People who think IRMAA is another hurricane may have a tax shock coming when they go on Medicare.
IRMAA is short for income-related monthly adjustment amount. It frequently surprises retirees because it is tacked on to standard Medicare premiums for people with incomes above certain cutoff points. Although it is aimed at higher-income retirees, “you don’t have to be rich to fall into the penalty box,” notes Denver financial planner Phil Lubinski.
This year, IRMAAs hit individuals with modified adjusted gross incomes of more than $91,000, and for couples, more than $182,000. Instead of paying the standard annual Medicare premium of $2,041.20, higher-income individuals are paying from $3,006 to $7,874.40. Couples can pay double that.
Each year, Medicare charges are reset based on the income that people reported two years earlier. Even retirees who never had a problem can be blindsided by an IRMAA after an unusually high-income year.
Ignorance isn’t bliss in such cases. People can often make income adjustments before year end to dodge an IRMAA threshold, such as selling losing investments to offset capital gains. Cutting income by as little as a penny can slice almost $1,000 off an individual’s annual Medicare premiums at the lowest levels, and thousands at higher levels.
Retirees should watch out for potential income spikes. Pulling a big chunk of money from an individual retirement account in a particular year to buy a car, or pay for a trip, or for a Roth conversion, can push them over the IRMAA threshold.
Planning to avoid IRMAA should start at age 60 and continue annually because each year’s tax return matters, says Newport Beach, Calif., certified public accountant Robert Klein. The amount of income that seniors earn at age 63 will determine their premium when they turn 65, the year many retirees begin Medicare.
When a person reaches age 72, avoiding IRMAA gets tougher because of required minimum distributions, or RMDs, from IRAs. Long before a person is 72, financial planners try to get clients to whittle down balances through Roth conversions so annual RMDs are less likely to push a person over an IRMAA threshold.