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The Gift of the MAGI

James McGlynn

I’LL BE ENROLLING IN Medicare in a couple of years. I wish I knew how much my premiums will be, but that’s a mystery worthy of Sherlock Holmes. I’ve researched it thoroughly, as you shall see, and it all starts with something called IRMAA.

IRMAA is not the name of my seventh-grade crush. Instead, it stands for income-related monthly adjustment amount. It’s the premium surcharge that people with higher incomes pay for Medicare.

How much is the surcharge? In 2022, single taxpayers with incomes above $91,000—or $182,000 for joint filers—paid at least $68 a month on top of the standard premium of $170.10 for Medicare Part B. The surcharge ranged as high as $408.20 a month for top earners. You can get all the details here.

There’s a similar surcharge for Medicare Part D, which pays for prescription drugs. That surcharge ranged from $12.40 to $77.90 a month in 2022 depending, again, on income levels. These figures adjust a bit every year.

There are several complications in anticipating the size of my future Medicare premiums. First, my income this year, at age 63, will determine if I must pay a surcharge when I enroll in Medicare at 65. Medicare, you see, looks back two years when determining our income levels.

Second, the income amount that counts is not adjusted gross income, but rather MAGI, or modified adjusted gross income. MAGI is adjusted gross income with tax-exempt interest income added back in.

Third, if I exceed the income threshold—even by $1—the Medicare surcharge will be triggered for the entire year. To avoid this fate, I need to know my income this year and keep it below the threshold, if I can.

At the moment, I think I’m just below the limit. It’s complicated, though, because my income comes from many sources. I have a pension, a period-certain annuity from my IRA that I’m using as a bridge until I claim Social Security at age 70, Roth conversions, taxable interest income, taxable dividend income and capital gains. Then there’s my business income, which is negligible this year.

My pension and annuity income are easy to calculate because they’re fixed. My dividends and interest income are also mostly known quantities, and I can track those on a year-to-date basis in my taxable brokerage account. This leaves three swing factors affecting my income: Roth conversions, tax losses and health insurance deductions.

I’ve made sizable Roth conversions in the past, but I backed off in 2022 to stay beneath the IRMAA limit. Still, I have made small monthly Roth conversions this year, and monitored their effect on my income.

I was comfortably below the income threshold in November—until Elon Musk decided to buy Twitter Inc. I owned some Twitter shares, and his purchase meant a long-term capital gain that has put me very close to the IRMAA threshold.

After that unexpected gain, I stopped making Roth conversions. If, in 2022’s remaining days, it looks like my income will exceed the IRMAA threshold, I can take some capital losses in my brokerage account before year-end to get my income below the threshold.

I also have a high-deductible health insurance plan, so I fund a health savings account. This year, I’ve contributed $4,650 to my health savings account, which includes a $1,000 catch-up contribution. It’s the biggest deduction from my MAGI income calculation.

Right now, I’m fairly confident that I won’t pay an IRMAA surcharge in the year I turn 65 and become eligible for Medicare. But that doesn’t mean I won’t pay the surcharge in future years. One reason: I won’t be able to contribute to a health savings account after I file for Medicare, so I’ll have one less lever to pull to reduce my reported income.

IRMAA is complicated, and the surcharge might be unavoidable if your income is high. But it’s still worth paying close attention. Even if you breach one IRMAA income threshold, you may be able to avoid crossing the next one and triggering an even larger surcharge.

James McGlynn, CFA, RICP, is chief executive of Next Quarter Century LLC in Fort Worth, Texas, a firm focused on helping clients make smarter decisions about long-term-care insurance, Social Security and other retirement planning issues. He was a mutual fund manager for 30 years. James is the author of Retirement Planning Tips for Baby Boomers. Check out his earlier articles.

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Jim Kerr
Jim Kerr
1 month ago

This is a super helpful article on a subject I’ll have to deal with in a couple years as well. Thanks for writing it, James.

James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 month ago
Reply to  Jim Kerr

Jim glad to be of help. Dealing with IRMAA is a pastime like playing Wordle for me.

John Harville
John Harville
1 month ago

Good points Jonathan. Not undertaking this without a lot of thought however. With zero debt, it isn’t likely I’ll ever be itemizing again, but will always have necessary income for the full standard deduction. No big ticket items needed or wanted at this stage of life, cash & carry anyway. Granted, medical/long term care is always the X factor at this age. Currently this couple is in good health and has excellent medical insurance coverage. Financial planner has stated we can handle it and won’t be running out of money. It will take four years at todays rates to complete the mission of conversions, a long time at this age. If attained however, income drops back to retirement/pension income, once again qualifying me for zero taxed dividends of approximately $13,000 annually, plus no more RMDs. Also, rules and regs for inherited IRAs have become less friendly to heirs, with the potential to cause tax grief for my children. I’m basically paying the taxes for them, with monies I haven’t needed, and don’t figure to need. Risk is everywhere, all of the time. Surprises? We’ll deal with them as they come.

John Harville
John Harville
1 month ago

On a mission to convert all of my Trad IRA investments to Roth, I’ve chosen to go to the next level of Medicare from standard. This because market valuations have been reduced considerably in the 2022 downturns. You are taxed on the value of the conversion on the day you do it, making the higher Medicare premium more than worth it to me for this year. This also allows me to get the conversion job done faster, at age 82, likely nearing end of life. Valuations are predicted to be low or lower in 2023 as well, whether a recession or not, creating another good conversion opportunity. I’ve used my unneeded RMDs over the 15 year bull market to pay fed taxes, painless.

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  John Harville

I don’t know your financial situation, but I would be leery of converting all of your traditional IRA to a Roth. Every year, you want at least some taxable income to take advantage of the standard or itemized deductions, along with the lower tax brackets. In addition, if you later get hit with large, tax-deductible medical expenses, you can pay for those with your traditional IRA and you may incur little or no tax on your withdrawals.

wtfwjtd
wtfwjtd
1 month ago

Good point. Not only that, but I’m hard-pressed to come up with a reasonable scenario where doing Roth conversions while drawing Social Security makes sense math-wise.

Andrew Forsythe
Andrew Forsythe
1 month ago

 Jonathan, can you please elaborate on this:

In addition, if you later get hit with large, tax-deductible medical expenses, you can pay for those with your traditional IRA and you may incur little or no tax on your withdrawals.

Thanks.

Jonathan Clements
Admin
Jonathan Clements
1 month ago

Suppose you have no taxable income and you have large tax-deductible medical expenses. That tax deduction would be totally wasted. But if you have a traditional IRA, you could pull money out of your IRA and, thanks to your tax-deductible medical expenses, there would be no taxes owed — a clear tax win.

Andrew Forsythe
Andrew Forsythe
1 month ago

Got it. Thanks.

wtfwjtd
wtfwjtd
1 month ago

James, one other possible deduction to lower your income would be an IRA contribution. You’d be allowed one to the extent of your self-employment income, which may or may not be useful to you. And since exceeding the threshold by $1 triggers IRMAA, even a small amount might be useful 🙂

David Lancaster
David Lancaster
1 month ago

I suspect that most of the readers of Humble Dollar spend a fair amount of time as I do trying to make their finances as efficient as possible. If one’s income meets the minimum of $91,000 to trigger the $68 IRMAA minimum surcharge, it is .000747 percent of said income. If I had this level of income in retirement (which I don’t), rather than spending time and energy trying to save such a paltry percentage of my income, I would spend it enjoying the fruits of my income, and feeling blessed.

Nate Allen
Nate Allen
1 month ago

It is $68/month, not per year.
So, the calculation would be $816 per year ($68 * 12) / $91,000 = 0.897% (almost 1%)

This is before adding in the other income penalties, such as to Part D mentioned in the article, which would likely push it over 1%.

Not disputing the rest of your argument, just making sure the numbers are correct.

R Quinn
R Quinn
1 month ago

I agree.

Martin McCue
Martin McCue
1 month ago

I’ve just had my Medicare payments for 2022 retroactively adjusted upward because the government claimed it didn’t get the information it needed to set my Medicare rate in a timely way last year, and my MAGI had increased quite a bit. Now I’m on the hook for about $4K. I don’t doubt the calculation is right, but I sure would have preferred to have been able to pay this over time in 2022 as it should have been.

Each year, Medicare looks just like another progressive tax to me. My health is pretty good, but my premiums are now almost entirely related to my income.

parkslope
parkslope
1 month ago
Reply to  Martin McCue

Part B premiums are actually regressive. For example, the MAGI cutoff for the top IRMAA bracket that begins at $500,000 is 5.2 times the bracket that begins at $97,000, but those in the higher bracket only pay 2.4 times as much as those whose MAGI is at the cutoff for the lower bracket ($560.50/month versus $230.00/month).

R Quinn
R Quinn
1 month ago
Reply to  Martin McCue

What you pay from your paycheck is a tax. What you pay after starting Medicare is a premium, about 25% of the cost of part B for the standard premium.

The greatest blessing you can receive is not receiving a penny in healthcare for all you paid in taxes and premiums.

William Perry
William Perry
1 month ago

I have seen some people with self employment earnings make strategic after end of year contributions to a deductible traditional IRA to lower their taxable income to be below a IRMAA income threshold.

Some people are surprised to find out that an above the line (adjusted gross income) deduction may be
available for health insurance premiums including Medicare premiums if they have sufficient net SE income. Eligibility can be complex if the SE income is from a LLC for which you are a partial owner.

Congress is currently dealing with a Continuing Resolution to keep the government running. Of the three retirement bills (commonly referred to SECURE 2.0) that may get attached to the final CR is a provision which may immediately raise the RMD age to 73 effective for year 2022 as I understand. The modified CR may be released Monday so I am still holding out on taking a RMD from a 401(k) of my former employer to get the best tax result for me. I am not close to the IRMAA limit.

I like using the free AARP tax calculator to help deal with the complexity that James refers to in making year my end tax decisions.

Best, Bill

William Perry
William Perry
1 month ago
Reply to  William Perry

Update 12/20/2022

It appears from this mornings news that Secure 2.0 will be part of the massive CR if passed. I have not seen any update on the final bill text but the text of the latest bill is at https://www.congress.gov/bill/117th-congress/house-bill/2954/text

As I turned age 72 in 2022 the current bill would not provide me any relief from the current law required beginning date (RBD) which means I will have to take my 2022 401(k) RMD by 4/1/2023 and my 2023 RMDs by 12/31/2023.

The bill’s effective date is for years after 12/31/2022 and this version of the bill would raise the RBD to age 73 next year. I will be glad when the bill becomes law and a readable summary is available.

The bill is paid for by making post 2022 catch-up contributions all 401(k) Roths which may impact your decision regarding your elective deferrals if you are still working and contributing in 2023.

Andrew Forsythe
Andrew Forsythe
1 month ago

Thanks for this article on an often confusing subject. When I first learned of IRMAA I thought you applied the bracket from 2 years ago to your MAGI from 2 years ago. It was a relief to learn you apply the current year’s bracket (which is higher) to your MAGI from 2 years ago.

As others have stated, the trick is trying to predict what the bracket will be 2 years from now so as to keep your current year’s income below the (future) IRMAA threshold. The only article I’ve found which helps with this is the one Randy Dobkin links below, and thanks to him for posting it.

Last edited 1 month ago by Andrew Forsythe
Randy Dobkin
Randy Dobkin
1 month ago

The Finance Buff has a good blog post about IRMAA:
https://thefinancebuff.com/medicare-irmaa-income-brackets.html

Randy Starks
Randy Starks
1 month ago
Reply to  Randy Dobkin
OldITGuy
OldITGuy
1 month ago

When I remarried 4 years before I retired, my wife and I kept our finances separate and simply contributed to a joint household account. For simplicity we also filed our taxes “married filing separately”. Turns out that can be a real problem with the IRMAA brackets since if you exceed the lowest bracket you immediately jump up to the highest brackets. Once we realized it we started filing our taxes jointly. Fortunately, I was able to use the “life changing event” process and get relief the first year which allowed me time to change our tax filing status. Otherwise, our tax filing separately would have been a costly mistake for us. Of course, filing married separately would make sense for couples in different circumstances. The only real “problem” was I was ignorant of it and hadn’t explicitly determined the best way (in light of the IRMAA brackets) that we should have been filing our taxes in the years immediately before I started Medicare.

Ormode
Ormode
1 month ago

It is always important to not let the tax tail wag the income dog, and the same thing is true of IRMAA. You are a single retiree with a steady yearly income of $165,000? That’s great, pay up and be happy. You still have more money left after paying than most retirees.

James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 month ago
Reply to  Ormode

Where do you get the $165000 figure?

Steve Spinella
Steve Spinella
1 month ago

Like Jo Bo says, ain’t it grand?! I hope we pay very high medicare premiums for the rest of two very long lives. Still, it’s nice to know…. Thanks for writing. (But we’re going to have to work on increasing our [MAGI] income if we want to qualify for this prestigious honor!)

James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 month ago
Reply to  Steve Spinella

I concur. I would add it is “easier” to hit the IRMAA amounts as a single person versus a married couple.

Paul Stifel
Paul Stifel
1 month ago

The thing that has always gotten my goat is that I don’t know what the brackets will be two years hence, yet if I go $1 over, I get to pay extra. It is impossible to manage this exactly, so I have to guess what the future brackets will be and then stay a couple thousand short of the limit. This mostly affects my efforts to roll over $$ from IRA to Roth. I could just use the current brackets, knowing the future brackets will be higher, but that means I miss rollover opportunity.

Jo Bo
Jo Bo
1 month ago

I like to remind myself that to worry about IRMAA is a wonderful problem to have. Even the highest possible Medicare premiums are a bargain compared to the cost of non-subsidized, individual health care plans.

R Quinn
R Quinn
1 month ago

IRMAA premiums always get attention. I don’t see them as surcharges, but more accurately income based premiums similar to what some employers do.

I pay IRMAA, always have and always will. My bracket changes each year it seems driven by RMDs and investments.

I’d rather not of course, but if we buy into the concept of fair share, charging higher premiums for higher income seems fair. Why shouldn’t a couple earning $150,000 in retirement pay more than one earning $40,000 for the same coverage? Remember, the payroll tax on unlimited earnings only fund the Part A trust, not Part B which IRMAA funds (partially).

Only 8% of beneficiaries pay IRMAA premiums.

What I don’t think is fair is that MAGI does not include Roth earnings, but does include tax free municipal bond income. Both should be treated the same in my view and if not, the bond interest should be the one exempt as there is a lower return and the purpose is to help with public funded projects.

James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 month ago
Reply to  R Quinn

I will think it unfair if Congress changes the rules on the taxation of Roth accounts as I have already paid my taxes in advance for converting from my IRA.

R Quinn
R Quinn
1 month ago

no worry, doubt that will happen, but you didn’t pay taxes on future earnings generated from the Roth and that’s what would be part of MAGI.

tshort
tshort
1 month ago
Reply to  R Quinn

@RQuinn – Kind of defeats the purpose of paying the taxes on a ROTH conversion if the future earnings are still taxable. What’s the point?

R Quinn
R Quinn
1 month ago
Reply to  tshort

The issue was concern over Congress changing the rules for MAGI purposes and counts Roth earnings for the purpose of IRMAA only just like how municipal bond interest is counted, but not subject to income tax.

Tom Walsh
Tom Walsh
1 month ago

If you either stop work or reduce income you can submit form SSA-44, attest to a Life Changing Event (LCE), estimate your MAGI for the year and reduce or eliminate IRMAA. We had a windfall in 2021 which put us near the top IRMAA bracket, but I will be formally retiring next year and will be under the limits. There are 7 LCE conditions outlined on SSA-44.

Randy Starks
Randy Starks
1 month ago
Reply to  Tom Walsh

Exactly; however, you will need a letter from your previous employer (on their Letterhead) stating when you retired. I appealed and saved tons of IRMAA money premiums that, after I won my appeal, were applied to the standard Medicare Premium Part A until the credits were used up.

Last edited 1 month ago by Randy Starks
Cody Mercurio
Cody Mercurio
1 month ago

Thanks for the direct link to Medicare page.
In regard to IRMAA, I notice that the income trigger has been increased for 2023.
You’ll pay the higher premium if your modified adjusted gross income, as reported on your IRS tax return from 2 years ago, is more than:

  •  $91,000 in 2022 ($97,000 in 2023), if you file an individual tax return or are married and file separately
  •  $182,000 in 2022 ($194,000 in 2023) if you are married and file a joint tax return

Social Security will tell you if you have to pay a higher premium because of your income.”

James McGlynn CFA RICP®
James McGlynn CFA RICP®
1 month ago
Reply to  Cody Mercurio

Yes I am “assuming” that the IRMAA in 2024 will be $101,000 for my 2022 calculations!

eludom
eludom
1 month ago

Is the lookback fixed or rolling? e.g. 10 years after I retire (when income will be lower) is premium based on the higher income 2 years prior to claiming or the lower, later income amount? Thanks.

Tom Walsh
Tom Walsh
1 month ago
Reply to  eludom

Social Security uses the most recent tax return which is the one two years prior to the year you are enrolling. See above post on form SSA-44 to possibly reduce IRMAA costs.

Jonathan Clements
Admin
Jonathan Clements
1 month ago
Reply to  eludom

It’s a rolling two-year period i.e. Social Security is always looking back two years. You can also dispute IRMAA surcharges if you had a “life-changing event.” For instance, contesting seems to work for folks who had a salary two years earlier but have since retired:

https://humbledollar.com/2021/10/fighting-irmaa/

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