Why am I starting to face IRMAA surcharges?
Fortunately for people under the age of 65, IRMAA is something that no one has to worry about until they start paying Medicare premiums. For people who are working beyond age 65 (or have a spouse who is still working, and they’re both covered by the workplace plan), you can kick the Medicare can a little further down the road. But as you get closer to retirement, a few things happen that most people don’t really anticipate.
First, your taxable income might go up, not down in retirement. This does sound counterintuitive, but it does happen. Why? Several reasons:
- The power of compound interest. A magical thing happens to people who save a little at a time, stay employed, and work for 30-40 years. All of that saving, combined with average market-rate investment returns, causes your wealth to explode. If this growth happens in your Roth IRA accounts, or if you’ve been doing Roth conversions for a while, most of this might be tax-free growth. Great! But if you’ve been doing this savings in a tax-deferred or a taxable account, this will impact your taxable income.
Required minimum distributions (RMDs). All of that compound interest, in tax-deferred accounts, will eventually come OUT of that account and be taxed. Starting at age 72, the IRS will ‘help’ you determine the appropriate amount to take out of your account each year.
Social Security. Even though Social Security isn’t completely taxed, you would be surprised at how much of an impact it has on your income. If you wait until age 70 (which makes sense for most people), the income is even higher, which means even more taxable income.
Deferred compensation, executive comp, stock options, etc. All of this compensation, which might be deferred to keep you in your job longer, starts to pay out.
Becoming a widow/widower: After the first year, the surviving spouse is likely to be taxed significantly more at the ‘Single’ tax rate than under ‘Married Filing Jointly.’ Even if there is a loss of a pension, annuity, or Social Security income, this can have a significant tax impact.
Pensions, inheritances, etc. These are all things that we don’t consider when we think about retiring. That $500 per month pension from 4 jobs ago, that doesn’t start until age 65? The $10,000 I inherited from Aunt Millie a few years back? It adds up.
Second, as your taxable income goes up, it will probably stay up. Other than inheritances, most of the above will increase over time. In many cases, compound interest increases portfolio size beyond many people’s ability to spend. Much of the time, even with tax-efficient investment management, taxable income will go up. RMDs are calculated by using a table that forces a higher percentage of IRA balances to be distributed each year. Pensions and Social Security payments usually have cost-of-living adjustments (COLA) each year. Even if your deferred comp and other executive benefits are paid out, they will likely generate additional future income.
A third, and completely unrelated reason, is because people often:
Retire at or after age 65
Immediately go onto Medicare
Are assessed IRMAA surcharges based upon income they earned when they were working.
Recognizing if this might happen to you is why the timing of your IRMAA determination is important because you might be in a position to do something about it.
Why the timing of your IRMAA determination can be important
If you just retired from your job, applied for Medicare, then got assessed IRMAA surcharges, then you might be able to lower (or eliminate) your IRMAA because of what’s called a life-changing event. This could apply if you reduced your work hours (like going from full time to part time employment).
There are 7 different situations that the SSA considers to be life-changing events. If you qualify (and you expect that your income will go down because of this event, then you may be able to have the SSA recalculate your IRMAA based upon your new expected MAGI.
For example, if you and your spouse had MAGI of $400,000 in 2018, but then retired in 2019, you probably would have received an IRMAA determination letter for 2020. Let’s say that after retirement, your income goes down to $80,000 per year. However, because the SSA calculated your IRMAA based upon your working income, you can send them updated information to reflect that your income is now expected to be $80,000 per year. This is done by using what’s called an SSA-44 ‘Medicare Income-Related Monthly Adjustment Amount – Life Changing Event Form.’
The SSA-44 is fairly straightforward. However, if you’re wondering what constitutes a ‘Life-Changing Event,’ we wrote you can read this article we’ve written: “What is a Life-Changing Event and How Does it Impact My Medicare?” From there, you can read a little more about whether you might be able to reduce or eliminate your IRMAA.
What you can do about your IRMAA now
If you do qualify under a life-changing event, then simply filling out the Form SSA-44 and providing the requested documentation should be sufficient. The Social Security Administration usually takes this at face value and recalculates your MAGI based upon the revised information you send them.
If that new calculation ends up with your MAGI being below the IRMAA threshold, then SSA will simply remove the IRMAA surcharges (Part B and Part D) from your Social Security withholdings. SSA will also go back to the beginning of the year and credit any IRMAA surcharges that you’ve already paid. In other words, when IRMAA is adjusted, it is retroactive for the entire calendar year.
Even if your IRMAA isn’t completely removed, but simply lowered, you can expect SSA to make the appropriate adjustments.
Unfortunately, if you don’t qualify for a life-changing event, there might not be a lot that you can do about IRMAA now. However, you could think about how to manage your IRMAA in the future.
What you might be able do to keep your IMRAA lower in the future
Most opportunities to lower your IRMAA mostly focus on your ability to keep your taxable income down in the future—otherwise known as tax planning. Here are a few ideas you might consider:
Roth conversions: If you’re under the age of 72, and do not have to take required distributions, you may consider Roth conversions. Creating and implementing a tax-efficient Roth conversion strategy may help lower your required minimum distributions (RMDs). This would lower your taxable income down the road.
Charitable distributions: If you’re charitably inclined, you may consider charitable giving from your IRA once you reach age 70 ½. These are known as qualified charitable distributions (QCDs). For people who were already giving to charity, this is the most tax-efficient way to do so. And when you start having to take required distributions, QCDs count towards the total amount of that year’s RMD. For example, if you have a $30,000 RMD, and donate $10,000 as a QCD, you only need to receive a $20,000 taxable distribution that year. You can do QCDs for up to $100,000 per taxpayer, per year.
Delay taking Social Security: For people wondering whether they should start taking Social Security, delaying Social Security until age 70 (but not longer than that) will allow you more ‘space’ for Roth conversions. Of course, your Social Security payments will be larger once you do start taking them. However, if you were considering taking Social Security at age 65, and decide to delay until age 70, that gives you five years of additional flexibility to stay under the IRMAA threshold or make Roth conversions.
Medicare can be complicated. Having to pay IRMAA on top of your Medicare premiums can be frustrating. However, you don’t always have to pay IRMAA simply because you received a letter from the Social Security Administration. By doing proper tax planning and knowing how to navigate the process, you can often find ways to lower or eliminate your IRMAA surcharges.