A Fidelity research report shows that couples typically require about $300,000 to fund their healthcare upon retirement. One costly medical-related fee retirees must deal with is monthly Medicare premiums. On top of this, Medicare beneficiaries might be subject to a surcharge fee on their premiums known as IRMAA.
In this article, you will learn:
- What is IRMAA
- How to you calculate IRMAA
- Tips to avoid IRMAA
- How to appeal your IRMAA
WHAT EXACTLY IS IRMAA?
The income related monthly adjustment amount (IRMAA) is an additional amount you pay on top of your Part B and D Medicare premiums if your income reaches a certain level.
If your income increases significantly and you cross the threshold to a higher IRMAA income bracket, you might be subject to an IRMAA charge. The Social Security Administration (SSA) determines what the IRMAA should be yearly.
More specifically, the Social Security Administration calculates your IRMAA based on the reported income from two years prior. For example, the 2022 IRMAA will be based on the income from 2020.
As a quick note, Part B covers medical insurance, such as outpatient health services, preventive care, and medical equipment. Part D covers prescription drugs and is sold by private companies.
If you are subject to IRMAA, the Social Security Administration sends you a notification by mail. This notification, commonly referred to as a predetermination notice, will include:
- How the SSA calculated the IRMAA
- What to do if the IRMAA determination is incorrect
- What to do if you experienced a life-changing event that resulted in a reduced income
After 20 days of receiving your predetermination notice, the SSA will send you a determination notice with information such as:
- More insights into the IRMAA
- When the IRMAA goes into effect
- How to pay the IRMAA
- Steps to take to appeal the IRMAA determination
HOW DOES THE SOCIAL SECURITY CALCULATE IRMAA?
As earlier stated, the IRMAA calculation is based on an IRMAA specific modified adjusted gross income (MAGI) from two years prior. In the case of 2022 IRMAA, the Social Security Administration will use income information from 2020.
The 2020 IRMAA MAGI is calculated by adding tax-exempt incomes to your adjusted gross income (AGI). Here are all the income items to add to the 2020 adjusted gross income to find the year's MAGI.
- Earned or accrued tax-exempt interests
- Interests from US savings Bonds used to pay for higher education
- Earned income excluded from gross income due to living abroad
- Income from these locations (Puerto Rico, American Samoa, Gaum, and the Northern Mariana Islands), not included in the adjusted gross income
The SSA then uses the total from this calculation to determine your medicare-specific income bracket and whether you're subject to an IRMAA.
HOW MUCH WILL IRMAA SURCHARGES ADD TO YOUR MEDICARE PREMIUMS?
The standard monthly premium for Part B is $170.10 as long as your IRMAA MAGI is $91,000 or less when filing individually or $182,000 or less when filing jointly as a married couple. If your IRMAA MAGI is higher, you will be subject to IRMAA. This means you will pay the standard Part B premium plus the Income Related Monthly Adjustment Amount (IRMAA). The chart below illustrates what your total Medicare Part B cost per month would be based on MAGI and filing status.
On the other hand, there's no standard monthly premium for Part D plans. The company offering the Part D coverage determines what the premium should be. However, when your income increases and you cross over to the subsequent IRMAA MAGI bracket, you will have to pay the IRMAA in addition to the premium charged by the company as shown in the chart below.
Here are two case studies to help you understand better.
Jack and Jill— A married couple filing jointly had a 2020 MAGI of $270,000
- Their 2022 Medicare Part B total premium will be $340.20 per month (base premium of $170.10 + IRMAA surcharge of $170.10)
- Their 2022 Medicare Part D total premium will be the premium determined by their policy provider plus a surcharge of $32.10 per month
Lettice— filing individually had a MAGI of $92,000 in 2020
- She will be subject to IRMAA in 2022 because her income is in the 'more than $91,000 or but less than $114,000 bracket'
- Lettice's 2022 Medicare Part B premium will be $238.10 per month (base premium of $170.10 plus a surcharge of $68)
- Her 2022 Medicare Part D premium will be based on her plan premium plus $12.40
If Lettice's 2020 MAGI totaled $80,000, she would only pay the base premium of $170 for Part B and the policy-arranged premium for part D. In other words, Lettice will not be subject to IRMAA surcharges.
Note that the IRMAA on your Part D premium is paid to Medicare, not your policy provider. Usually, Medicare will deduct your premiums and the IRMAA automatically if you receive benefits from Social Security or Railroad Retirement Board.
HOW TO REDUCE OR AVOID IRMAA
What's the best way to reduce or avoid IRMAA surcharges in 2022?
The best strategy is to find ways to reduce your modified gross income. Doing so prevents you from crossing the threshold to a higher IRMAA-specified income bracket. Here are a couple of ways to avoid IRMAA on your Medicare premiums.
1. CONVERT TRADITIONAL IRA/401(K)/403(B) TO A ROTH IRA
The IRS requires you to start withdrawing from your traditional IRA/401(k)/403(b) account when you hit 72 years old. Unfortunately, these withdrawals, also known as required minimum distribution (RMDs), are taxable and can catapult you to a higher income bracket. When this happens, you might be subject to IRMAA surcharges on top of your monthly premiums.
However, you might be able to avoid IRMAA in future years by opting for a Roth Conversion. A Roth conversion involves withdrawing money from your qualified retirement account (such as an IRA, 401(k) or 403(b)) and moving it to a Roth IRA account. The withdrawal is taxable and you have to carefully analyze your age, the amount you convert, the amount of your future RMDs, and tax rates of your beneficiaries to determine if it would be of benefit to you. Once money is in a Roth IRA, you will not be required to take distributions and any distributions that you choose to take will not be included in your taxable income. By keeping future growth in a Roth IRA versus a traditional IRA, you can potentially reduce your taxable income in the future and therefore the likelihood of IRMAA.
2. CHARITABLE GIVING TO OFFSET RMD TAXATION
Required minimum distributions at age 72 and older could cause your income to increase and push you up in the IRMAA MAGI brackets. One way to satisfy RMD requirement and not add to your income is through making qualified charitable distributions (QCDs). Making a QCD involves making a charitable contribution using funds from your qualified retirement account.
As long as you're 70 ½ years old, you're eligible for QCDs of up to $100,000. It is important your donation go directly from your qualified retirement account to the charity in order for the distribution to be tax-free. Be sure to talk to your advisor or custodian about QCDs so that you can be sure to do them correctly.
3. PLAN FOR TAX-FREE INCOME
If you have a tax-free income source, you can keep your modified annual gross income low and avoid encounters with the IRMAA. Here are two tax-free income sources to consider.
Instead of the traditional 401(k) account, consider the Roth IRA. That's because withdrawals from the Roth IRA are not taxable, which will keep your MAGI low.
Another option is to fund a whole life insurance policy. With some life insurance policies, you can tap into the cash value tax-free. So, you pay a fixed premium each month, and in turn, you get a tax-deferred interest-accruing account.
4. OPT FOR A MEDICARE SAVINGS ACCOUNT
Another effective way to reduce IRMAA in 2022 is to opt for a Medicare savings account (MSA) if you are eligible.
To be eligible for an MSA, you must have a high-deductible Medicare plan. Contributions made to an MSA are tax-deductible, and the withdrawals are tax-free, if they cover medical expenses qualified by the IRS.
5. TAX-DEDUCTIBLE RETIREMENT ACCOUNT CONTRIBUTIONS
Making tax-deductible contributions for retirement is one more way to keep IRMAA at bay if you have earned income. Such contributions reduce your adjustable gross income and help you remain in a lower income bracket for IRMAA purposes. Here are a few options for you:
- Traditional 401(k) plan
- Traditional IRA
- SIMPLE IRA
HOW TO APPEAL YOUR IRMAA WITH THE SOCIAL SECURITY ADMINISTRATION
If you received the initial determination from Social Security and disagreed with the IRMAA, you can request a new initial determination. Under which circumstances can you request this?
If you have experienced a life-changing event, which resulted in an income decrease, you are eligible to make this request. Also, if you have reason to believe Social Security used incorrect and outdated information to make a determination, you can request a new initial determination.
Outdated information can crop in if the social security failed to factor in the amended tax returns filed with the IRS. It could also occur if Social Security failed to acknowledge the more recent tax returns showcasing a lower income.
Below are the qualified life-changing events as defined by the Social Security Administration.
- The death of a spouse
- Divorce or annulment
- You or your spouse stopping work
- Loss of pension
- Involuntary loss of income
You'll have to schedule an appointment with Social Security or submit form SSA-44(PDF download).
Sometimes, you might not qualify to file based on a life-changing event. In such circumstances, you still have the option of appealing. This process is known as requesting a reconsideration. However, you need to contact the SSA to guide you in the filing of an appeal.
If the SSA denies the request for a reconsideration, you can file an appeal with the Office of Medicare Hearings and Appeals (OMHA). This needs to be within 60 days of the SSA rejecting your appeal.
You also have ten days upon filing the appeal with OMHA to file new evidence that will support your appeal. If the OMHA approves your appeal, your monthly premium will be adjusted to the correct value.
IRMAA surcharges can be an expensive affair, especially when you consider the other amounts you need to fund your medical expenses in retirement. With some of the tips we shared above, you can keep IRMAA at bay.
Remember, this year's income will determine how much IRMAA you'll be subject to in just two years. So, it's important to consciously plan your income sources in the present and in the future to reduce IRMAA.