Understanding the Cost of Medicare and IRMAA Rules

Did you know that your monthly Medicare cost adjusts based on your income?  While most retirees may know this, many pre-retirees do not. It is important for those who are not receiving Medicare benefits yet to understand the rules so that financial planning decisions can be made ahead of time to reduce or avoid the impact of this additional expense.

What is IRMAA?

The Income-Related Monthly Adjustment Amount (IRMAA) is an additional charge that high-income Medicare beneficiaries must pay for their Medicare Part B (medical insurance) and Part D (prescription drug coverage) premiums. This adjustment is based on a beneficiary’s modified adjusted gross income (MAGI) from two years prior, as reported on their tax return. The following table provides the cost of Medicare Part A and Part D premiums based on a taxpayer’s 2023 income levels. 

How IRMAA Affects Medicare Costs

IRMAA is added to the standard Medicare Part B and Part D premiums. For those affected, the extra cost is deducted directly from Social Security benefits, or they receive a bill if they are not yet collecting Social Security benefits.

Understanding IRMAA rules can help Medicare beneficiaries anticipate costs and explore ways to minimize their expenses. Staying informed and proactive about income levels can make a significant difference in overall healthcare costs.

Planning for IRMAA

Proper financial planning can help current and future Medicare beneficiaries manage IRMAA costs. Here are a few strategies to consider:

· Roth IRA Conversions: Traditional IRA withdrawals count toward MAGI, but Roth IRA withdrawals do not. Converting funds to a Roth IRA before retirement can help keep taxable income lower in later years.

· Charitable Contributions: Qualified charitable distributions (QCDs) from an IRA can help lower taxable income, reducing the chances of exceeding IRMAA thresholds.

· Delaying Social Security Benefits: Since IRMAA is based on income from two years prior, delaying Social Security and managing other income sources strategically can help avoid higher premiums.

· Tax-Efficient Withdrawals: Carefully planning withdrawals from retirement accounts can help keep taxable income below IRMAA brackets.