Understanding IRMAA and how it impacts Medicare Payments
Understanding Medicare and its many rules can seem like a daunting task. Among the many terms and acronyms that you must learn, one that frequently comes up is IRMAA—Income Related Monthly Adjustment Amount. The term is a mouthful and understanding IRMAA is crucial, especially for those enrolled in Medicare. In this article, we will review what IRMAA is, why it is important, and how it can impact your healthcare costs.
What is IRMAA?
IRMAA stands for Income Related Monthly Adjustment Amount. It is an additional amount that higher income Medicare beneficiaries are required to pay for Medicare Part B (medical insurance) and Medicare Part D (prescription drug coverage). It is an extra charge added to your monthly premium if your income exceeds certain thresholds.
Who is Affected by IRMAA?
IRMAA affects individuals enrolled in Medicare Part B and Part D whose total household modified adjusted gross income (MAGI) rises above specific income thresholds. These thresholds are based on your tax return from two years earlier. This rule can come as a surprise for those with low income this year but experience an increase in Medicare premiums due to higher income levels two years earlier.
How is IRMAA Calculated?
The calculation of IRMAA is based on the modified adjusted gross income (MAGI) amount. MAGI includes all taxable income plus certain deductions such as student loan interest or contributions to a traditional IRA. The Social Security Administration (SSA) determines your IRMAA based on the MAGI reported on your tax return from two years prior.
The income thresholds that trigger IRMAA vary depending on whether you are filing taxes as an individual or jointly. For example, individual tax filers whose MAGI exceeded $91,000 and married couples whose MAGI exceeded $182,000 in 2022, are subject to additional IRMAA payments for Medicare Part B & D in 2024.
The IRMAA amounts are recalculated annually and can change based on inflation. Therefore, it is essential to stay informed about any updates to the IRMAA thresholds.
Why Does IRMAA Matter?
Understanding IRMAA is crucial because it directly impacts your healthcare costs. Depending on how high your MAGI amount is, the additional amount you are required to pay due to IRMAA can significantly increase your Medicare premiums. The monthly increase in Medicare Part B premium can range from $70 to $419 per month and the increase in Medicare Part D premiums can be anywhere from $13 to $81 per month. For individuals on fixed incomes or with limited resources, these extra costs can be a financial burden.
In addition, failing to pay your IRMAA can result in penalties. The SSA will add the IRMAA charges to your Medicare premiums, and if you do not pay the increased amount, you may face penalties or even lose your Medicare coverage.
What Can Be Done to Reduce IRMAA Charges?
While IRMAA may seem like an unavoidable expense, there are strategies to help manage and potentially reduce your IRMAA costs:
1. Plan Ahead: Since IRMAA is based on your income from two years prior, consider how certain financial decisions, such as retirement account withdrawals or selling investments, might impact your MAGI and subsequently your IRMAA.
2. Utilize Tax-Advantaged Accounts: Contributions to tax-advantaged retirement accounts like a 401(k) or IRA can reduce your MAGI, potentially lowering your IRMAA.
3. Roth Conversions: Converting funds from a traditional IRA to a Roth IRA can also lower your MAGI since Roth IRA withdrawals are not included in the calculation.
4. Strategic Timing: If possible, time certain income-generating events, like selling assets, to occur in years where it will not push your MAGI over the IRMAA thresholds.
5. File an Appeal: If you experience a significant life-changing event, such as retirement or the death of a spouse, resulting in a reduction in income, you can file an appeal with the Social Security Administration via Form SSA-44 to request a reconsideration of your IRMAA.
Understanding how IRMAA is calculated and its potential impact on your healthcare costs is essential for effective financial planning during retirement. By employing strategic financial planning strategies, individuals subject to IRMAA can potentially minimize its impact and ensure their healthcare needs are met without experiencing significant financial strain.
This content is developed from sources believed to be providing accurate information, and provided by Attune Financial Planning. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information only.