What is the Medicare IRMAA?
/Key Questions Answered
It is commonly known by most that Medicare, the federal health insurance program for people ages 65 and over, involves paying a monthly premium for coverage.
Many of the approximately 66 million people enrolled in Medicare (CMS, January 2024) though are often surprised to learn that they are being impacted each month by what is known as IRMAA, or the Medicare Income-related Monthly Adjustment Amount.
Medicare IRMAA is an income-based surcharge that couples or individuals must pay on top of their existing monthly premiums for Medicare Part B (coverage for preventive care, doctor visits and outpatient care) and Medicare Part D (prescription drug coverage). Certain individuals and couples with higher incomes may be subject to an IRMAA surcharge.
While most of the cost of Medicare Part B and Part D is covered by general revenues, the IRMAA surcharges help to spread that cost to beneficiaries who can afford to pay a larger share of the cost of their coverage (Medicareresources.org; March 2024). These higher premiums for Medicare began in 2007 under the Medicare Modernization Act, while for Medicare Part D, they took effect in 2011, under the Affordable Care Act.
What income determines whether one is subject to IRMAA?
The income used to determine IRMAA is a form of Modified Adjusted Gross Income (MAGI) specific to Medicare. MAGI includes not only wages, but IRA/retirement plan distributions, dividends, capital gains and tax-exempt interest income (i.e. interest from Municipal bonds).
When calculating whether IRMAA charges apply to you, Medicare uses the MAGI you reported on your Federal income tax return from two years prior to the current year. This means that for your 2024 Medicare premiums, the government will base those on your 2022 level of income.
For example, an IRMAA surcharge is added to your 2024 premiums if your 2022 income was over $103,000 (or $206,000 if you’re married). The Social Security Administration will inform you by mail if you are being assessed IRMAA, but as I mention later, there’s a process available to appeal an IRMAA determination if you feel it is unwarranted.
Below are the marginal tax brackets which will determine the IRMAA monthly surcharge for both Medicare Part B and D. As you can see in these sliding scales, the higher your income level, the larger the amount of the IRMAA surcharge.
2024 Medicare Part B IRMAA
2024 Medicare Part D IRMAA
Remember that the MAGI levels in these charts above refer to your 2022 income!
Here are two examples of how the IRMAA 2024 brackets work in practice.
Example #1: Adam (Individual Tax Payer)
Adam’s MAGI was $102,500 in 2022.
He will not be subject to IRMAA in 2024 because his income is below the $103,000 threshold.
His 2024 Medicare Part B premium will be $174.70/month (no IRMAA surcharge).
His 2024 Medicare Part D premium will be based on what his plan charges (no IRMAA surcharge).
Example #2: Jeremy and Katherine (Married Filing Jointly)
Their MAGI was $206,001 in 2022.
They will be subject to IRMAA in 2024 because their income exceeded the $206,000 threshold.
Their 2024 Medicare Part B total premium will be $244.60 per month (base premium of $174.70 + IRMAA surcharge of $69.90).
Their 2024 Medicare Part D total premium will be the base policy cost (a.k.a. “Plan Premium”) + a surcharge of $12.90 per month.
Do I still have to pay the IRMAA if I choose Medicare Advantage?
Some people mistakenly think they can avoid paying IRMAA charges if they sign up for a Medicare Advantage plan instead of Original Medicare. However, IRMAA applies to all Medicare beneficiaries whose earnings are high enough to make them eligible. This is because everyone on Medicare Advantage still owes the Part B premium of $174.70 per month in 2024, as well as any applicable IRMAA charges.
Additionally, if you have a Medicare Advantage plan that includes prescription drug coverage, the Part D IRMAA also applies (nerdwallet.com; January 2024).
How do I find out if the Medicare IRMAA applies to me?
When you sign up for Medicare, the standard Part B premium and the premium your Part D plan charges will apply until Social Security receives your income data from the IRS. At that point, if your income is high enough for IRMAA to be charged, Social Security will mail you a predetermination notice. This notice will explain that IRMAA will apply, how this determination was made and how to proceed if any of this information is in error or your situation has changed.
After sending out the predetermination notice, Social Security will then mail you an initial determination notice informing you that you owe IRMAA on your Part B and Part D (if applicable) premiums. Similar to the prior notice, this will once again explain how the determination was made, but it will also provide instructions on what to do if you feel it isn't correct. If you receive an initial determination notice, it is important to hold onto it for future reference.
How do I pay the Medicare IRMAA surcharge?
If you're receiving retirement benefits from Social Security and already have your Medicare Part B and Part D (if applicable) premiums deducted from your Social Security payment, you don't have to take action if you owe IRMAA. Your IRMAA will automatically be deducted from your Social Security benefit.
If you don't have any Medicare premiums deducted from your Social Security payment, you'll receive a bill for your Part B and Part D IRMAAs.
How can I appeal the Medicare IRMAA if I don't think it applies to me?
If you receive a notice that you owe IRMAA and feel it is incorrect, perhaps because of an extraordinary change in your income level in a particular year or due to a life changing event such as a divorce, the IRMAA appeal process can be started by any one of the following three actions:
1. Request a new “initial determination” from Social Security
2. Submit form SSA-44 (IRMAA – Life Changing Form)
3. Call Social Security Administration at (800) 772-1213
You are only given 60 days to request an appeal and the 60-day clock begins when you receive your Part D IRMAA letter.
What are some planning-related ideas to consider regarding IRMAA?
As illustrated above, simply exceeding an income level threshold by just a dollar can result in a significantly higher Medicare premium payment. For that reason, the best way to reduce IRMAA (or avoid it) is to monitor your sources of income closely and try to lower your Modified Adjusted Gross Income (MAGI).
Here are just a few planning-related ideas to consider, which can reduce your MAGI and help you to potentially escape this surcharge.
1. Own Tax-Efficient Investments
You can further minimize taxes using tax-efficient investments in accounts and being mindful of asset location.
Avoid high turnover funds. A high turnover fund frequently buys and sells securities on your behalf. This creates unnecessary short-term and long-term capital gains that are passed down to you, the investor.
Choose ETFs over mutual funds. Mutual funds pass capital gains down to their investors. Even if you don’t trade your mutual fund, you can still be on the hook for unwanted capital gains taxes due to the activity inside the fund by the investment manager. In most cases, ETFs avoid this problem and give you control over your capital gains, making them more tax-efficient.
Consider asset location. If you have investments in both taxable and tax-advantaged retirement accounts, asset location can help minimize taxes. For example, bonds might be better suited for tax-advantaged retirement accounts because they generate regular taxable income. Growth-oriented or broad-based market funds (i.e. an S&P 500 ETF) that generate a limited amount of dividends may be a better fit for taxable accounts.
2. Consider Tax-Free Income Sources for Meeting Cash Flow needs
When creating your sources of cash flow during retirement, you should be mindful of where you are withdrawing money. Some withdrawals are tax-free, while others are taxable and included in the MAGI calculation.
By withdrawing money from certain tax-free sources, you can keep your taxable income level lower and perhaps reduce (or avoid!) IRMAA in a particular year.
Here are two examples:
1. Roth IRA: If you’re over age 59 ½ and have satisfied the “five-year rule,” withdrawals from a Roth IRA are tax-free. Keep in mind that, while withdrawing funds from a Roth IRA might be good for IRMAA planning purposes, doing so would also decrease the value of an important long-term tax-efficient savings vehicle.
2. Permanent Life Insurance: Certain types of permanent life insurance policies allow you to tap into the cash value tax-free. Before taking action, you will want to understand how this process works for your specific policy and any restrictions that might be in place. (Source: Youstaywealthy.com; March 2024)
3. Evaluate whether Roth IRA Conversions make sense
At age 73 (or 75, for those born after 1960), the IRS forces you to begin withdrawing money from your Traditional IRA/401(k) accounts.
These withdrawals are known as Required Minimum Distributions (RMDs), and every dollar distributed is taxed as ordinary income.
RMDs can be hundreds of thousands of dollars per year, causing unwanted IRMAA surcharges.
To reduce your future RMDs (and your future taxable income!), consider doing Roth conversions during your “gap” years. Your gap years begin the year you retire and continue up until your RMD age (73 or 75).
As explained in greater detail in my October 2022 post, Revisiting the Roth IRA Conversion, a Roth conversion is the process of withdrawing money from your Traditional IRA, paying taxes on the withdrawal, and immediately transferring the dollars to a Roth IRA.
For many retirement savers, their level of income is lower during this “gap” period of time. Getting money transferred out of a Traditional IRA via a Roth Conversion and paying the subsequent income tax at a more favorable marginal income tax rate, while simultaneously building up your tax-free Roth IRA bucket for the future, makes a lot of sense.
4. Make Charitable Donations
Charitable giving not only benefits the non-profit organizations receiving your money, but some charitable contributions can also reduce your MAGI for future IRMAA bracket calculations.
For example, if you are 70 ½ or older, you can donate up to $100,000 per year from your Traditional IRA to a qualified non-profit organization, known as a Qualified Charitable Contribution (QCD).
If you are charitably inclined and are currently subject to Required Minimum Distributions (RMDs), this is a great way to reduce your MAGI for IRMAA purposes in 2024. QCDs can be used as all or part of your RMD and there are no taxes on QCDs. This type of charitable gifting strategy would directly reduce your IRMAA calculation for that tax year.
The amount of an individual’s RMDs are one of the reasons why many Medicare recipients are pushed into a higher IRMAA bracket. QCDs made before reaching RMD age would also result in reducing the value of your retirement account from which future RMDs will be determined. If those RMDs are lower, this could subsequently help to reduce your MAGI (and also reduce IRMAA!) in future years.
In summary, Medicare beneficiaries should be mindful of IRMAA and how it may increase Medicare premium costs. Thankfully, there are several planning strategies to consider that can potentially impact whether IRMAA will come into play or not for a given situation. When planning for IRMAA or any financial-related issue, it is always important to weigh how a change that addresses one area can impact another area in one’s overall financial plan.
Note: Nothing contained herein is offered as tax advice. Please consult qualified professionals with any tax planning needs or tax questions you may have
