One assumption some people have about retiree healthcare expenses is that when they turn 65 and become eligible for Medicare, their health insurance will be a low rate that doesn’t change. While it’s true that Medicare is often less expensive than private insurers, there are still are copays and monthly premiums associated with Medicare that should be factored into your retirement budget. Furthermore, if you’re on Medicare and earning a high income, your premiums for Medicare Part B and Part D can increase substantially. This increase is driven by IRMAA, the Income Related Monthly Adjustment Amount.
What Triggers the IRMAA?
The IRMAA is triggered if your modified adjusted gross income (MAGI) exceeds a certain amount. Each year it’s calculated based on your tax return from two years ago. So this year, IRMAA is calculated based on 2019 tax returns. If you’re single and your MAGI in 2019 was less than $88,000, or if you’re married and file jointly and your MAGI was less than $176,000, you won’t have to pay the IRMAA. But if your MAGI exceeded these amounts in 2019, the IRMAA will apply and increase your monthly Medicare premium as follows:
| Individual | Married Filing Jointly |
Total Medicare Part B Premium |
|---|---|---|
| $88,000-$111,000 | $176,000-$222,000 | $207.90 |
| $111,000-$138,000 | $222,000-$276,000 | $297.00 |
| $138,000-$165,000 | $276,000-$330,000 | $386.10 |
| $165,000-$500,000 | $330,000-$750,000 | $475.20 |
| Over $500,000 | Over $750,000 | $504.90 |
Over $500,000 Over $750,000 $504.90 The IRMAA will also be applied to the Medicare Part D prescription drug coverage if your income exceeds a certain level. The additional amounts will be as follows in 2021 (again based on your 2019 tax return):
| Individual | Married Filing Jointly |
Additional Medicare Part D Premium |
|---|---|---|
| $88,000-$111,000 | $176,000-$222,000 | $12.30 |
| $111,000-$138,000 | $222,000-$276,000 | $31.80 |
| $138,000-$165,000 | $276,000-$330,000 | $51.20 |
| $165,000-$500,000 | $330,000-$750,000 | $70.70 |
| Over $500,000 | Over $750,000 | $77.10 |
How to Avoid the IRMAA
As the tables above show, IRMAA can boost monthly Medicare premiums drastically. In some instances, IRMAA is unavoidable. If, for example, you’re on Medicare but still working and earning an income well into six figures, you likely won’t be able to avoid the surcharge. However, in some instances you may have a good deal of control over your cash flow, and more specifically, you might be in a position to have sufficient cash flow to cover expenses but still be able to minimize taxable income.
One way to do this is to consider a Roth conversion at least two years before you become eligible for Medicare. With a Roth IRA, you won’t have to take annual required minimum distributions (RMDs), which can trigger the IRMAA and if you withdraw from a Roth to meet expenses, those withdrawals aren’t taxable. As for a traditional IRA, if you must take RMDs but don’t need the funds, consider a qualified charitable distribution (QCD).
Here are a few other possible ways to avoid the IRMAA:
- Maximize contributions to a Health Savings Account (HSA) before you begin Medicare in order to reduce taxable income and save more money for healthcare expenses.
- Take tax-free distributions from a Roth IRA instead of a traditional IRA.
- Borrow money against the cash value in a permanent life insurance policy to meet living expenses and avoid increasing your MAGI. If you elect to do this, work closely with your agent to make sure you don’t over-borrow from the policy.
- Choose tax-efficient mutual funds to avoid year-end distributions that can increase your MAGI.
- Project your annual income carefully. If you go even one dollar over the MAGI limits, you and your spouse will both be hit with the IRMAA on your Medicare Part B and Part D premiums.
Appealing the IRMAA
If you don’t think you should have been assessed the IRMAA, you can appeal the decision within 60 days of receiving the determination notice. Your appeal can be based on incorrect or old tax information being used to make the IRMAA decision, or upon you experiencing one of these specific qualifying events:
- Marriage
- Divorce or annulment
- Death of a spouse
- Reduction in work hours or cessation of work
- Loss or reduction in pension benefits
- Loss of income from income-generating property
You’ll need to contact the Social Security Administration to start the appeal process. Be ready to supply supporting documentation such as federal income tax returns, marriage or death certificates, a divorce decree, copies of pay stubs and a letter from your employer indicating a reduction in work hours or stoppage of work. You might also have to complete IRS Form SSA- 44, the Medicare Income Related Monthly Adjusted Amount Life-Changing Event form. If you have more questions about the IRMAA and retirement planning in general, schedule an introductory call with us at this link.