Undoubtedly, for some Verizon retirees, the extra cost associated with the income-related monthly adjustment amount (IRMAA) can take you by surprise and disrupt your household budget. According to the Center for Medicare & Medicaid Services, 7% of Medicare Part B beneficiaries are paying extra because they have a high enough income for IRMAA to kick in.
This means that the Social Security Administration (SSA) charges extra costs to your monthly premium if you have a higher-than-average income. So, how do you reduce this cost? The secret is understanding how to spend and invest your retirement assets to eliminate IRMAA. This article takes you through how IRMAA works, and how to reduce or avoid this pesky surcharge.
How Does Medicare’s IRMAA Work?
Medicare’s IRMAA works by considering your tax returns from two years prior. For example, if you want to calculate your 2023 IRMAA, the SSA will look at your 2021 returns to determine your income bracket and the added charge to your monthly Medicare premiums. The SSA calculates your income based on your Modified Adjusted Gross Income (MAGI).
So, whether you’ll have to pay IRMAA depends on your MAGI, which is your Adjusted Gross Income (AGI), including tax-exempt interest income. If you want to calculate your MAGI, take your 2021 tax returns and find your Adjusted Gross Income (AGI), add your tax-exempt interest from your saving bonds, and any earned income from abroad not included in your AGI.
The total amount represents your 2021 MAGI specific to Medicare’s IRMAA. In 2023, most people are paying a standard premium of $164.90, and this surcharge takes effect if your MAGI is higher than $97,000 for individuals or $194,000 for married couples when submitting joint tax returns.
It’s also important to note that some financial decisions may impact your IRMAA and taxable income. You will raise your annual income when you:
- Sell real estate that generates a capital gain
- Take required minimum distributions from retirement accounts
- Carry out transactions that net a significant capital gain
- Process your Roth conversions from a traditional IRA in one transaction
The good news is, in addition to filing the Form SSA-44 and recognizing the above actions that can raise your annual income, there are some ways to reduce or avoid the IRMAA.
3 Strategies to Reduce Medicare’s IRMAA
There are specific strategies you can use to reduce or eliminate Medicare’s IRMAA, including:
1. Life-Changing Events
You can request your 2023 IRMAA reconsidered if you’ve experienced a life-changing event as defined by the SSA. If your circumstances have changed over those two years, you can file Form SSA-44 to let Medicare know about a reduction in your income. The following events qualify as life-changing events to request a reduction in your IRMAA:
- Marriage
- Divorce
- Spouse’s death
- Reduced hours or loss of your job
- Loss of income-generating property
- Reduction or loss of your pension
- A settlement from an employer
However, the SSA does not consider loss of alimony or child support, voluntary sale of real estate, and higher healthcare as life-changing events.
2. Roth Conversions
Usually, when you reach the age of 72, the IRS requires that you start withdrawing from your Verizon 401(k) or Traditional IRA accounts. But you’re taxed on each dollar you withdraw the same as ordinary income. Considering that these withdrawals can amount to hundreds of thousands each year, the unwanted IRMAA automatically kicks in.
Roth conversions involve transferring these amounts to your Roth IRA at a favorable tax rate. If making Roth conversions, consider smaller incremental conversions over several years to avoid exceeding the high-income threshold in any given year.
3. Qualified Charitable Distributions (QCDs)
Consider a qualified charitable distribution (QCD) to avoid Medicare’s IRMAA. Once you reach the age of 70 ½, the QCD allows you to donate a maximum of $100,000 of your Traditional IRA to a qualified non-profit organization each year. The best part? This withdrawal is treated as a non-taxable distribution hence eliminating Medicare’s IRMAA.
QCDs are a great way to reduce your MAGI, and you can include them when you withdraw from your retirement accounts - which pushes you to a higher IRMAA bracket. In this way, you will directly lower your MAGI and, as a result, reduce your IRMAA for the current year because there are no taxes on QCDs.
Let Us Help You Navigate Medicare’s IRMAA
Medicare is one of the most significant expenses for retirees, and IRMAA is the extra cost charged to Medicare Part B and Part D premiums if you are a high-income earner. Thankfully, you can use these three strategies to reduce your IRMAA.
Still have questions? Please feel free to email H&A Wealth Management or call us at 800-722-1143. We’ve been working with Verizon retirees for over 20 years and we’re always happy to help.