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Understanding IRMAA: A Crucial Component of Financial Planning

June 08, 2023

Financial planning plays a vital role in securing your financial future. One crucial element that often goes unnoticed but can significantly impact your financial well-being is the Medicare Income-Related Monthly Adjustment Amount (IRMAA). Many CalSTRS & CalPERS members may not have a ton of clarity regarding Medicare in general, let alone what in the world IRMAA is! In this article, we’ll explore what IRMAA is and how it will fit into your financial plan.

IRMAA is an additional premium amount that certain high-income Medicare beneficiaries are required to pay for their Part B (Medical Insurance) and Part D (Prescription Drug Coverage) benefits. IRMAA was introduced as part of the Medicare Modernization Act in 2003 to help fund Medicare programs effectively.

The Social Security Administration (SSA) determines whether individuals are subject to IRMAA based on their modified adjusted gross income (MAGI) reported on their federal income tax returns. The MAGI includes taxable income and certain tax-exempt interest, such as interest from municipal bonds.

The calculation of IRMAA takes into account your MAGI from two years prior. For example, if you are paying Medicare premiums in 2023, the SSA will consider your MAGI from 2021 tax return to determine if you are subject to IRMAA.

The IRMAA brackets for Part B and Part D are structured based on income thresholds. The higher your MAGI, the higher your IRMAA premium. The first IRMAA brackets for 2023 (from 2021 tax returns) are as follows:

Individual tax return: MAGI above $97,000

Married Filing Jointly tax return: MAGI above $194,000

Keep in mind, this is only the first IRMAA bracket. There are an additional 6 brackets based upon an even higher amount of your MAGI. 

IRMAA can significantly impact your monthly expenses during retirement. When creating a retirement budget, it is crucial to factor in the additional costs associated with IRMAA. Failing to account for these expenses could result in unexpected financial strain.

Strategically planning the timing of your retirement account withdrawals can have a substantial impact on your MAGI, particularly if you are nearing retirement and expecting to receive Medicare benefits. It is crucial to carefully consider the timing and amount of your withdrawals to avoid entering a higher IRMAA bracket. This also applies to any Roth conversions you complete, as they do contribute to your MAGI.

For our clients, we recommend waiting until the end of the year, typically October through early December, to initiate Roth conversions. We do so for two main reasons. First, it ensures that there are no unplanned withdrawals or other taxable income that was not expected. Second, the updated IRMAA figures are typically released in October, allowing us to work with the most up-to-date information possible. By delaying the Roth conversions until the end of the year, we can execute them with greater confidence & precision, ensuring they remain within the desired IRMAA bracket.

If your MAGI two years prior to your retirement exceeds an IRMAA bracket and we expect a decrease in your income at retirement that falls below the IRMAA bracket, then we advise our clients to submit something called a “Change of Life Event” (SSA-44) form. This will notify the Social Security Administration that you are retiring and expect to be in a lower IRMAA bracket. Remember, because of the two year look back of tax returns used when calculating your Medicare premiums, they will assume that you are still in a higher bracket. You’ll have to do this two years in a row, assuming your MAGI was above the IRMAA bracket in both years prior to your retirement.

When creating a comprehensive financial plan, it is important to consider all aspects that can impact your financial well-being, including healthcare costs. IRMAA is a crucial element of financial planning for Medicare beneficiaries with higher incomes. By understanding IRMAA and its implications, you can make informed decisions, adjust your retirement budget, and implement strategies to manage your MAGI effectively. Working with a financial planner, like myself I might add, can be valuable in navigating the complexities of IRMAA and optimizing your financial plan for a secure future.