Worried about paying too much for Medicare? Watch out for Medicare surcharges

Health care will likely be one of your largest expenses in retirement. And if you exceed a certain amount of income, you may have to pay a Medicare premium surcharge, which can be significant.

The income-related monthly adjustment amount, known as IRMAA, is a surcharge assessed to Medicare Part B and Part D premiums. IRMAA is calculated based on your modified adjusted gross income (MAGI), backdated two years. For example, the government would look at your 2023 tax returns to determine whether your 2025 Medicare premiums would be subject to IRMAA.

This table shows the amounts added (per person) to the base Medicare Part B and D premiums for 2025.

What makes up your MAGI?

Your MAGI* consists of:

• Your adjusted gross income (AGI), which commonly includes:

  – Earned income from employment

  – Social Security income (many people will have 50% to 85% of their Social Security benefits taxed)

  – Distributions from traditional retirement accounts, such as IRAs and 401(k)s

  – Investment income, such as dividends and capital gains

  – Pension income

• Tax-exempt interest income (e.g., municipal bond interest)
• Interest from U.S. savings bonds used to pay higher education tuition and fees
• Earned income of U.S. citizens living abroad that was excluded from gross income
• Income from sources within Guam, American Samoa, the Northern Mariana Islands or Puerto Rico not otherwise included in AGI

Take steps early to help control MAGI in retirement 

As the chart above shows, the Medicare surcharge can be significant — and if it’s unexpected, it can be an unpleasant surprise. So, if you’ve still got a few years until you enroll in Medicare, you may want to take steps to control your MAGI and potentially limit IRMAA during your retirement.

In fact, the earlier you start planning, the more flexibility you’ll have in managing your MAGI and IRMAA.

Here are a few moves to consider:

• Contribute to a health savings account (HSA). If you are eligible to contribute to a health savings account (HSA), take advantage of it — and if you can, save your contributions for use during retirement. HSA withdrawals for qualified medical expenses are tax-free, so by using these funds to pay for costs such as Medicare premiums, deductibles and copays, you can possibly avoid using taxable income — and the lower your taxable income, the lower your MAGI.
• Contribute to a Roth IRA. If you’ve got a Roth IRA, keep contributing to it if it’s appropriate for your overall financial strategy. Roth IRA withdrawals are generally tax-free. These tax-free withdrawals can enable you to avoid taking taxable withdrawals from other accounts, which, in turn, can help you avoid an increase in your IRMAA. 

• Consider a Roth IRA conversion. If you’ve been investing in a traditional IRA, you could convert some, or perhaps all, of the assets into a Roth IRA. The big issue in a Roth IRA conversion is taxes — converted amounts of deductible contributions to your traditional IRA and the earnings generated by these contributions are taxable in the year of the conversion, so you’ll want to have funds outside your IRA available to pay these taxes. But then you’ll have a tax-free source of income you can tap into, which can help you manage your MAGI. 

   

  And if a conversion from a traditional IRA to a Roth IRA is appropriate for your needs, you might want to act on it three or more tax years before you enroll in Medicare. If you convert a large amount from a traditional IRA to a Roth IRA after that, you could increase your MAGI bracket and bump up your IRMAA two years later. If you’ve missed that window, a Roth conversion may still be advantageous; you just want to be aware of the potential to trigger or increase IRMAA so you’re not caught off guard.

   

To determine if these or other taxable income-reducing strategies are right for your situation, you’ll want to consult with your financial and tax professionals.

How will you know if you’re subject to IRMAA?

Once you've enrolled in Medicare, the Social Security Administration (SSA) will send you a notice explaining whether IRMAA will apply and what information was used to calculate it. This notice will also include instructions on how to appeal the determination if you wish to do so. Appealing is a strategy to keep in mind if you’ve triggered IRMAA and have lower income due to one of the qualifying life events.

One of the more common reasons to appeal is when someone retires and enrolls in Medicare at age 65, but their IRMAA is assessed from MAGI when they were still working (and their income was higher). For this and other life events, you can appeal the IRMAA determination, provide documentation that your income is lower and potentially reduce or eliminate your premium surcharge.

You have 60 days from receiving your initial determination notice from the SSA to appeal. To start, you’ll need to contact the SSA. You may need to file Form SSA-44 and provide supporting documentation.

Working to help you avoid surprises

Navigating Medicare and managing your health care expenses in retirement can seem daunting. Your financial advisor and tax professional are ready to work with you to help you feel more prepared and in control.