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Financial Planning Retirement Planning

Unlocking the Mystery of IRMAA: How to Plan for Surcharges on Medicare Premiums

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As we navigate the complexities of healthcare in the United States, it's crucial to be informed about various aspects that can impact our financial well-being. One such factor that often catches retirees by surprise is the Income-Related Monthly Adjustment Amount (IRMAA). Understanding IRMAA can be crucial for retirees who are enrolled in Medicare, as it can significantly impact their Medicare premiums. In this blog post, we'll delve into the most important items to know about IRMAA, and will highlight a few planning opportunities.

  1. What is IRMAA?

IRMAA, which stands for Income-Related Monthly Adjustment Amount, is an additional premium that some Medicare beneficiaries are required to pay. The premium amount is based on an individual's or a couple's modified adjusted gross income (MAGI) from two years prior. In other words, IRMAA uses tax information from two years ago to determine the Medicare premiums for the current year.

For many, MAGI is very close to their Adjusted Gross Income which can be found on line 11 of your 2020, 2021, and 2022 federal tax returns.

  1. Who is Affected by IRMAA?

IRMAA primarily impacts individuals who are enrolled in Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage). Most Medicare beneficiaries pay standard premiums for these parts, but those with higher incomes may be subject to IRMAA and pay higher premiums.

  1. IRMAA Income Brackets

IRMAA determines premiums based on five income brackets. For the year 2023, these brackets are based on the MAGI from 2021 tax returns. Here are the income brackets for individual and joint filers:

  • How IRMAA is Calculated

The Centers for Medicare & Medicaid Services (CMS) calculates the IRMAA based on the tax information reported to the Internal Revenue Service (IRS). CMS uses a sliding scale to determine the IRMAA amount, and the higher the income, the higher the adjustment. The IRMAA is added to the standard Medicare Part B and Part D premiums, and the total amount is paid directly to Medicare.

This may lead some that work past 65 to stay on their company health insurance, if your company insurance allows, and wait to apply for Medicare. It's very important to sign up for Medicare correctly and promptly after ending employment/losing group health insurance to avoid long-term higher premiums.

  1. Impact on Medicare Premiums

For those affected by IRMAA, the additional premium can be a significant expense. It's essential to plan ahead and understand how changes in income can impact Medicare premiums. Retirees experiencing a reduction in income or life-changing events, such as marriage, divorce, or the death of a spouse, should inform Social Security about these changes to potentially have their IRMAA reevaluated.

Planning opportunity: in some cases, you may want to discuss with your accountant if married filing separately could be of benefit to your family of if married filing jointly is still the best option. 

  1. Appealing an IRMAA Determination

If you believe that the IRMAA determination does not accurately represent your current financial situation, you have the right to appeal. The Social Security Administration (SSA) reviews appeals based on updated income information, life-changing events, or if you stop working and experience a decrease in income.

Many families pay the IRMAA surcharge after retiring and don't realize they should appeal. This can be a costly mistake! If you retire and your income is nowhere close to what it was 2 years prior, appealing IRMAA could save you a great deal of money.

Conclusion: Unlocking the Mystery of IRMAA: How to Plan for Surcharges on Medicare Premiums

As you plan for your retirement and navigate the intricacies of Medicare, understanding IRMAA is crucial. Being aware of how IRMAA is calculated, the income brackets it affects, and the potential impact on Medicare premiums can help you make informed decisions about your healthcare expenses. If you find yourself subject to IRMAA, your financial planner should be helping you navigate this and you should have conversations with your account about it as well.