Who’s this “IRMAA”, anyway?
Who’s IRMAA: What You Need to Know for Better Financial Planning
When planning for retirement, Medicare and its various parts are key financial considerations. However, for some, a hidden cost can impact how much they end up receiving.
In this blog post, we’ll explore what IRMAA is, how it can affect what retirees pay for Medicare benefits, how to plan for it, and when a financial planner might recommend accepting additional income that could trigger an IRMAA surcharge.
What is IRMAA?
The Income-Related Monthly Adjustment Amount, or IRMAA is an additional premium that higher-income retirees must pay for their Medicare Part B and Part D coverage. It’s based on your income and applies to individuals or couples whose income exceeds certain thresholds. Essentially, the more you earn, the more you may pay for Medicare premiums, which includes both medical insurance (Part B) and prescription drug coverage (Part D).
The government uses your Modified Adjusted Gross Income (MAGI) from your tax return to determine whether you’ll be subject to IRMAA. These additional premiums are billed by the Social Security Administration (SSA) but are distinct from regular Social Security payments.
Who Is Affected by IRMAA?
IRMAA applies to those with higher annual incomes, specifically for 2025:
Single filers: Those with a MAGI of over $106,000
Married couples filing jointly: Those with a MAGI over $212,000
If your income exceeds these thresholds, you’ll be required to pay higher premiums for Medicare coverage. The thresholds are determined based on your tax return from two years ago. For example, your 2024 premiums are based on your 2022 tax return.
How Much Could IRMAA Cost?
The amount you pay for IRMAA depends on how much your income exceeds the threshold. The more your income surpasses the threshold, the higher your premiums will be.
Medicare Part B covers outpatient services (e.g., doctor visits, lab tests), and for most people, the standard premium is about $185 per month in 2025. If you are subject to IRMAA, your premium can go up to $628.90, depending on your income level.
Medicare Part D covers prescription drugs, and your premium could increase based on your income. It can range from an additional $0 to $85.80 per month.
These increased costs can significantly impact your retirement income, so it’s important to factor them into your financial planning.
How to Plan for IRMAA
Being aware of IRMAA and its potential impact is key to a successful retirement plan. Here are a few steps to help you manage these costs:
Monitor Your Income: Since IRMAA is based on your income, consider managing your taxable income in retirement. For example, using tax-advantaged accounts like Roth IRAs or health savings accounts (HSAs) can reduce your MAGI, potentially lowering your IRMAA.
Plan for Future IRMAA Changes: IRMAA thresholds are adjusted annually based on inflation, so you’ll want to keep an eye on the changes each year. If you experience a significant increase in income, such as from selling a property or a large distribution from a retirement account, that could trigger a higher IRMAA for the following year.
Consider Roth Conversions: Some retirees choose to convert traditional IRA funds into Roth IRAs during retirement. While this increases your taxable income in the short term, it can reduce your income in future years—helping you avoid higher IRMAA payments later.
Appeal IRMAA Decisions: If you experience a significant life event (e.g., a divorce, death of a spouse, or a reduction in income), you may be able to appeal an IRMAA decision. The Social Security Administration allows individuals to request a reduction in their IRMAA premiums under these circumstances.
Work with a Financial Advisor: Navigating IRMAA can be complex, especially if your income fluctuates. A financial planner can help you develop strategies to minimize your exposure to higher premiums, such as managing your taxable income or taking advantage of tax-deferred savings options.
When a Financial Planner Might Be Okay with Additional Income Resulting in an IRMAA Surcharge
While many financial planners work to minimize your exposure to IRMAA surcharges by managing your income, there are certain situations where they may recommend that you accept the additional cost. While nobody enjoys paying more for Medicare, there are circumstances where the benefits of increased income might outweigh the higher premiums. Here are some situations where a financial planner might be okay with you having additional income, even if it results in an IRMAA surcharge:
1. Strategic Withdrawals from Tax-Deferred Accounts
If you’re withdrawing funds from tax-deferred accounts, like a 401(k) or traditional IRA, during retirement, these withdrawals can increase your taxable income and potentially push you into a higher IRMAA bracket. A financial planner might encourage this if it’s part of a larger strategy to take advantage of a temporary lower tax bracket.
For example, if you’re in a low-income year and can withdraw from your retirement accounts without incurring a significant tax burden, the increase in income might result in a short-term IRMAA surcharge. However, the planner may feel this is acceptable if it helps lower your taxable estate or converts assets to Roth IRAs—where future growth is tax-free.
2. Tax-Advantaged Roth IRA Conversions
A common strategy to mitigate taxes in retirement involves converting assets from a traditional IRA to a Roth IRA. While Roth IRA conversions increase your taxable income in the year of the conversion, they are often used to create a tax-free income stream in the future.
Although this might lead to a temporary increase in your MAGI—and possibly result in an IRMAA surcharge—many financial planners would consider this an acceptable strategy if it lowers your future tax burden. By shifting assets into a Roth IRA, you avoid paying taxes on future growth and distributions, which can result in a more tax-efficient retirement over time.
3. Additional Income from Selling Assets
If you sell a high-value asset, such as real estate or stocks, it could result in a large one-time income increase. This could lead to a higher IRMAA surcharge for the following year. However, a financial planner might support this decision if the asset sale is part of a larger financial strategy, such as downsizing your home in retirement, securing liquidity for a business venture, or reinvesting the proceeds into a more favorable financial vehicle.
Even though the additional income could temporarily increase your Medicare premiums, the financial planner might determine that the sale is beneficial for your long-term financial goals, especially if it allows you to reinvest or reallocate your assets into more tax-efficient investments.
4. Large Inheritance or Gifts
Receiving an inheritance or large gift can significantly increase your income, and that increase will be factored into the calculation of your IRMAA. In these cases, a financial planner might be okay with the increase in income if the inheritance allows you to pay off debt, secure a better financial future, or fund charitable giving.
In this situation, while IRMAA may temporarily rise, the planner may determine that the benefits of receiving and utilizing the inheritance outweigh the surcharge. Additionally, they may develop a plan to strategically manage the funds to minimize the impact of IRMAA in future years.
5. Business Income in Retirement
For retirees who have started a business or continue to earn income from a side job or consulting, additional income could push them into a higher IRMAA bracket. A financial planner may be okay with this if the income is critical to maintaining an active lifestyle or helping to meet specific retirement goals.
Moreover, if the business income is reinvested into tax-deductible expenses, there may be ways to reduce overall taxable income in other areas, effectively mitigating the impact of the IRMAA surcharge. In some cases, continued work might be a personal preference or part of a broader retirement plan.
Weighing the Pros and Cons
Ultimately, whether a financial planner is comfortable with IRMAA surcharges hinges on your broader financial goals. If the additional income serves a specific purpose, such as funding a critical need or taking advantage of a tax planning opportunity, the higher Medicare premiums may be seen as an acceptable tradeoff.
However, this is always a case-by-case decision. A financial planner will help you balance the short-term costs of IRMAA with your long-term financial strategy. The goal is to make sure your increased income enhances your retirement and doesn’t undermine it with unnecessary costs.
Conclusion
IRMAA is a crucial consideration when planning for retirement, as it can lead to higher Medicare premiums for those with higher incomes. By understanding the thresholds, how your income affects your premiums, and how to manage your taxable income, you can better prepare for the potential costs.
While IRMAA is something that may affect only a portion of retirees, it’s important for higher-income earners to be aware and take steps to minimize its impact. Strategic financial planning now can lead to a more comfortable retirement down the road.
Remember, retirement planning is more than just saving for the future—it’s about understanding how to manage all aspects of your finances to maintain a secure and fulfilling retirement. Whether that means minimizing IRMAA or strategically using additional income to boost your financial position, working with a knowledgeable financial planner is key to achieving your goals.
