One of the more common — and frustrating — surprises I see among retirees is a little-known Medicare surcharge called IRMAA. The acronym stands for income-related monthly adjustment amount, and while it sounds technical and harmless, IRMAA can materially increase the cost of Medicare for households with even modestly above-average income.
Most people assume that once they turn 65, Medicare premiums are largely fixed. That’s true for many beneficiaries, but not all. Medicare Parts B and D are subject to income testing, and higher-income retirees pay more — sometimes much more — than the standard premium.
Here’s how it works. Medicare looks back two years at your modified adjusted gross income as reported on your federal tax return. Based on that number, the Social Security Administration places you into an IRMAA income tier. If your income exceeds certain thresholds, you pay a surcharge on top of standard Medicare premiums.
The problem isn’t that Medicare charges higher-income households more. The problem is how easily retirees stumble into IRMAA territory without realizing it.
For example, a married couple filing jointly can trigger IRMAA this year with 2024 modified adjusted gross income of just above $218,000 (remember, there’s a two-year look-back). That may sound high, but it’s surprisingly easy to cross that line in the first few years of retirement. Required minimum distributions, Roth conversions, the sale of a business or rental property, capital gains from rebalancing a portfolio or even a single unusually strong investment year can push income over the threshold.
What makes IRMAA especially aggravating is its “cliff” structure. These aren’t gradual increases. Cross a threshold by one dollar, and your Medicare premiums can jump thousands of dollars per year. And because Medicare uses a two-year look-back, retirees are often penalized long after the income event has passed.
Consider a retiree who sells a long-held property at age 66. The resulting capital gain may push income into a higher IRMAA tier. Two years later — after the proceeds have been reinvested and income has returned to normal — Medicare premiums suddenly increase. For many people, it feels arbitrary and unfair.
There’s also a psychological element. Medicare premiums are deducted quietly from Social Security checks or billed quarterly, so the increase is easy to miss. By the time people notice, the surcharge is already in effect.
The good news is that IRMAA isn’t entirely unavoidable. With thoughtful planning, its impact can often be reduced or managed.
Income smoothing is one of the more effective strategies. Coordinating the timing of Roth conversions, capital gains and charitable giving can help keep income below critical thresholds. Qualified charitable distributions from IRAs, for example, can satisfy required minimum distributions without increasing taxable income — often a powerful IRMAA-management tool.
It’s also important to know that Medicare allows appeals. If your income was temporarily elevated due to a life-changing event like retirement, the death of a spouse, divorce or the loss of pension income, you may be able to request a reduction in your IRMAA surcharge. Appealing requires paperwork and persistence, but it can be well worth the effort.
Ultimately, IRMAA is a reminder that retirement planning isn’t just about saving and investing. Taxes, Medicare and income coordination are central elements of a healthy financial plan. What may look like a smart move in isolation — like a Roth conversion, property sale or portfolio rebalance — could have unintended consequences if Medicare premiums aren’t part of the analysis.
Steven C. Merrell is a partner and managing director at Creative Planning (formerly known as Monterey Private Wealth). He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road, Suite 202, Monterey, CA, 93940. Or you can email steve.merrell@creativeplanning.com. This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
