By: Dustin A. Husarik, CFP®Executive Vice President – Financial AdvisorMagnan Family Wealth ManagementPlanning for retirement often involves balancing income, expenses, and taxes but one often-overlooked factor is the Income-Related Monthly Adjustment Amount (IRMAA). IRMAA is a surcharge added to your Medicare premiums if your income exceeds certain thresholds. For retirees with higher incomes, IRMAA can represent a significant, unexpected cost. Please reach out to us if you want to discuss how it might impact you directly.
What is IRMAA?IRMAA applies to Medicare Part B (Medical Services) and Part D (Prescription Drug Plans). It is based on your modified adjusted gross incomes (MAGI) from two years prior to the current year. For instance, your 2024 IRMAA is determined by your 2022 MAGI.
For 2024, IRMAA starts affecting individuals with a MAGI above $103,000 or married couples filing jointly with MAGI above $206,000 (adjusted for inflation annually). As your income increases, so does your IRMAA surcharge, which can add anywhere from $69.90 to $419.30 per month to your standard Medicare Part B premium. For Medicare Part D, the surcharge ranges from $12.90 to $81 per month, depending on income.
While these may not seem like massive numbers individually, they can quickly add up. Over the course of a year, a retiree with a high income could pay thousands of dollars extra in Medicare premiums, reducing their disposable income and straining their retirement budget.
How Can We Help?Managing IRMAA is not just about paying less – it’s about optimizing your overall retirement income and tax strategy. Here are a few ways we can help:
Strategic Tax PlanningYour MAGI includes taxable income from sources like Traditional IRAs or 401(k) withdrawals, capital gains, and dividends. Here are a few ways we can strategize:
- Roth Conversions: Converting Traditional IRA assets to Roth IRAs before starting Medicare allows you to pay taxes upfront and avoid (or manage) taxable withdrawals later in retirement. Starting before age 63 can help avoid IRMAA, since conversions in earlier years won’t affect Medicare premiums.
- Tax Loss Harvesting: Selling investments at a loss can offset capital gains, reducing your taxable income.
- Roth IRA Withdrawals: If your plan has you taking a lump sum withdrawal for a major purchase, it may be strategic to take the distribution from your Roth IRA as these distributions are not included in your MAGI.
- Municipal Bonds Interest: Consider allocating a portion of your Bear Market Savings to Municipal Bonds as these investments are generally federally tax-free and do not count towards MAGI.
- Health Savings Account (HSA) Withdrawals: If used for qualifying medical expenses, HSA withdrawals are tax-free and won’t affect IRMAA calculations. Consider covering medical expenses from this account before taking a distribution from investment accounts.
- Coordinate Social Security Benefits: The way you take Social Security benefits can impact your taxable income. Consider delaying Social Security to increase your monthly benefit, while avoiding additional taxable income early in retirement. Additionally, timing your Social Security benefits with other income can be advantageous.
- Qualified Charitable Distributions (QCDs): If you’re over 70.5, you can make tax-free distributions directly from your IRA to a qualified charity. QCDs reduce taxable income, and the donations are excluded from MAGI. This could be a great strategy for anyone who has reached Required Minimum Distribution (RMD) age.
By staying proactive and aligning your income streams with your goals, you can avoid unnecessary Medicare surcharges and maintain more control over your retirement income. If you are looking for the strategy that is right for you, please reach out to Brian or myself.
*Wells Fargo Advisors Financial Network does not provide legal or tax advice. We encourage you to speak to your chosen tax advisor regarding your specific situation.