Hopefully by the time you start Medicare, you will have an understanding (or at least a rough feel) for what it will cost you. You’ll know about the monthly premium and annual deductibles for Parts A & B, and you’ll also know about the monthly premium and deductibles for your Medicare Supplement + Part D drug plan (or for your Medicare Advantage plan if you chose that route instead). But what do you know about the additional costs if you are subject to IRMAA charges?
IRMAA: Income Related Monthly Adjustment Amount
Are you one of the 7% of Medicare beneficiaries affected by IRMAA? Most people are surprised by these charges, but you aren’t necessarily stuck with them.
What is IRMAA?
IRMAA, or the Income-Related Monthly Adjustment Amount, is essentially a tax added to the cost of Medicare for individuals above a certain income level. This surcharge increases the cost of both your Part B premium (covering doctors and outpatient care) as well as your Part D premium (for prescription coverage). Costs are more fully outlined below, but if IRMAA applies to you, you will be paying at least $71 more per month for your Medicare.
Only about 7% of people on Medicare will be affected by these surcharges, but many of the people in that group are taken by complete surprise when the bill comes. Some people will be able to make adjustments to lower or avoid the extra payments, but even for those that can’t, we think it is important to be prepared and informed.
How much does IRMAA cost?
Whether or not you are affected by IRMAA, and by how much, is determined using your Modified Adjusted Gross Income (MAGI) from your tax return. The standard premium for Part B in 2021 is $148.50/month; there is no standard premium for Part D plans, but the average for 2021 is about $33/month. If you make more than $88,000/year as an individual or $176,000/year as a couple, you will be charged extra for your Medicare coverage.
So, if you make $87,000/year, you can expect to pay about $181.50 in monthly premiums for your Medicare. But if you make $89,000/year, that amount increases to $253.20 for the same coverage. A typical couple might make $250,000/year. Without IRMAA charges, their monthly Medicare charges would total about $363/month. But since they will be subject to IRMAA, they can actually expect to pay three times that much: $1,157.80.
Listen to learn more about what to expect from “Aunt IRMAA”
So, what can I do?
Like any taxes, there are strategies to legally lower these costs or avoid them completely.
The first thing to consider is your income immediately prior to retirement and immediately after. IRMAA is calculated from your tax return, but it’s your tax return from 2 years ago. In their first year of Medicare, many people are notified that they will be expected to pay IRMAA because when they were earning income from a job, their MAGI was above the threshold. However, your recent retirement probably significantly lowered your current MAGI, and so you can file an appeal to recalculate your obligations. Depending on how much income you have in retirement, the recalculation may drop you into a lower tier or eliminate the extra cost altogether.
Throughout your retirement, it will be important for you to monitor your taxable income and be strategic about where you are pulling the money you are living on. Most people have money in a variety of places, each with different tax classifications – there are Social Security checks, 401(k)s or pensions, traditional and Roth IRAs, stock dividends and gains (or losses) from selloffs, CDs and annuities, standard bank accounts, and more. If you are careful, you can move taxable money into tax-free accounts while living off of your tax-free money, all while staying in the lowest possible tax and IRMAA brackets.
IRMAA shouldn’t be a shock, and you shouldn’t feel you have to take the charges laying down. Cardinal can help you know what to expect, show you how to file an appeal, and work with you to make sure you keep your Medicare costs low throughout retirement.
