How to avoid IRMAA
You need to know many tricks to maximize your retirement income, and one of those is how to avoid paying IRMAA.
While IRMAA might sound like a hurricane from 2017 (close, Irma), it’s actually a financial landmine that explodes when you’re on Medicare and earn over a certain income.
Let’s get into the details on how you can avoid IRMAA and this potentially thousands-of-dollars per year mistake.
What is IRMAA
IRMAA stands for “Income-related monthly adjust amount.” It’s been around since 2003 and has changed a few times since, but its primary purpose is to increase Medicare premiums for high-income retirees.
Each year after you start receiving Medicare, the Social Security Administration calls up the IRS and says, “Hey, how much did (insert name here) make a couple of years ago?”
The IRS checks your MAGI from your tax return, tattles on you if you make too much money, then you start getting charged more for Medicare.
Who will have to pay IRMAA?
You need to be taking Medicare Part B and/or Medicare Part D to be subject to IRMAA, which means you’re also 65 years or older.
Next, the social security administration looks at your income from two years ago to determine if you’ll pay the surcharge this year.
This two-year delay really surprises people because you’d pay IRMAA in 2020 based on 2018 tax returns!
If you have to pay IRMAA, you’ll receive a determination letter from social security to let you know the impacts.
How is IRMAA calculated?
IRMAA is calculated based on your Modified Adjusted Gross Income (MAGI). MAGI is your Adjusted Gross Income (AGI) with certain deductions added back in. Here’s what’s included:
Gross Income (salary, capital gains, dividends, interest, social security, etc.)
MINUS
Above the line tax deductions (HSA contributions, student loan interest, etc.)
PLUS
Certain deductions which count for AGI but not MAGI (IRA contributions, excluded foreign income, rental losses, passive income or loss)
For many people, MAGI will be the same as AGI as the deductions you have to add back in aren’t as common.
How much IRMAA will you pay?
We know your MAGI from two years ago determines if you’ll pay IRMAA this year, but we don’t know the updated IRMAA tables until two years out!
However, IRMAA income limits typically go up the same amount as social security COLA (cost of living adjustments), so you can expect them to go up 1-2% per year.
Here’s the IRMAA table for 2020, with MAGI from 2018:
The two extra IRMAA payments are for Medicare Part B and Part D, which are extra medicare coverages. Part B covers doctors’ services and preventive care, and Part D covers prescription drugs.
For Part B, the standard premium is $144.60, but as your income goes up, you’ll add an extra $90 per MAGI bracket. If you’re in the top bracket, your Part B coverage increases from $144.60 per month to $491.60 per month!
For Part D, you’ll add an extra amount on top of your premium. This isn’t as big of a hit as Part B IRMAA, ranging from $12 to $76 extra per month.
The other IMRAA difference is these extra payments are “cliffs” rather than percentages of income.
Each time you hit the new amount, you pay the full amount, rather than a pro-rata amount like other penalties such as social security taxes.
Another important thing to keep in mind is IRMAA is calculated every year based on income, so if you had a large income event that pushed you into IRMAA, it could go away the next year if your income comes back down.
As we’ll see in our case study below, these two IRMAA amounts can easily add thousands of dollars to your Medicare each year.
How do you pay IRMAA?
Typically, your IRMAA will be pulled from your social security check before you receive it. However, if you’ve deferred social security until later or your social security won’t cover it, they’ll bill you directly.
Since your extra premium is pulled from your social security check, it won’t feel like you’re paying more for Medicare as much as it feels like you’re receiving a lot less social security!
IRMAA Case Study
Let’s walk through an IRMAA case study that I recently saw with a potential client. This client is a single female who lives off a combination of social security and investments.
Her typical spending averages around $75k per year, which keeps her well under the IRMAA initial bracket of $87,000.
However, in 2018, she needed an extra $100k to cover a big expense. Her advisor removed the full amount from an IRA.
Because the advisor removed the money from an IRA, the entire amount counted as income.
This move raised her typical $75,000 income all the way to $200,000 because they took out even more from the IRA to cover taxes.
She was surprised to see a big increase to her state and federal taxes, but even more surprised when two years later, her social security check shrunk substantially.
If we go to the tables above, you’ll see this move put her in the fourth highest MAGI bracket for IRMAA.
Her Part B premium increased by $318.10, and her Part D increased by $70, for a total hit of $388.10 per month, or $4,657 per year!
The worst part is this easily could’ve been managed by removing the extra money from brokerage accounts instead of the IRA.
How to avoid IRMAA
The first way to avoid a potential IRMAA financial landmine to know about it. If you’ve read down to this paragraph, you’re ahead of most people.
As we saw in the example above, big increases in income can push you over the IRMAA cliff.
Increases in income can result from the sale of a business, capital gains (like selling a house), IRA distributions and RMD’s, and salary additions to social security.
It’s important to plan out large income increases as you approach retirement and Medicare age to avoid these major tax and IRMAA implications.
How to appeal IRMAA
You can appeal your IRMAA extra payments if you had a life-changing event during the year, or you feel the calculation was incorrect.
An appeal will go through the Social Security Administration, using the following reasons:
- Tax return inaccurate or out of date
- A beneficiary filed an amended tax return for the year SSA is using to make an IRMAA decision
- There was an error in the IRS data
- The IRS provided SSA with older data, and the beneficiary wants to use newer information
- You had a major life-changing event that significantly reduced your income
2. A life-changing event that affects the beneficiary’s modified adjusted gross income
- Death of spouse
- Marriage
- Divorce or annulment
- Work reduction
- Work stoppage
- Loss of income from income-producing property
- Loss or reduction of certain kinds of pension income
You’re now officially an expert on IRMAA. It’s a large penalty that not many people know about, but it’s pretty avoidable with the proper planning.
