You may be retired and think your Medicare premiums are pretty predictable. Then you receive a notice stating there will be a significant jump. But why?
The Social Security Administration could have determined you owe an income-related monthly adjustment amount (IRMAA) surcharge for your Medicare Part B or Part D coverage due to an increase in your income.
How IRMAA surcharges work
IRMAA surcharges are essentially a “tax” added to base Medicare premiums for higher-income retirees. These surcharges are tiered, meaning sometimes a single additional dollar of income could trigger thousands in extra costs for a retired couple. And because IRMAA is based on your modified adjusted gross income (MAGI) from two years ago, many retirees don’t see it coming until it’s too late.
Avoid IRMAA mistakes with these planning opportunities
Fortunately, IRMAA is assessed each year, which means you can take steps now to manage your costs. Here are four times when you could pay more than you should and strategies that can help:
1. After a major life event
A life event could lead to a reduction in income (or a change in filing status) that hasn’t been factored into your Medicare premiums because of the two-year look-back. The most common events include retirement or a reduction in work, marriage, divorce or the death of a spouse.
Strategy: Many Medicare beneficiaries don’t realize they can appeal an IRMAA determination after certain life-changing events. Consider an appeal if the event is likely to move you into a higher IRMAA bracket. Instructions are included with your determination notice. You have 60 days from the date you receive it to appeal.
2. When your MAGI is near an IRMAA threshold
Withdrawals from pretax retirement accounts, such as IRAs and 401(k)s, are treated as taxable income. Capital gains on taxable assets are also included in your MAGI. If you’re near a threshold, an unnecessary or untimely distribution or asset sale could push you into the next tier.
Strategy: If you have a health savings account (HSA), use it to cover qualified medical expenses. The distributions won’t increase your MAGI. You could also selectively tap your Roth accounts for tax-free distributions to keep you under the next IRMAA threshold. And if you’re considering selling a taxable asset, explore tax-loss harvesting opportunities to offset the gain or potentially defer the sale if you expect your income to be lower in future years.
3. When you start taking required minimum distributions (RMDs)
RMDs generally must be taken from pretax retirement accounts starting at age 73, which can lead to a meaningful increase in your MAGI.
Strategy: Consider a qualified charitable distribution (QCD). A QCD is a direct transfer from an IRA to a qualified charity. It can satisfy your RMD without increasing your MAGI while giving to your charity of choice.
4. When you’re doing Roth conversions
A Roth conversion occurs when you move funds from a traditional retirement account to a Roth account. It’s a taxable event the year you convert, but in exchange, you get the potential for tax-free distributions, no RMDs and a tax-free asset for your beneficiaries.
Strategy: Weigh the impact of higher taxable income now against the potential to save on IRMAA in future years. It may also make sense to spread a conversion across multiple tax years to stay under the next IRMAA threshold.
How Edward Jones can help
Tracking your MAGI can be complex. Consult your Edward Jones financial advisor who can partner with your tax advisor to coordinate distributions, asset sales and conversions to help reduce the potential for IRMAA.