Premiums for Medicare Part B (which covers some doctor’s bills, home health care, and medical equipment) are pricey at $164.90 a month, about $1,979 a year. But 7% of people with Part B get hit with a special Medicare monthly surcharge that can boost those premiums dramatically.
That surcharge is known as an Income-Related Monthly Adjustment Amount, aka IRMAA. In 2023, it can more than triple Part B premiums to as much as $560.50 a month or $6,732 for the year.
There’s also an IRMAA surcharge for 8% of Medicare beneficiaries who have Part D plans (prescription drug coverage). It can be $76.40 a month—$912 a year—on top of Part D premiums charged by health insurers.
The IRMAA surprise in Medicare
IRMAA, enacted by Congress in 2003 and expanded in 2011, is Medicare’s extra fee for high-income beneficiaries.
The Social Security Administration’s Annual Determination Notices of upcoming IRMAA surcharges, sent to Medicare beneficiaries each November, “certainly come as a surprise to people,” says Casey Schwarz, senior counsel for education and federal policy at the Medicare Rights Center, a nonprofit advocacy organization.
“IRMAA just seems to be one of those pain points for people,” says Taylor Schulte, CEO of the Define Financial retirement planning firm in San Diego. “I think a big part of it is that it catches them off guard.” He calls the surcharges “pesky.”
If you’re slapped with an IRMAA surcharge, there are a few ways you may be able to appeal to have it reduced or even eliminated. There are also some savvy financial moves you can make to head off an IRMAA bill in the future.
One reason it comes as a surprise to some: IRMAA is based on a Medicare beneficiary’s income two years earlier, because that’s the best income data the government has.
Some people in their 50s and early 60s, Schulte says, don’t realize that their income in retirement might be higher than when they worked full-time due to Social Security, pensions, and retirement plan withdrawals or distributions. This increased income can lead to IRMAA surcharges.
How IRMAA surcharges are determined
IRMAA surcharges are determined by a Medicare beneficiary’s modified adjusted gross income (MAGI)— the total of your gross income and tax-exempt interest minus things like retirement account contributions and alimony payments.
For 2023, IRMAA kicks in if your 2021 MAGI was over $97,000; for married couples filing joint tax returns, above $194,000.
The size of the surcharge is based on a sliding scale and increases with each of five IRMAA-related income brackets. Those brackets top out for people with incomes of $500,000 or more ($750,000 or higher for couples).
IRMAA thresholds change each year, partly due to inflation. “I have yet to see these thresholds drop,” says Diane Omdahl, president of 65 Incorporated, a Medicare advisory service.
Schulte expects the 2024 IRMAA income thresholds to be $101,000 for singles and $202,000 for married couples.
8 life-changing events that deflect IRMAA surcharges
If you get a notice from Social Security saying you owe an IRMAA surcharge, you may be able to eliminate or reduce that fee by showing that your modified adjusted gross income was wrong or by proving you’ve had one of eight “life-changing events” that lowered your income.
They are:
- Marriage
- Divorce or annulment
- Death of your spouse
- Work stoppage
- Work reduction
- Involuntary loss of income-producing property
- Loss of pension income
- Employer settlement payment due to its closure or bankruptcy
“Requesting a new IRMAA calculation doesn’t just have to be, ‘I shouldn’t owe an IRMAA at all,’” says Schwarz. “It can also be, ‘I had a life-changing event, and I should owe a smaller IRMAA.”
To get an IRMAA redetermination, you can file a Social Security SSA-44 form or schedule an appointment with the agency. (If you had more than one of the life-changing events, you need to call Social Security at 800-772-1213.)
“Most people who complete the life-changing event form are successful” at reducing or eliminating the surcharge, says Omdahl.
But speed is of the essence. You generally must appeal within 60 days of getting the IRMAA notice.
If Social Security won’t adjust your IRMAA surcharge after your request, you can submit a formal appeal through the Office of Medicare Hearings and Appeals.
5 money moves to avert IRMAA
To avoid a hefty IRMAA surcharge in the future, you may want to take steps to keep your modified adjusted gross income below the thresholds. “We had a client who ended up being $101 above the lowest IRMAA threshold and owed the IRMAA surcharge,” says Omdahl. “This is not what you want to happen.”
Schulte suggests these five potential IRMAA-busters:
1. Give to charity. “Charitable giving is a really easy way to reduce your modified adjusted gross income,” says Schulte. “It’s also a way for people to make an impact with their money.”
One of his favorite charitable-giving techniques to deflect IRMAA: using a donor-advised fund from a major financial institution. Here, you make a contribution to the donor-advised fund account with cash or appreciated securities, get a tax deduction, and make grants to charities with the money in the future.
Schulte particularly favors the IRMAA strategy of pairing a donor-advised fund with a Roth conversion. That’s when you take money out of a traditional IRA, pay taxes on it, and then invest the cash in a Roth IRA whose withdrawals are tax-free.
“A way to offset the Roth-conversion tax bill for somebody who’s charitably inclined is to fund a donor-advised fund at the same time,” he says.
2. Make tax-deductible retirement account contributions to a traditional IRA or 401(k) or, if you’re a small-business owner, to a solo 401(k) or a SIMPLE or SEP IRA. Doing so can help keep you in a lower IRMAA bracket in subsequent years, notes Schulte.
3. Look for tax-efficient investments that will minimize your tax liability. This means choosing Exchange-Traded Funds (ETFs) over mutual funds and avoiding high-turnover funds that sell securities often, sticking investors with taxable capital gains.
4. Fund a Medicare Savings Account (MSA) if you have a private insurer’s Medicare Advantage plan (the alternative to Original Medicare). Like a Health Savings Account, an MSA is a savings account at a bank the insurer selects. Medicare contributes money to the MSA that’s not taxable, and you withdraw the money, tax-free, for out-of-pocket medical expenses.
5. Make Roth IRA conversions in what Schulte calls “your gap years”—when your income is low, in between the year you retire and when Required Minimum Distributions (RMDs) from traditional IRAs and 401(k)s must begin (age 73 in 2023; 75 starting in 2033).
But Schulte warns not to go overboard making, or not making, an investment decision just to avoid an IRMAA surcharge.
“You don’t want to let the tax tail wag the investment dog,” he says. “It might be okay to accept that IRMAA surcharge in exchange for, ‘I’m going to do some great tax planning that I know is going to save me six figures while paying a little bit more to Medicare.”
