Chances are you haven’t looked very closely at your Medicare premium notice from last year, but if it included an IRMAA adjustment and you experienced a life-changing event, you might want to look at it again. Why? To avoid the IRMAA tax cliff and save thousands of dollars in Medicare premiums. But, truly, the time to start planning to avoid the tax should begin a few years before you become Medicare-eligible at age 65.
Beware of the IRMAA Bump!
Typically, the subject of Medicare doesn’t appear on anyone’s radar until they enter the age 65 orbit. But, since the Income Related Monthly Adjustment Amount, known as IRMAA, was instituted in 2007, it is crucial you begin thinking about it before you turn 63. That’s because Medicare premiums that start at age 65 are based on your Modified Adjusted Gross Income (MAGI)[i] from two years prior. If you land in one of the higher tax brackets during that time, you could pay extra Medicare Part B[ii] premiums to the tune of more than $4,000.
If, at age 63, your adjusted gross income (AGI) is $88,000 or less for a single filer or $176,000 as a joint filer, you will pay the baseline Medicare Part B premium of $148.50 per person per month. But, if your income sneaks above those levels by just one dollar, your premiums will increase significantly. As the table below illustrates, the premium increases can be very steep. Note, the table does not include the Medicare Part D (prescriptions) IRMAA, added in 2010 as part of the Affordable Care Act.[iii]
Keeping in mind that the IRMAA assessment is based on a two-year lookback, at some point your income may fall within the lower brackets, triggering a premium reduction. In the meantime, the IRMAA tax could cost you thousands of dollars. However, with proper planning done well before you become Medicare eligible, it can be mitigated or even avoided entirely.
Planning for IRMAA
If you have more than two years to plan for your initial IRMAA assessment—which is issued when you first sign up for Medicare and then reissued every November—there are a number of strategies to consider with regard to shifting or reducing your MAGI (which includes taxable Social Security benefits and tax-exempt income), including:
- Completing a Roth conversion before age 63
- Realizing capital losses to lower AGI
- Funding a high-deductible insurance policy for a Health Savings Account
- Holding lower income-producing funds and securities in a brokerage account
- Delaying Social Security until age 70
- Setting up Qualified Charitable Distributions to reduce MAGI post-age 70
Of course, any IRMAA planning strategy should be evaluated as part of your overall financial plan, but the key is understanding where your MAGI lines up with the IRMAA brackets and what forms of income can be excluded.
What if I am at or near Medicare Eligibility?
If you are at or near (within two years) Medicare eligibility, these planning strategies can still work for future years if your MAGI still exceeds the IRMAA thresholds. However, if your income falls drastically after age 65, you aren’t necessarily stuck with the IRMAA premium tax. You can appeal to Medicare if your decrease in income results from a life-changing event, such as marriage, divorce, death of a spouse, work stoppage, work reduction, or loss of income. You can also appeal if you suspect the IRS made an error in calculating your MAGI.[iv]
If you qualify for an appeal based on one of these events, you can print out form SSA-44 (Medicare Income-Related Monthly Adjustment Amount) and submit it to the Social Security Administration. The website includes the steps to follow for updating your income information, including the documentation required as evidence of the income change. You should provide as much official documentation as you can and top it with a cover letter.
If the appeal is approved, the Social Security Administration will correct their Medicare Part B and D premium amounts and make it retroactive for the months that you paid the higher premiums. If the appeal is denied, you will receive instructions for appealing the denial to an Administrative Law Judge.
Money-Saving Plans for Higher Income Clients
Understanding how the various Medigap plans work could help high-income earners save money on Medicare costs. For a slightly higher premium, Medigap plan G has an annual Part B deductible of $203 (for 2021). Plans L, M, N, and High Deductible F can also be a better fit for high-income earners. They can provide substantial savings with just a little more cost-sharing. If you’re willing to accept a higher deductible or slightly higher coinsurance, you can save a significant amount of money over time.
Allow Your Advisor to Guide You
Each year, we make it a point to contact all of our URS Advisory clients nearing retirement to map out a timeline for discussing their Medicare plans and the actions they will need to consider before becoming Medicare eligible.
If you could use a fiduciary on your side to help you navigate potential costs like these in retirement, we encourage you to reach out. We serve clients locally on the Treasure Coast and in the Palm Beaches as well as virtually all over Florida. Schedule a call directly through our website or call the office at 561-594-0100.
[ii] https://www.medicare.gov/your-medicare-costs/part-b-costs 26 August 2021