When you’re enjoying your golden years, the last thing you want is unexpected financial surprises, like Medicare’s Income-Related Monthly Adjustment Amount (IRMAA). Luckily, you can keep these charges from impacting your nest egg with some strategic asset management.
What Is the IRMAA?
The IRMAA is an additional charge added to Medicare Part B and Part D premiums for individuals and couples at higher income levels. In other words, if your modified adjusted gross income (MAGI) exceeds a certain threshold, you’ll be required to pay a higher premium for your Medicare Part B (medical services) and Part D (prescription drugs).
How Does the IRMAA Work?
The IRMAA doesn’t impact Medicare beneficiaries equally. It’s organized in brackets and only affects individuals whose MAGI exceeds a certain amount. The Social Security Administration (SSA) looks at your income tax return from two years prior to determine how much you owe for a given year.
For 2023, individuals with a 2021 MAGI above $97,000 or couples filing jointly with a MAGI above $194,000 must pay the IRMAA. The premiums continue to rise incrementally as income increases. The surcharge doesn’t apply to anyone with earnings below this threshold.
How Does It Impact Your Asset Management?
Without proper planning, these additional costs can erode your hard-earned nest egg.
Income shiftsÂ
If you’re on the cusp of an IRMAA bracket, a large taxable event, such as taking required minimum distributions from a retirement account, could raise your income and, consequently, the premium surcharge you’ll need to pay.
Tax implications
How you access your retirement funds, whether from tax-deferred or Roth accounts, can impact your MAGI, potentially changing your IRMAA.
Tax-deferred accounts: Withdrawals from accounts like Traditional IRAs or 401(k)s count as taxable income and can escalate your MAGI.
Roth accounts: Qualified withdrawals from Roth accounts are tax-free and will not increase your MAGI. However, conversions from traditional to Roth can create a taxable event in the year of conversion.
Capital gains:Â Realizing capital gains, say from selling stocks at a profit, can also increase your MAGI, affecting your IRMAA determination.
How Can You Reduce These Costs?
Fortunately, with the right planning, you can mitigate the effects of IRMAA on your retirement assets.
Income timing
If possible, aim to manage the timing of your income. This could mean:
Being flexible with spending: Consider delaying or accelerating expenses (and the funds needed to cover those expenses) into a year where your income may be lower.
Spreading out significant withdrawals: If you can’t re-time your withdrawals or transactions, spreading them out over a few tax years can help you avoid an abrupt spike in your MAGI.
Withdrawing from tax-free accounts: Consider using tax-free accounts, like Roth IRAs, for qualified withdrawals as they won’t contribute to your MAGI.
Using tax-efficient investment strategies: Make reducing taxable income a priority in your investment management. For example, bonds that generate income can be placed in tax-advantaged accounts, where they won’t add to your MAGI.
IRMAA appeal
The SSA understands that a lot can happen between the year that determines your IRMAA bill and the year you pay it. If your income decreases because of certain life-changing events, such as marriage or the death of a spouse, it’s possible to appeal the IRMAA determination.
By presenting documentation of the event and its impact on your income, you might be able to have your Medicare premiums adjusted. Regularly reviewing your IRMAA status, especially after significant life events, can be key to ensuring you’re not overpaying.
The Medicare IRMAA isn’t the only expense that can impact your retirement. Connect with us to learn how our financial advisory services can help you tackle whatever costs come your way.Â
