FREE NEWSLETTER
THERE ARE TWO THINGS that Americans loathe paying: taxes and health care costs. When those two come together, watch out.
That brings us to IRMAA, short for income-related monthly adjustment amount, the steeper Medicare premiums paid by retirees with high incomes. Those who pay IRMAA are often livid about the extra cost.
I looked up my Social Security records. Over my working career, I paid $98,062 in Medicare taxes and my employer paid $97,735, for a total of $195,797. Yes, that’s a lot of money. But my wife, who didn’t have any earned income after 1970 and thus paid minimal Medicare taxes, has incurred bills paid by Medicare well in excess of $300,000.
Many retirees can say the same and most paid far less in Medicare taxes than I did. Keep in mind that the current taxes funding the Medicare hospital trust are inadequate. The trust will run out of money in about four years. The standard Medicare Part B premiums only fund about 25% of the program’s costs. The balance comes from general federal government revenue.
In that context, the IRMAA surcharges don’t seem so terrible. Yet, when I pointed out to a group of retirees that the income-based premiums affected only 7% of retirees, many weren’t impressed. Many also discounted the fact the premiums start at $91,000 for individuals and $182,000 for couples, well above the typical U.S. household income.
Here are some of the replies I received from various Facebook groups:
Affluent current and future retirees seek ways to avoid or limit IRMAA. One strategy is to fund Roth accounts or to make Roth conversions two years in advance of Medicare. Tax-free distributions from Roths aren’t counted when determining income for IRMAA purposes, but tax-free municipal bond interest is. Go figure.
I think keeping your income low to avoid paying $816 a year more in Part B premiums—that’s the sum if you breach the first IRMAA income threshold—is a losing proposition. But this Facebook commenter didn’t think so: “The last thing you want is to make $1 more than the [IRMAA] bracket. That’s really feeling screwed.”
Yes, IRMAA is a so-called cliff penalty. Even if you’re just $1 above the threshold amount, you get charged the full extra premium for that income level. The premium surcharges could have been better designed. Still, is it so unreasonable for high-income retirees to pay more for Medicare?
i am going to go in a different direction. my wife of 30 years was all about “the market” and accumulation. i am not. she passed 3 years ago. she was and i am an orphan. i am sitting on 700 k in cash and a paid for house after unwinding from “the market”. i am 64 and have 100 acres and a small off grid house waiting for me when i retire at 65. none of my immediate family made it out of their 70’s. i am done with the machinations of the world and wish the best for you and yours. at some point, enough is enough. 1500 a month in ss (in its coming diminished form) will take care of any ‘extras’.
Have tried to explain this before to
Mr. Quinn but he does not get it –
IRMAA is a form of double taxation-
Part B Is financed through general
revenue and higher income taxpayers
are already paying higher marginal
tax rates (not to mention Obamacare
taxes). But we are still asked to pay
a disguised income tax through IRMAA.
Also, paying IRMAA over many years
can degrade the resiliency of a retirees
investment portfolio. There is a lot of
Instability in the world – Covid/war/
inflation/poor public policy – retirees
have limited means of coping as they
are at the mercy of financial markets.
Mr. Quinn worked in HR. Companies
try to attract employees with good
benefit packages even when the
core compensation elements are
good. Retirees in IRMAA face 20 K
per year or more health care costs
which are not pre-tax dollars.How
many employees would sign up with
a company offering plans with costs
like that.
It’s a premium surtax not unlike the higher premiums many employers charge higher income workers. Is the standard Part B premium a tax or a premium?
Not sure the share of employers who
charge more – but if they do it is not
likely to be 3 or 3.5 x more – also
pre-tax dollars.
Funding of Part B was set up as
a mix of premium and general revenue.
IRMAA was a very late addition
(well after 2000), using clever
language indicating it was a reduction
of a subsidy.
I consider it a disguised tax as it
is not consistent with the principle
of social insurance that benefits
be reasonably priced. The fact that
it is paid with after tax dollars just
compounds the offense.
Some employers do and employees often pay 25% and more of the cost. Benefits be reasonably priced? To me that means the price should reflect the actual cost. So, you are saying that the retiree living on Social Security and the one living on $300,000 a year should pay the same premium? Or, are you saying the Medicare beneficiary who incurs $100,000 in medical care should pay higher premiums than the person with zero medical costs in a year? I can think of many subsidies at the federal and state levels where subsidies are based on income using a cliff. How would you handle it?
Given our double tax theory, would you advocate eliminating medicare premiums all together? I guess we would have to increase income taxes to offset that. Or would you suggest a different funding source?
As article indicates Part B is 25Pct
premium financed and 75 Pct General
revenue. So the basic amount would
Not be subject to a double taxation
Argument – just the IRMAA.
Amount of funds collected through
IRMAA is not huge but replacing
the funds raised with other taxes
is necessary given trajectory of
Medicare spending.
I am not sure we can continue to
have 100 Pct deductible corporate
premiums for health care – can 80
or 90 Pct be looked at – this would
raise a much, much more than IRMAA,
of course.
Meanwhile we continue to support
reckless policies like the endless
student loan moratorium at 5 billion
per month.
it also occurs to me that IRMAA is
a back door approach to means
testing social security without
generating public resistance.
You agree the standard $170.10 Part B is a premium, but any additional premium based on income is double taxation? Where does the double part come from and how could there be a difference between the premiums?
What is your feeling regarding the fact Medicare payroll taxes are based on all earnings rather than on a limited amount?
We have a progressive tax system with higher marginal
rates for higher incomes.
A portion of the income tax
paid at higher rates is used
to fund Part B which is 75 Pct
paid through general revenue.
As a result, higher income
taxpayers are already contributing at higher rates
to Part B than lower income
taxpayers. IRMAA is layered
on top of this.
As to the expansion of the Medicare payroll tax, I was
never thrilled about it but
looked at it as an adaptation
to the needs of an aging society
that wanted a robust health
care system.
But that was before the onset
of IRMAA and the Obamacare
(unindexed) investment tax.
When you put everything
together, you are left with
the feeling that you are
paying significant funds
for other peoples health care
(Part A and Obamacare)
but when it comes to your
own, you still cannot get the
benefit of reasonably priced
social insurance due to high
IRMAA rates and no
deductibility.
For some reason, I don’t
have a good reaction to this
mix of circumstances.
We are paying the IRMAA premium (1st tier) for the first time this year. We are in late 70s and most of our savings are in TIRAs. We also are very close to the first IRMAA tier. We decided to do Roth conversions up to the maximum of the first tier in 2020 because 1) tax rates are low right now, 2) Roth strategy will reduce RMDs, preventing us from reaching first IRMAA tier, 3) when the first of us dies, the other will pay taxes as single tax payer, using higher tax rate and lower IRMAA threshhold.
We did another Roth conversion in 2021 and will continue as long as factors are favorable.
I have no problem with IRMAA premiums. Medicare is a fantastic program for seniors. IMO, those with higher incomes should pay more if they participate in Medicare. We should all be thankful to use such a great program. My friends under 65 cannot wait to get Medicare coverage.
What happens when the Medicare fund runs out of money?
Do we have a non sequitur here?
You are doing Roth conversions to reduce your RMDs so you can avoid the first IRMMA tier. Then you say you have no problem with IRMMA premiums.
Are you saying that you wish to avoid IRMMA premiums for yourself, but don’t mind if others pay the premium?
I see no problem doing Roth conversions and paying higher taxes today to avoid IRMMA premiums later. But it would appear that you do indeed have a problem with IRMMA premiums and are taking steps to avoid them.
It is not the principal of IRMAA “those with substantial additional means should pay more” which is the problem. It is the implementation which is the problem.
1) Cliff penalties: Exceeding a bracket threshold by one dollar should only cost some portion of that one dollar. Income tax and IRA bracket thresholds (a different MAGI) have proportional costs. Why not IRMAA?
2) After the fact IRMAA threshold publication: The IRMAA bracket thresholds are not known at the time the income occurs. The online forecasts are only educated guesses.
3) Retirement account transfers included in MAGI: Should transferring previously earned and saved funds from a normal IRA to a Roth IRA even be considered as income in a true “means test”. As an accounting convenience it makes perfect sense to include Roth conversions for the purpose of collecting income tax. But the IRMAA MAGI calculation should exclude these conversions since they do not result in real income (means) available to pay higher premiums.
All of these are fixable without impacting the means test goal of IRMAA.
I’m thinking #1 would be difficult to administer. If a Roth conversion were not counted, that income when it is used would never be counted. That doesn’t seem fair either.
And if #3 above were implemented it would then make sense to include Roth distributions in the IRMAA MAGI calculation since that income would be available to pay additional premiums. But the advantage is that larger post age 63 Roth conversions could be done without triggering the IRMAA penalty and presumably the Roth distributions would be performed later in life and less likely to cause an IRMAA problem.
I’m currently trying to complete Roth conversions by age 63 to avoid IRMAA. “Keeping your income low to avoid paying $816 a year more in Part B premiums” doesn’t seem like a “losing proposition” to me. I’m curious why you feel that way since it seems contrary to your normal views that people should do what they can to reduce taxes within the bounds of the tax code.
We are talking about premiums directly related to coverage not taxes, but that comment was more related to one’s income. It’s like keeping income low so you don’t move into a higher tax bracket. Generally, would a person be better off having a higher income while paying the $816 more in premium. A retiree can have $23,000 in additional income and still pay only $816 a year more in premium.
Keep in mind too many employers charge their workers for health benefits based on their pay. I doubt many people would turn down a raise.
And yes, playing by the rules to minimize taxes is fine. It’s the rules that are the problem sometimes.
I have been paying IRMAA for years. The first level is not bad – this year I am paying $250 a month instead of $170.
However, the next level is much worse. I have deliberately not been getting as much income as possible, because I don’t want to go over the next limit – for this year, $114K. This is difficult to do, because there is a two-year lag. I have to keep this year’s income under what the limit will be in 2024, but no one knows what that will be. I suspect it will be much higher, maybe around $125K or so, or even more.
Of course, once I have to withdraw from my retirement accounts, I’ll be way up there. You pay an additional $445 a month at that level. At least I won’t have to worry about LTC!
Check out Harry Sit’s article 2022 2023 Medicare Part B IRMAA Premium Brackets that he periodically updates. I believe he updates it in October for the next 2 years (2023 2024). So should have 2024 tier estimates that are based on 2022 income later this year.
Not sure what you mean about the LTC comment.
If you’re a single retire with an income over $170K, and you need to go to a nursing home, you can just pay out of income.
Thanks for your response. I was wondering as well.
Yes Medicare is a great bargain. I think what many dislike about IRMAA is that they are surprised when she shows up. The 7% who are affected are unaware that she is a surcharge baked in at age 63. They thought deferring income until retirement would mean lower taxes in retirement. The 2-year lookback and the cliff-tax arrangement catches them by surprise. According to the taxation principles of :ability to pay and the benefit received IRMAA is “fair”. The more it is discussed the more people can decide whether they want to pay it or try to avoid it.
I’m guessing the look back is simply a practical administrative necessity. However, there is an appeal process such as when a person had a high working income that then drops significantly at retirement.
I’m in the same Facebook groups as you and enjoy your frequent posts on this topic.
For me, I don’t know if people are having an adverse reaction to the topic or if its the way your frame the question. On one hand you mention your wife hasn’t paid medicare since 1970 and has taken way more out of the system than put in (as have others you noted). On the others hand, stop complaining about IRMAA and fund the system! Its akin to telling a chef to stop complaining about how hot it is in the kitchen as one’s third helping at the buffet its noticed food is getting low.
I think a more constructive conversation would be along the lines of why Medicare is unsustainable in its current form, what percentage of our Federal budget should be used to fund and prop-up Medicare, and should we revert to a social security approach where one generally has to pay into the system for a set number of quarters to qualify?
I think I system where you need to qualify would be going backwards.
Medicare is effectively a government run insurance system, from a pay/benefit perspective there will always be winners and losers. Until this year at age 78 I had not collected anything under Medicare and I would be happy to have it stayed that way as I suspect others would as well.
Americans want all the health care they want, when they want it and they don’t want any third party interfering – and they want someone else to pay. It doesn’t work that way.
Mention a universal system and the first thing you hear is yeah, but they wait weeks to receive care. But we aren’t even talking about such a system.
We can’t have it both ways- unlimited care – and affordable.
Why is Medicare unsustainable? Any less sustainable than our entire health care system?
The fees Medicare pays are 20-30% less than private coverage so it’s shifting costs. Apply those fees across the board and what are the consequences? Shortages of facilities and providers?
We need to decide what we want, how we will balance competing demands and how we will pay for it.
Congress has not had the courage to tell us the truth and we probably don’t want to hear it so they find ways to make funding less obvious- like income taxes on SS benefits from 50% to 85%.
Just as with SS, Medicare revenues should have been regularly adjusted to keep up with changing demographics, spending patterns, but what fun is that?
Thanks, for this response. I think you are exactly right. I was really unhappy when I retired and realized I would be paying a higher medicare premium because of my income. I am widowed and I do think the brackets are a little unfair for a single versus a couple. A married couple can have twice the household income without incurring the additional premium. But everything is not exactly fair.
I agree that IRMAA is a good problem to have. Count me as a Pollyanna — I see SS and Medicare as amazing social safety nets. Sure, I could argue that a streamlined and nationalized health care system would be improvements, but I will nonetheless be grateful to obtain Medicare coverage. And yes, I will be an IRMAA cliff dweller!