Avoiding Aunt IRMAA Visiting You In Retirement

A lot of people aren’t familiar with IRMAA and how it can impact their Medicare premiums. But she’s real, and if your 63 (2 years before general Medicare eligibility) or older you need to know about her.

What is IRMAA?

IRMAA stands for income-related monthly adjustment amount. If you have income above certain thresholds you will have to pay an additional amount toward your Part B Medicare premium and toward your Part D drug plan premium.

When Aunt IRMAA comes to visit she doesn’t stay only a few days like a good guest. She’ll stay with you an entire year.

That’s because if your tax return shows that your income has exceeded certain thresholds, the IRMAA penalty will apply to you. And since you won’t have your next tax return prepared until the following year, that means the IRMAA penalty stays with you for that year.

The tax return that is used to determine if you are subject to IRMAA is the one from 2 years back. That’s why even if you are 63 and won’t be eligible for Medicare until 65 you need to be aware of this.

Made Easy Explanation
Your most recent available tax return is used to determine if IRMAA applies to you. So for 2020 IRMAA would be based on your 2018 tax return. Why? Because your 2019 tax return doesn’t have to be filed until April of 2020. Thus, the 2018 tax return is the most recent one available.

What is the IRMAA penalty?

It’s adjusted for inflation each year. But for 2020 it’s based on your modified adjusted gross income (MAGI) from your 2018 tax return with the following thresholds:

2018 MAGI single	2018 MAGI joint	Part B Premium	Part D additional fee
$87,000 or less	$174,000 or less	$144.60	$0
$87,001-$109,000	$174,001-$218,000	$202.40	$12.20
$109,001-$136,000	$218,001-$272,000	$289.20	$31.50
$136,001-$163,000	$272,001-$326,000	$376.00	$50.70
$163,001-$500,000	$326,001-$750,000	$462.70	$70.00
Above $500,000	Above $750,000	$491.60	$76.40

If you don’t exceed the first threshold you pay the standard $144.60/month for Medicare Part B and $0 additional for your Part D drug plan.

Once you start exceeding the first threshold your Part B premium goes up. And whatever your Part D drug plan premium is, you will have to pay an additional amount for it, starting at $12.20.

What Is Included In the Income Calculation For IRMAA?

Your modified adjusted gross income is the income you earned plus tax-exempt interest. So even interest earned on tax-exempt muni-bonds goes into the calculation for the IRMAA penalty. And the standard deduction does not apply to MAGI, so don’t look for relief there.

Some people may have no choice but to pay IRMAA because they have regularly recurring income that puts them above the thresholds. But other people can unknowingly trigger an IRMAA penalty.

Made Easy Example:
I remember one story years ago of a person in my town who hit it big on the slot machines at a casino. She had to claim the earnings as income and pay taxes on them. Then 2 years later she had to pay IRMAA for a year until her next tax return came out showing only her Social Security income. The really sad part is that after winning big, she gambled those winnings away in the same year. The IRS doesn’t allow you to deduct gambling losses, but it does make you claim gambling winnings if they are large enough.

A very common way to trigger IRMAA is through Roth IRA conversions. I’m a big fan of Roth IRA conversions. But before doing them you need to know the impact they will have. It’s common to look at marginal tax brackets to help determine how much should be converted to Roth.

But a lot of times people forget to look at the thresholds for the IRMAA penalty.

Then 2 years later they are upset that they have to pay a higher Part B and Part D premium.

This is an example of unintended consequences that must be considered when doing a Roth conversion. Aunt IRMAA’s visit may not just cost you a spare bedroom in your house, but also the best seat in front of the TV as well as the remote.

Another thing that can trigger IRMAA could be required minimum distributions from an IRA after reaching age 72. IRA distributions are taxable income, thus are counted toward the IRMAA threshold.

Another way it could happen is by loading up high dividend paying stocks in a taxable brokerage account. Dividends are included in the MAGI calculation, thus they are included in the IRMAA calculation. And since taxable accounts (i.e. non-IRA type accounts) must have taxes paid annually on their dividend and interest income, they can contribute to busting through an IRMAA threshold and triggering higher Medicare premiums.

What is NOT Counted Toward IRMAA?

Roth IRA withdrawals are NOT counted toward the IRMAA calculation. That’s one reason I like the options that Roth accounts give retirees as they determine which accounts to pull money from to fund their retirement.

So even though Roth conversions initially count as income included in the IRMAA calculation, once they are in the Roth account, the eligible withdrawals will not count.

If a retiree feels they are about to bust through an IRMAA threshold, they can pull from Roth accounts to help prevent this.

IRMAA is a Cliff Penalty

If you cross an IRMAA threshold by even $1 you have to pay the corresponding additional premium on Medicare. This is unlike marginal tax brackets, where only the additional dollars over a bracket threshold are taxed at the higher rate.

In other words, $1 over and you fall off the cliff into IRMAA canyon.

So keep in mind, if you want to do a Roth conversion and it’s going to cause you to break an IRMAA income threshold slightly, then you need to consider if it makes sense to go ahead and do more Roth conversions before reaching the next threshold.

If you’re going to pay the additional IRMAA penalty it might make sense to consider filling that bucket up before crossing the next threshold.

How Do You Pay The IRMAA Penalty?

Most people pay the IRMAA penalty by having it withheld from their Social Security check. It gets added to their regular Part B premium.

If they have a Part D drug plan, then they will pay the additional IRMAA penalty as well. They don’t pay it to the Part D insurance plan provider. They have it deducted from their Social Security check.

If it’s not deducted from the Social Security they will get a bill.

Can I Appeal IRMAA If I Disagree With The Decision?

You can appeal the IRMAA decision. You use Social Security’s form SSA-44. Here’s a link that currently works for that form: https://www.ssa.gov/forms/ssa-44-ext.pdf

If the link doesn’t work in the future, just do a web search for IRMAA appeal form.

This appeal is made if you’ve had a life-changing event. These include:

Marriage
Divorce/Annulment
Death of your spouse
Work stoppage
Work reduction
Loss of income producing property
Loss of pension income
Employer Settlement Payment

What’s really important to remember for retirees is the “Work Stoppage” event. If you retire at age 65, your income will likely go down. But IRMAA would be calculated off your higher earnings from age 63. That’s where an appeal becomes handy.

How To Help Avoid IRMAA?

Be aware of how close you are to IRMAA thresholds before converting all or a portion of your IRA to a Roth IRA.

Also, consider how any one-time capital gains will impact your modified adjusted gross income.

If you are going to show a big gain on the sale of some property, maybe that will be a year where it doesn’t make sense to do a Roth IRA conversion. Perhaps you’ve already filled up to much of the available threshold “buckets” for that year.

Sounds silly but… Should You Always Try To Avoid IRMAA?

I know we all want to avoid paying additional taxes. And even if the IRMAA is not technically considered a tax, it is still additional money you are paying out.

But other goals have to be considered as well. We can’t let the IRMAA tail wag the dog.

If you are concerned there might be higher taxes in the future and so you want to do some large Roth conversions today to avoid potentially higher taxes down the road, then it may make sense to go ahead and break through an IRMAA threshold.

For 2020, the additional monthly IRMAA cost for Part B in the first threshold is $57.80 and for Part D it is $12.20. That’s a total annual additional fee of $840.

It may make sense to pay this additional amount because you feel the Roth conversion is still beneficial, all things considered.

Also, remember since IRMAA is a “cliff penalty” just $1 over a threshold and you pay the additional fee. So if you are going to bust through a threshold it may make sense to do more Roth conversions up to right below the next threshold.