How IRMAA Can Increase Your Medicare Premiums in Retirement
It’s an unfortunate reality: the more financially prepared you are for retirement, the more you might have to spend on Medicare premiums.
Many people mistakenly believe that reaching Medicare eligibility means an end to health insurance premiums, or that everyone pays the same Medicare premiums for identical coverage. However, numerous retirees are shocked to discover that their Medicare premiums are tied to their income in retirement. This knowledge could prompt many to reconsider their retirement planning strategies.
Even though you might expect to have no income once you stop working, Medicare Part B premiums are actually based on your household income, using a two-year look-back period. The specifics of this income calculation can be surprising. However, there are strategies to mitigate the impact of these premiums.
Higher-income retirees often face unexpected surcharges on their Medicare premiums based on their income levels. These surcharges, known as the Income-Related Monthly Adjustment Amount (IRMAA), increase your Medicare premiums. Fortunately, these income thresholds are adjusted annually for inflation. It’s important to note that IRMAA surcharges are determined based on your income from two years prior. Therefore, if you turn 65 in 2024, your premiums will be based on your 2022 income. If you were fully employed in 2022, your income that year might be higher than in 2024.
When you begin Medicare, the Social Security Administration (SSA) will send you an initial determination notice if you owe an IRMAA. This notice will also provide information on how to request a new determination if you’ve experienced a significant life-changing event, potentially reducing the impact of IRMAA surcharges.
IRMAA surcharges are added to your monthly Medicare Part B and Part D premiums. It is your responsibility to ensure these surcharges are paid, even if your employer covers your Part D costs.
2024 IRMAA Amounts
For 2024, IRMAA surcharges are as follows:
- Single taxpayers with incomes over $103,000 and up to $129,000 (or joint incomes between $206,000 and $258,000) will pay an additional $69.90 for Part B and $12.90 for Part D.
- Single taxpayers with incomes over $129,000 and up to $161,000 (or joint incomes between $258,000 and $322,000) will pay an additional $174.70 for Part B and $33.30 for Part D.
- Single taxpayers with incomes over $161,000 and up to $193,000 (or joint incomes between $322,000 and $386,000) will pay an additional $279.50 for Part B and $53.80 for Part D.
- Single taxpayers with incomes over $193,000 and up to $500,000 (or joint incomes between $386,000 and $750,000) will pay an additional $384.30 for Part B and $74.20 for Part D.
- Single taxpayers with incomes over $500,000 (or joint incomes over $750,000) will pay an additional $419.30 for Part B and $81.00 for Part D.
Smart tax planning can help you minimize the impact of these surcharges.
How to Reduce IRMAA Surcharges
To address IRMAA surcharges, you might need to notify Medicare if your income has decreased since retiring or if you have implemented effective tax-planning strategies. If you expect your income to be significantly lower than it was two years ago, inform Medicare by submitting Form SSA-44, “Medicare Income-Related Monthly Adjustment Amount Life-Changing Event,” to the Social Security office. Life-changing events such as work reduction, retirement, marriage, divorce, or the death of a spouse can qualify for a reassessment of your IRMAA.
Failing to notify Medicare of these events could cost you thousands in unnecessary Medicare premiums. It’s crucial to monitor your taxable income annually to avoid future IRMAA surcharges. A well-structured retirement income strategy can help reduce your lifetime tax burden and minimize or avoid IRMAA surcharges. Tax-free income sources like Roth IRAs or Cash Value Life Insurance can help those with higher income needs avoid the top IRMAA brackets.
If you anticipate high income levels during retirement, consider strategies to reduce your modified adjusted gross income (MAGI) before becoming eligible for Medicare. Contributing to tax-preferred retirement accounts like a 401(k) can significantly lower your adjusted gross income (AGI). For instance, in 2024, contributions can reduce AGI by $23,000, plus an additional $7,500 for those aged 50 and older.
Health savings accounts and Roth individual retirement accounts also provide tax-free income during retirement. Conducting a Roth conversion before reaching Medicare age can increase your future tax-free income. Additionally, if you are over 70.5, making qualified charitable distributions from your IRA can reduce your MAGI by up to $100,000.
Working with a tax-planning-focused Certified Financial Planner can ensure you are not overpaying taxes on your retirement income, helping you avoid excessive Medicare costs as you age.
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