IRMAA, which stands for Income-Related Monthly Adjustment Amount, can significantly impact healthcare costs for Medicare enrollees. But what is IRMAA, and how might it influence you and your retirement?
Here are the basics of IRMAA, why it matters, and how it can affect your Medicare expenses.
What is IRMAA?
IRMAA is a surcharge added to your Medicare Part B and Part D premiums if your income exceeds a certain threshold. It’s a way for the government to collect additional funds from higher-income Medicare beneficiaries to help support the Medicare program.
IRMAA primarily affects Medicare Part B (which covers doctor visits, outpatient services, and medical equipment) and Medicare Part D (which covers prescription drugs) premiums.
The Social Security Administration (SSA) determines your IRMAA based on your modified adjusted gross income (MAGI) from two years prior. In other words, your IRMAA for a specific year is based on your income from two years earlier.
Why Does IRMAA Matter?
IRMAA matters for several reasons:
1. Increased Healthcare Costs: The most obvious reason IRMAA matters is that it can significantly increase your Medicare costs. If you fall into a higher income bracket, you will pay a surcharge on top of your standard Medicare premiums. These surcharges can vary widely based on your income level and add up to hundreds or even thousands of dollars annually.
2. Income-Based Tiers: IRMAA is not a flat fee; it is assessed on a sliding scale based on income. There are several income-based tiers, and the higher your income, the higher your IRMAA surcharge will be.
3. Impact on Retirement Planning: Knowing how IRMAA works and how it can affect your Medicare expenses is crucial for retirement planning. It’s essential to factor in these potential surcharges when estimating your retirement healthcare costs.
4. Tax Planning: Since IRMAA is based on your MAGI, it’s essential to consider the tax implications of your retirement income. Strategies like Roth conversions or managing your withdrawals from retirement accounts can help reduce your MAGI and potentially lower your IRMAA.
5. Enrollment Periods: IRMAA assessments are made annually, so if your income fluctuates, you may experience changes in your Medicare premiums from year to year. Being aware of these potential changes can help you make informed decisions during Medicare enrollment periods.
Consult Your Financial Advisor
Understanding IRMAA and its impact on your Medicare costs is crucial to retirement planning and managing your healthcare expenses.
By understanding how your income affects your IRMAA surcharges, you can make informed decisions about your retirement income strategy, potentially reduce your Medicare expenses, and financially prepare yourself for healthcare costs during retirement.
It’s always a good idea to consult with a financial advisor specializing in retirement planning to help you navigate the complexities of IRMAA and make the best decisions for your situation.
For example, before you make any financial decisions that will affect your income, such as withdrawing a large sum of money for a project, make sure your financial advisors know, as they can help you understand how it could affect your IRMAA surcharge and what you can do to mitigate these effects.
To learn more about managing IRMAA surcharges, reach out to an advisor using the form below.
Source: “Understanding IRMAA and Why it Really Matters.” FMeX. 2023. 13204.pdf (fmexcontent.s3.amazonaws.com)