Understanding IRMAA Surcharges and How to Mitigate Their Impact

For retirees navigating the complexities of Medicare, the Income-Related Monthly Adjustment Amount (IRMAA) is an important factor to be aware of. This surcharge increases Medicare premiums for higher-income individuals, potentially reducing disposable income. Below we will dive deeper into how IRMAA is calculated, as well as some proactive steps to take for those that are affected by IRMAA.

What is IRMAA?

IRMAA is a surcharge added to Medicare Part B (medical insurance) and Part D (prescription drugs) premiums, whenever the insured’s income falls above certain thresholds. Unlike standard Medicare premiums, IRMAA is income-adjusted, meaning the more you earn, the more you pay for your Medicare health coverage.

The Social Security Administration (SSA) determines IRMAA based on your Modified Adjusted Gross Income (MAGI) from two years prior. For example, your 2024 IRMAA is calculated using your 2022 tax return. MAGI includes adjusted gross income plus any tax-exempt interest, such as municipal bond income.

How are Income Brackets Calculated?

IRMAA brackets are indexed annually for inflation, meaning they change over time. These brackets determine the surcharge amount applied to your Medicare premiums. If your MAGI exceeds the lowest bracket, you’ll pay an additional premium based on your income level. Additionally, exceeding a threshold even by just $1 can place you into a higher surcharge tier.

2025 IRMAA Brackets

Here are proposed income thresholds for 2025 and the Part B adjustments, as published by CMS.gov:

Income Level (MAGI, Single)   Income Level  (MAGI, Married Filing Jointly) Part B Surcharge    Total Monthly Part B Premium

$106,000 or Less                         $212,000 or Less                                                   $0                                        $110.40

$106,001 - $133,000                 $212,001 - $266,000                                        $73.60                                $184.00

$133,001 - $167,000                 $266,001 - $334,000                                       $184.10                                $294.50

$167,001 - $200,000                 $334,001 - $400,000                                       $294.50                                $404.90

$200,001 - $499,999                 $400,001 - $749,999                                       $404.90                                $515.30

$500,000 or Greater                 $750,000 or Greater                                       $441.70                                $552.10

Additional surcharges could be applicable on your Part D premiums as well. Please visit www.CMS.gov for more information and as always, seek the help of a certified tax adviser for guidance.

How and When Are IRMAA Fees Paid?

IRMAA surcharges are added directly to your Medicare Part B and Part D premiums. For retirees receiving Social Security benefits, the premiums, including any IRMAA surcharges, are deducted automatically from their monthly checks. This reduction in Social Security income can significantly impact retirees’ monthly cash flow and can often cause a financial burden. But, there are some proactive steps that you can take in order to minimize the impact of IRMAA.

Strategies to Minimize the Impact of IRMAA

1.      Tax-Efficient Withdrawals: Strategies such as Roth IRA conversions can reduce taxable income over time, as qualified withdrawals from Roth accounts are not included in MAGI. Additionally, utilizing funds from Health Savings Accounts (HSAs), which offer triple tax advantages, can help pay for medical expenses without affecting MAGI. Properly sequencing withdrawals from taxable, tax-deferred, and tax-free accounts (such as loans against a cash value life insurance policy) can also help smooth out income levels and avoid IRMAA bracket spikes.

2.      Timing of Income: Careful timing of income recognition is another critical strategy. One-time events, such as selling a property, cashing out stock options, or taking large distributions from tax-deferred accounts, can push MAGI above an IRMAA threshold. To mitigate this, consider spreading such events over multiple years or deferring them to years when income is expected to be lower. Charitable giving strategies, such as Qualified Charitable Distributions (QCDs) from IRAs, can also reduce taxable income while supporting philanthropic goals.

3.      Annuities: Fixed Indexed Annuities (FIA) can serve as a reliable income source that help offset the costs associated with IRMA. FIAs provide a guaranteed income stream and offer growth potential linked to market indexes without the risk of direct investment losses. By using annuity payouts to supplement retirement income, clients can reduce their reliance on Social Security and better manage their overall cash flow. 

4.      Cash Value Life Insurance: Fixed Indexed Universal Life Insurance (FIUL) can also provide you indexed market growth without risk of investment losses. FIUL can serve as a reliable and tax-free income source in retirement as it allows the policy owner the option to pull money from the cash value each year in the form of a policy loan, without increasing MAGI or triggering IRMAA surcharges. It can often also provide you with additional living benefits for certain health occurrences and long-term care needs that you can draw out tax-free as well. This can be a valuable tool for later in life, to cover your care expenses, without increasing your taxable income.

Conclusion

IRMAA surcharges can significantly affect retirees’ financial plans, particularly for high-net-worth individuals. By understanding the intricacies of IRMAA and implementing strategies such as the ones outlined above, retirees can better manage their income and maintain financial stability. As a financial firm specializing in retirement planning, Summerlin Benefits Consulting is here to help clients navigate these challenges and secure a comfortable retirement. Contact us today to learn more about how fixed indexed annuities can fit into your retirement strategy.