If you’re approaching Medicare eligibility, you may have heard of IRMAA, or the Income-Related Monthly Adjustment Amount. IRMAA is a surcharge added to your Medicare Part B and Part D premiums if your income is above certain limits. For many retirees, these extra costs come as a surprise, especially since they’re based on income from two years prior.
While IRMAA isn’t always something you can completely avoid, the good news is that with careful planning you can often reduce or manage it more efficiently. In this article we’ll explain how IRMAA works, what types of income count toward it, and strategies you can use to keep your Medicare premiums as low as possible. Whether you’re still working, recently retired, or planning your future withdrawals, understanding IRMAA can save you thousands of dollars over time.
How many years does IRMAA last?
You are always potentially subject to IRMAA, but the determination is made each year based on your income from two years prior.
For example:
- Your 2024 MAGI determines whether you pay IRMAA in 2026.
- Your 2025 MAGI determines whether you pay IRMAA in 2027.
This means you might pay IRMAA one year and not the next. For example, if your income fluctuates due to something like a Roth conversion, property sale, or large one-time withdrawal, you may face IRMAA for a single year. It may then drop below the threshold later and you won’t owe IRMAA.
Does IRMAA ever stop?
Yes, but only when your income, as defined by the IRMAA modified adjusted gross income (MAGI) formula, falls below the threshold.
If your income drops due to retirement, reduced withdrawals, or other factors, you may not owe IRMAA in future years. However, keep in mind there’s a two-year lookback, so it may take time for lower income levels to show up in your Medicare premiums.
Is there any way to avoid IRMAA?
Yes, with proactive retirement income planning you can often reduce or avoid unnecessary IRMAA surcharges. The key is to manage how and when income is recognized, starting two years leading up to Medicare enrollment.
Here are a few strategies:
- Coordinate withdrawals: Tax-efficient withdrawals provide a number of benefits in retirement. Use taxable, tax-deferred, and Roth accounts strategically to stay below IRMAA thresholds.
- Time large events: Spread out Roth conversions, property sales, or capital gains over multiple years.
- Leverage charitable giving: Consider Qualified Charitable Distributions (QCDs) from IRAs to reduce taxable income.
- Plan ahead: Begin income planning well before age 63, since Medicare looks back two years when calculating IRMAA.
Important note: Trying to completely avoid IRMAA isn’t always the most optimal approach. Sometimes it makes sense to accept a temporary IRMAA surcharge if it results in larger long-term tax savings.
For example, a Roth conversion this year might push you into IRMAA for one year. But if it lowers your future required minimum distributions (RMDs), you might avoid IRMAA for multiple years down the road, saving far more in the long run. That’s because RMDs are taxed as income and included in your AGI.
Does Social Security count towards IRMAA?
Yes. Social Security benefits count toward your MAGI for IRMAA purposes, but only the taxable portion of your benefits.
Up to 85% of your Social Security may be taxable, depending on your other income. This means that Social Security benefits can contribute to whether you cross an IRMAA threshold.
Does tax-exempt income count towards IRMAA?
Surprisingly, yes. Tax-exempt income, such as municipal bond interest, is added back when calculating MAGI for IRMAA.
This catches many retirees off guard because they assume tax-free income won’t affect Medicare premiums. If you rely heavily on municipal bonds or other tax-exempt investments, you could still face IRMAA surcharges.
Does an inheritance affect IRMAA?
It depends on the type of inheritance:
- Cash inheritance: Simply receiving cash doesn’t count as income for IRMAA.
- Inherited retirement accounts (like a traditional IRA): Withdrawals you take do count as income and could push you above IRMAA thresholds.
- Inherited investments: If you sell inherited stocks, mutual funds, or real estate, the capital gains may also count toward MAGI.
The timing of withdrawals or sales after an inheritance can play a big role in whether you face IRMAA.
Do capital gains affect Medicare IRMAA?
Yes. Capital gains are included in MAGI for IRMAA.
This includes:
- Gains from selling stocks or mutual funds
- Gains from selling real estate
- Gains from the sale of a business
Even one large gain can trigger IRMAA for a single year, so it’s wise to plan large sales carefully. You might spread gains across multiple tax years or offset them with losses to reduce the impact.
Can I appeal IRMAA if I retire?
Absolutely. Retirement is considered a qualifying life-changing event that could allow you to waive IRMAA under Medicare rules.
If your IRMAA is based on a past year when you were still working, you can file Form SSA-44 with the Social Security Administration to request a reduction. You’ll need to provide documentation, such as a letter from your employer showing your retirement date.
Appealing IRMAA can immediately reduce your premiums to match your new, lower income level so it’s worth the effort if you’ve recently retired.
Final Thoughts
IRMAA surcharges can be frustrating, but with advance planning, they don’t have to derail your retirement. By understanding what counts as income, timing large financial moves, and knowing when to appeal, you can keep your Medicare premiums under control.
To get help from a fee-only fiduciary and make sure that tax efficiency is a part of your retirement plan, email me at brandon@belongingwealth.com or call 903-471-0624 and I’d be glad to help you.
