Hurricane IRMAA

If you’re of a certain age (65+) and income (higher), you may be aware of Medicare’s Income-Related Monthly Adjustment Amount (IRMAA); more likely, you don’t know what I’m talking about.

It’s an acronym that only a federal bureaucrat could love.

IRMAA is an extra premium paid by high income earners for Medicare Parts B and D if their modified adjusted gross income (MAGI) exceeds certain levels. Effectively, it’s an income tax surcharge for those seniors. To complicate it more, it’s based on your tax return from two year’s prior as that’s the most recent information that Medicare has. And, it’s poorly designed in that if you’re just $1 over the amount, you pay the full surcharge — yes, $1 more of income could cost you $2,000 in surcharges.

The standard Part B premium for most people in 2022 is $170 per month and Part D (prescription drugs) premiums vary depending on your plan. The surcharges begin to kick in when your MAGI is greater than ~$90,000 for a single person or ~$180,000 for a married couple. And, they keep getting higher as your income moves up.

It’s a nasty surprise as almost no one knows about IRMAA until that first letter arrives just before your 65th birthday.

This is, of course, a nice problem to have as it only affects wealthy Medicare beneficiaries; however, if you’re one of them, it pays to be mindful of this “tax” and plan around it. Elsewhere, I’ve explained MAGI and offered some examples about how to raise or lower it, at least in some years.

For the purposes of minimizing IRMAA over your lifetime, you may not want to minimize your MAGI every year. Instead, it may be wiser to increase your MAGI and pay the IRMAA premium in certain years but avoid it in others, depending if you find yourself just above or below an IRMAA bracket.

What do I mean?

• Roth IRA conversions become more strategic. These increase your MAGI so you may not want do a Roth conversion in years in which you’d otherwise find yourself just under an IRMAA bracket. Conversely, if you’re just into an IRMAA bracket, it may be optimal to do a Roth conversion that year to fill up the bracket (assuming you have the cash to pay the additional tax). Why might that be sensible? Roth conversions reduce your traditional IRA balance and that will reduce your future required minimum distributions (RMDs). So you may avoid rising into an IRMAA bracket in future years because you reduced your IRA balance now.
• If you’re still working, contributing to a traditional IRA / 401K will decrease your MAGI and if you’re eligible, this may be sensible if you would otherwise find yourself just over an IRMAA bracket. Contributing to a Roth IRA has no effect on your MAGI.
• Tax-exempt interest income (from municipal bonds) is included in MAGI so there’s no IRMAA benefit to switching your bond investments to these. However, to the extent you have flexibility, you may be better off with the bond portion of  your investments in your retirement account and the stock portion in taxable funds. Stocks usually generate less taxable income each year.
• IRMAA can be another good reason to delay claiming Social Security until age 70. Your Social Security income counts toward determining your MAGI so delaying may give you more time for Roth conversions to lower future RMDs.
• You may want to carefully time when you realize capital gains and/or losses to coordinate with optimizing your MAGI for IRMAA.

If you’re lucky enough to face IRMAA surcharges, be strategic and take a long-term view to minimize them over your lifetime. Also, because of the two-year lag between your tax year and the IRMAA payment, you’ll want to start planning in your early sixties.