IRMAA: How Your Income Can Affect Medicare Premiums and What to Plan For
Many retirees are surprised the first time they open a letter from Social Security explaining that their Medicare premiums will be higher than the standard amount. The reason is usually IRMAA, the Income-Related Monthly Adjustment Amount. It is a surcharge added to Medicare Part B and Part D premiums for people whose income rises above certain levels.
IRMAA is easy to overlook because it is based on income from a prior year, not what you earn today. A business sale, a large Roth conversion, or a big capital gain can show up in your Medicare premiums two years later. That timing gap is why Medicare IRMAA belongs in both your investment plan and your tax plan.
Start Here: A Complimentary Wealth and Tax Review
If you are approaching Medicare age or already enrolled, a coordinated review can show how your income decisions may affect premiums in future years. Compound offers a complimentary, no-obligation wealth and tax review that may include:
Recent tax returns: your modified adjusted gross income and what is driving it
Planned income events: Roth conversions, property or business sales, deferred compensation, or large distributions
Retirement account withdrawals: how required minimum distributions and other withdrawals may add to income
Your investment portfolio: where capital gains, dividends, and interest are being generated
Charitable goals: giving strategies that may also help manage taxable income
Request your wealth and tax review.
What Is IRMAA and How Does It Work?
IRMAA applies to Medicare beneficiaries whose income is above a set threshold. Medicare uses modified adjusted gross income (MAGI) from your federal tax return, which for this purpose generally means adjusted gross income plus tax-exempt interest. Social Security typically looks back two years, so the premiums you pay in a given year are usually based on the tax return filed for two years earlier.
There are several income tiers. Each tier adds a higher surcharge to Part B and Part D premiums, and the thresholds differ for single and joint filers. Income thresholds apply and are adjusted periodically, so it is worth checking the current figures each year rather than relying on old numbers.
One detail matters a great deal: IRMAA tiers work like a cliff. Going even slightly over a threshold can move you into the next tier for the full year. That makes planning around the edges of each tier especially valuable.
What Can Trigger Higher Medicare Premiums?
IRMAA is not just a concern for people with large salaries. Common triggers in retirement include:
Roth conversions. Converted amounts count as income in the year of conversion.
Required minimum distributions. RMDs add to taxable income whether you need the money or not.
Selling a business or real estate. A one-time gain can push income into a higher tier for that year.
Capital gains from portfolio rebalancing. Selling appreciated investments in a taxable account adds to MAGI.
Tax-exempt interest. Municipal bond interest is added back for IRMAA purposes, even though it is not federally taxed.
Working past 65 or consulting income. Earned income in early retirement years can count.
IRMAA Brackets Planning: Strategies Worth Discussing
IRMAA brackets planning is about managing income across years, not just in one year. Every situation is different, but areas worth reviewing include:
1. Plan Roth Conversions Around the Tiers
A pretax to Roth conversion strategy may still make sense even if it triggers IRMAA for a year or two, since future Roth withdrawals generally do not add to MAGI. The key is to model the conversion amount against tax brackets and IRMAA tiers together. Conversions made before the IRMAA look-back period begins may also be worth considering.
2. Manage Capital Gains in Taxable Accounts
Tax-aware investing, such as harvesting losses, spreading sales over multiple years, and placing investments in the right account types, can help manage how much income your portfolio produces. This is where high net worth investment management and tax planning work hand in hand.
3. Use Qualified Charitable Distributions
For eligible individuals, qualified charitable distributions from IRAs go directly to charity and are excluded from income. That may satisfy part of an RMD while keeping MAGI lower than a regular withdrawal would.
4. Plan Large Transactions Ahead of Time
If you expect to sell a business or property, tax planning before a business sale can look at payment timing, such as an installment sale, which may spread income over several years. Real estate owners may find our guide on real estate capital event tax planning helpful.
5. Coordinate Withdrawals Across Account Types
Blending withdrawals from taxable, tax-deferred, and Roth accounts each year may help keep income steadier and closer to your target tier. This is a core part of retirement planning in Wisconsin and elsewhere.
Can You Appeal an IRMAA Determination?
Yes, in some cases. If your income dropped because of a qualifying life-changing event, such as retirement, loss of a pension, divorce, or the death of a spouse, you may be able to ask Social Security to use more recent income. This is done with Form SSA-44 and supporting documents. Retiring from work is one of the most common reasons people request a new determination.
See the Long-Term Picture
The Compound calculator can show how a hypothetical portfolio may grow over time under different assumptions. Results are hypothetical, but they can help frame conversations about how today's decisions may affect income, taxes, and premiums in future years.
Why Wealth and Tax Planning Should Work Together on IRMAA
IRMAA sits right where investment decisions and tax decisions meet. A portfolio change that looks reasonable on its own may raise premiums later, and a tax move that looks good this year may affect your income plan. Compound brings wealth management and tax planning and preparation together, so these decisions are evaluated side by side. Compound works with retirees and families throughout Wisconsin, including Milwaukee, Madison, Green Bay, Appleton, Waukesha, Racine, Sheboygan, and Janesville, as well as surrounding areas.
Want to see how your income plan may affect Medicare premiums? Request a complimentary wealth and tax review.
Frequently Asked Questions
What is IRMAA?
IRMAA, the Income-Related Monthly Adjustment Amount, is a surcharge added to Medicare Part B and Part D premiums for beneficiaries whose income is above certain thresholds.
What income is used to calculate Medicare IRMAA?
Medicare generally uses modified adjusted gross income, which is adjusted gross income plus tax-exempt interest, from the tax return filed two years earlier.
Can Roth conversions increase IRMAA?
Yes. Converted amounts count as income in the year of conversion and may raise premiums two years later. Conversions may still be worth evaluating, since qualified Roth withdrawals generally do not add to future income.
How can I lower my IRMAA?
Options to discuss may include planning income around the tiers, managing capital gains, using qualified charitable distributions if eligible, and requesting a new determination after a qualifying life-changing event.
Does Compound work with clients outside of Wisconsin?
Compound serves clients throughout Wisconsin and in surrounding areas. Availability of investment advisory services in a given state may depend on registration requirements.
Compound is a registered investment adviser. Registration does not imply a certain level of skill or training. This article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Tax laws are complex and subject to change. Strategies discussed may not be suitable for everyone, and there is no guarantee that any strategy will achieve its objectives or reduce taxes. Calculator results are hypothetical, are not guarantees of future results, and do not reflect any actual investment. Investing involves risk, including possible loss of principal. Diversification does not ensure a profit or protect against loss. Please consult your tax, legal, and financial professionals before acting on any information in this article. For more information, see Compound's Form ADV, available at adviserinfo.sec.gov.
About Compound Wealth
Tax planning often intersects with investment decisions, business ownership, retirement planning, and other financial considerations. Compound Wealth provides an integrated approach that combines tax planning, wealth management, accounting, and business transition services to help clients evaluate financial decisions from multiple perspectives as part of an ongoing planning process.
