Avoid Paying More for Medicare by Planning Ahead


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Every year, higher-income Medicare beneficiaries receive a letter from Social Security telling them how much Medicare will cost. This letter outlines their income-related Medicare adjustment amount (IRMAA), which occurs if enrolled in Medicare Parts B and D and if their modified adjusted gross income, taken from their tax return two years prior, was over $85,000 (single) or $170,000 (joint). This is important as IRMAA surcharges can increase the annual cost of Medicare over $6,000 per year for high-income retirees. This cost is in addition to Medicare supplemental insurance, deductibles, co-payments and long-term care costs. Since most retirees have Medicare premiums deducted right from their Social Security check they don’t even see the money going right back to the government.

What Can a Higher-Income Medicare Beneficiary Do About IRMAA?

First, since the income numbers are two years old, are they indicative of this year’s income? If you retired, reduced your hours or income, divorced, married, lost a spouse or had some other life-changing event, you can complete Form SSA-44 requesting a reduction of IRMAA. I often tell the story of Rebecca (one of our clients), who had a large spike in income due to a mistaken retirement plan distribution. Two years later Rebecca was hit with substantial IRMAA surcharges she could not afford. We helped her appeal to Social Security and were successful in having the surcharges removed.

Reduce Future Taxable Income

Second, you can consider income-tax planning with the goal of reducing your taxable income in future years. A full or partial Roth conversion can significantly lower taxable income in future years.  We have a client Sally, who is very upset about IRMAA surcharges. Sally is paying the maximum IRMAA surcharges due to the combination of Social Security, a corporate pension, taxable distributions from her 401(k) and IRA, plus earnings on her regular investments. The tax planning we are recommending for Sally is a full Roth conversion of her 401(k) and IRA plus investing some of her regular investments into a single premium life insurance policy that pays the bill for long-term care. These two moves will lower Sally’s taxable income under the $85,000 threshold for IRMAA.

Move Income into a Tax Deferred Investment

Third, you might consider moving an investment generating ordinary income into an investment that is tax deferred like annuities, life insurance, or real estate. This works best if the investment income you are earning and realizing on your tax return is not being spent to support your lifestyle. If set up properly through life insurance, the tax deferred earnings pass to your heirs tax-free. Annuities postpone the taxes due until the money comes out of the policy and a real estate investment can trade short-term earnings for long term gains that are possibly taxed at capital gains tax rates.

While, it is never wise to undertake financial and tax planning targeting one issue in retirement like healthcare costs and IRMAA, it is beneficial to know and understand potential costs in your future. Perhaps an awareness of IRMAA will motivate you to start financial and tax planning regarding your retirement income and the taxes you pay in retirement.

Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at Hans@CardinalGuide.com.

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