How to Decrease (or Eliminate) IRMAA Surcharges on Medicare Premiums

IRMAA, which stands for Income Related Monthly Adjustment Amounts, doesn’t get a lot of run in the media, maybe because it’s boring and sad, but we’re going to shine a little light on some legal and ethical ways to reduce or eliminate it. It will still be boring, but hopefully less sad. If you’re a high-income earner and enjoy paying a few hundred dollars a month extra for Medicare, this would be a good post to ignore.

Before we get into a couple of the strategies that individuals and couples can use to mitigate some of the damage ol’ IRMAA can do to your wallet, let’s talk about the exact impact it has on certain income levels. It’s important to keep in mind that you can engage Medicare in a couple of ways – the original route, which often includes Medicare Part A (typically free), Part B (now $148.50/month for new enrollees), Medicare supplement (not mandatory, but recommended, in my opinion, and the cost varies by policy and age), and Medicare Part D (drug coverage, which varies based on your plan and the drug coverage you need). You can also have a Medicare Advantage plan, which typically combines some or all of the above coverages together into one plan. IRMAA applies to Medicare Parts B and D and the impact is as follows:

Part B

[1]

Part D

[2]

What does this mean in its simplest form? If you’re in the $750,000 (this is Modified Adjusted Gross Income) and above club, first, congratulations. As a couple, you could pay $8,553.60/year more for Part B and $1850.40/year more for Part D, so over $10,000 in increased premiums (sad trombone). This isn’t an article about whether Medicare premiums are reasonable – they generally are when you compare them to coverage purchased individually (outside of a group plan). It’s also not about how comprehensively Medicare covers you (it’s relatively comprehensive, even though it’s not perfect). This is about how engineering retirement (or pre-retirement income in some cases) income in a careful, legal, and ethical way can reduce the premiums you pay for Medicare.

Adjusted gross income (AGI) shows up on line 11 of the 1040 in 2020 (different from previous years) and includes all income except the above the line adjustments. These include, but aren’t limited to, things like HSA contributions, deductible IRA contributions, student loan interest, and, for self-employed individuals, things like part of self-employment tax, SEPs, SIMPLEs, qualified plans, self-employed health insurance and a couple of other things. Modified adjusted gross is generally close (if not the same) for most people as AGI. This means that itemizing or the standard deduction do not reduce your MAGI, as those things happen ‘below the line’ (even if they’re not always referred to that way).

Knowing generally how it’s calculated; how do we reduce that number in retirement? (Side note: IRMAA surcharges are what are known as cliff penalties. This means that if you’re one dollar above the stated level, you pay the entire penalty, there’s no phase in/out) Let’s talk about (some) of the different types of income you can generate in retirement and how those can be manipulated to put you in a more favorable tax situation. You have things like bond or fixed instrument interest – generally taxable as regular income. You have dividends from stocks – many of these are ‘qualified’ and if so, they’re generally taxed at capital gains rates. On that note, you have long-term capital gains, which can be taxed as high as 20% and as low as 0% depending on income (the rate is dependent on other income) and short-term gains, which are taxed at your marginal income tax rate. You have IRA and 401(k) distributions (taxable income) and Roth IRA/Roth 401(k) distributions (not taxable). You have municipal bond interest – not taxable federally and potentially at the state level depending on where you live and where the municipality is domiciled. Social Security (anywhere from 0% to 85% of this can be taxed), pensions, (generally all taxable income), and annuities (generally taxable if qualified and partially taxable if non-qualified) all typically generate some form of taxable income. Real estate also generates income, and this can be taxed in more than one way, but it’s taxable.

If you have fixed income above $750,000, you’re simultaneously in good shape, and S.O.L. when it comes to tax strategies to reduce income (you can potentially give large amounts to charities or incur large business expenses, but not a lot beyond that). For everyone else, if you’re in retirement and you’re around any one of these levels, there’s a good chance that you could reduce your lifetime IRMAA costs with careful planning.

The first way you could do so would be to use multiple retirement income sources in combination to reduce taxable income (combine IRA distributions with those from Roth IRAs and taxable accounts where some or all of the distribution consists of principal rather than capital gains). Some advocate for withdrawing from taxable accounts, then IRAs, then Roth IRAs. It’s possible this could work, but it’s a lazy strategy and far from optimal in many cases. If you have large IRAs, this could lead to larger Required Minimum Distributions (RMDs) later in life and exacerbate the problem we’re trying to avoid.

The second way you could handle this would be to do Roth Conversions. We talked about those a little bit here https://www.37wealth.com/blog/is-a-roth-conversion-right-for-you. Roth conversions also require some careful planning, but can be beneficial both to you and potentially your beneficiaries, as well https://www.37wealth.com/blog/planning-implications-for-individual-retirement-accounts-as-a-result-of-the.

Another thing that can be helpful is to ensure proper asset location (what type of account you hold a security in) and generally handle taxable accounts in an efficient manner. This can mean a lot of different things, but generally speaking, it helps to realize tax losses when the opportunity presents itself (if it’s in alignment with your plan and investment goals), not trade excessively in taxable accounts (which can create not just taxable capital gains, but short-term gains which are taxed as regular income), and choose tax-efficient investments.

On top of the above strategies, delaying Social Security while re-arranging your other assets can also be helpful. The point of this article, which is far from exhaustive, is to have a plan that not only accounts for having enough income from your assets to make it through retirement, but one that also carefully considers how, how much, and when to take income from different assets in retirement to make the most of your tax situation. Even though we can’t know future tax rates, having a plan that encompasses your whole retirement has the potential to be much more advantageous if done correctly. As I’ve mentioned before, if you’re near any of the brackets from the tables above, get your financial and tax advisor on the same page and put together a plan to make the most of your situation.

[1] https://www.medicare.gov/your-medicare-costs/part-b-costs

[2] https://www.medicare.gov/drug-coverage-part-d/costs-for-medicare-drug-coverage/monthly-premium-for-drug-plans

_{This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.} 

_{Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.}

_{No strategy assures success or protects against loss.}

^_(04/21)