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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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Great article, reaffirms my understanding of IRMMA, your situation and how you handled it has similarities to mine.
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.
Jim glad to be of help. Dealing with IRMAA is a pastime like playing Wordle for me.
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.
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.
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.
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.
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.