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Understanding IRMAA

IRMAA, which stands for Income-Related Monthly Adjustment Amount, is a term that may not be familiar to everyone. However, for individuals enrolled in Medicare, IRMAA can have a significant impact on their healthcare costs. Here are the basics of IRMAA, why it matters, and how it can affect your Medicare expenses.

What is IRMAA?

IRMAA, or Income-Related Monthly Adjustment Amount, is a surcharge added to your Medicare Part B and Part D premiums if your income exceeds a certain threshold. It’s a way for the government to collect additional funds from higher-income Medicare beneficiaries to help support the Medicare program.

IRMAA primarily affects Medicare Part B (which covers doctor visits, outpatient services, and medical equipment) and Medicare Part D (which covers prescription drugs) premiums. The Social Security Administration (SSA) determines your IRMAA based on your modified adjusted gross income (MAGI) from two years prior.

This means that your IRMAA for a specific year is based on your income from two years earlier. This is especially important to know if you plan on retiring and commencing portfolio distributions prior to age 65 as, depending on the type of account(s), those distributions may unknowingly impact your Medicare premiums. Each year, Medicare publishes an updated list of costs, which includes the income threshold in which IRMAA may apply, based on your tax filing status. For 2023, that list may be found here.


Why Does IRMAA Matter?

IRMAA matters for several reasons:

Increased Healthcare Costs: The most obvious reason why IRMAA matters is that it can significantly increase your Medicare costs. If you fall into a higher income bracket, you may pay a surcharge on top of your standard Medicare premiums. These surcharges can vary widely based on your income level and can add up to hundreds or even thousands of dollars annually.

Income-Based Tiers: IRMAA is not a flat fee; it is assessed on a sliding scale based on your income. There are several income-based tiers, and the higher your income, the higher your IRMAA surcharge will be.

Impact on Retirement Planning: Knowing how IRMAA works and how it can affect your Medicare expenses is crucial for retirement income planning. It’s essential to factor in these potential surcharges when estimating your retirement healthcare costs.

Tax Planning: Since IRMAA is based on your MAGI, it’s essential to consider the tax implications of your retirement income. Strategies like Roth conversions or managing your withdrawals from different types of retirement accounts (i.e. IRAs, Roth IRAs, or brokerage accounts) can help reduce your MAGI and potentially lower your IRMAA.

Enrollment Periods: IRMAA assessments are made annually, so if your income fluctuates, you may experience changes in your Medicare premiums from year to year. Being aware of these potential changes can help you make informed decisions during Medicare enrollment periods. In some cases where you’ve experienced a life-changing event, you may be able to submit a request to waive or reduce the IRMAA surcharge.

Plan Accordingly

Understanding IRMAA and its impact on your Medicare costs is a crucial aspect of retirement and income tax planning and managing your overall healthcare expenses in your retirement years. By being aware of how your income affects your IRMAA surcharges, you can make informed decisions about your retirement income strategy, potentially reduce your Medicare expenses, and ensure that you are financially prepared for healthcare costs during your retirement years.