Reducing Medicare Premiums with Strategic Retirement Income Planning

As you approach retirement, managing your income and expenses becomes crucial to maintaining financial stability. One factor that may surprise retirees is the Income-Related Monthly Adjustment Amount (IRMAA), which can significantly increase your Medicare premiums.

Fortunately, with proper retirement income planning, you can mitigate these surcharges and reduce both Medicare premiums and taxes.

What Is IRMAA?

IRMAA is a surcharge applied to Medicare Part B and Part D premiums for retirees with higher incomes. While most retirees pay a standard Medicare premium, those whose income exceeds certain thresholds are subject to IRMAA, leading to higher monthly premiums.

How IRMAA Is Applied

Medicare Part B and Part D Surcharges

IRMAA is added on top of your standard Medicare Part B (medical insurance) and Part D (prescription drug coverage) premiums. This can mean hundreds, or even thousands, of dollars in extra premiums each year, depending on your income level.

Income Thresholds for IRMAA

The Social Security Administration (SSA) determines whether you’ll pay IRMAA based on your modified adjusted gross income (MAGI) from two years prior. Here are the key thresholds for 2024:

• MAGI below $103,000 (single) or $206,000 (joint): No IRMAA surcharge.
• MAGI above these thresholds: IRMAA surcharges are applied in increasing brackets.

Your IRMAA amount rises as your income increases, and these charges are automatically calculated by the SSA.

How IRMAA Is Determined

IRMAA is determined by your MAGI, which includes adjusted gross income plus tax-exempt interest income. The SSA uses your income from two years ago (e.g., 2024 IRMAA is based on your 2022 MAGI).

How Income Affects Your Premiums

Income Brackets

IRMAA is assessed using income brackets, where higher income leads to higher surcharges. For example, for married filing jointly filers:

* Plus all applicable surcharges, minus Medicare Advantage Reduction. (For Medicare Advantage Reduction, see SM 03040.335.)

**Plus late enrollment or reenrollment fees for prescription drug coverage.

2 Year Look-Back Period

IRMAA is based on your income from two years prior, meaning actions you take now could affect your premiums in the future. For example, if you sell a large investment or receive a one-time bonus in 2024, this could trigger an IRMAA surcharge in 2026.

How Retirement Income Planning Can Help You Avoid IRMAA

The good news is that thoughtful retirement income planning can help reduce or avoid IRMAA surcharges. Strategic planning can prevent your income from unintentionally crossing into higher IRMAA brackets, allowing you to save on Medicare premiums and taxes.

Key Retirement Income Planning Strategies to Minimize Medicare Premiums

1. Roth IRA Conversions

A Roth IRA conversion is one of the most effective ways to minimize future IRMAA surcharges. By converting traditional IRA assets to a Roth IRA before reaching the age for required minimum distributions (RMDs), you can reduce taxable withdrawals in retirement.

• Traditional IRA RMDs: These are taxed as ordinary income, which increases your MAGI and could trigger IRMAA.
• Roth IRA Withdrawals: Withdrawals from a Roth IRA are tax-free and don’t count toward your MAGI. Roth IRAs are not subject to RMDs.

By managing the timing of conversions, you can prevent large taxable events in retirement that could push you into higher IRMAA brackets.

2. Timing of Withdrawals

The sequence in which you withdraw from your various accounts can also affect your MAGI and Medicare premiums.

• Taxable Accounts First: Drawing from taxable accounts early in retirement can reduce your MAGI later, helping you avoid IRMAA.
• Tax-Deferred Accounts Later: Postponing withdrawals from tax-deferred accounts (like traditional IRAs) allows you to delay taxable income.

By structuring your withdrawals wisely, you can maintain lower Medicare premiums throughout retirement.

3. Qualified Charitable Distributions (QCDs)

For retirees age 70.5 and older, QCDs offer a tax-efficient way to satisfy RMDs while keeping your MAGI down.

• Direct Charity Donations: Instead of taking RMDs as taxable income, you can donate up to $100,000 from your Traditional IRA directly to charity, which keeps the distribution out of your MAGI.
• Reduced Taxable Income: This strategy reduces your taxable income and helps you stay below the IRMAA thresholds.

4. Managing Capital Gains

Selling assets that generate large capital gains can spike your MAGI and push you into higher IRMAA brackets. To avoid this, consider:

• Spreading Sales Over Multiple Years: Instead of selling all at once, spread sales over several years to smooth out taxable income.
• Tax-Loss Harvesting: Use tax-loss harvesting strategies to offset capital gains with losses, keeping your income in check.

Proper capital gains management can prevent sudden spikes in income that lead to IRMAA surcharges.

Additional Considerations for Reducing Taxes and Premiums

Filing an Appeal

If your income drops significantly due to retirement, marriage, divorce, or the death of a spouse, you may qualify to appeal IRMAA surcharges. Filing a Request for Reconsideration with the SSA can reduce or eliminate these surcharges.

Life Events

Certain life events, such as downsizing a home or receiving a large inheritance, can have major tax and Medicare implications. Properly timing these events can prevent you from crossing into a higher IRMAA bracket.

The Role of Holistic Retirement Income Planning

Proper Medicare planning in retirement is crucial to keeping healthcare costs in check. With the guidance of an expert retirement planner, you can reduce or even avoid IRMAA surcharges. Whether it’s through Roth conversions, capital gains management, or tax-efficient withdrawal strategies, taking action today can help you save on Medicare premiums and taxes in the future.

Contact us today for a complimentary Tax and Retirement Analysis. Let’s explore how you can optimize your retirement income and keep your healthcare costs under control.