Why Medicare Surcharges Can Shock Retirees

[question everything]

Last edited Mon Feb 7, 2022, 08:23 PM - Edit history (1)

The topic here is the “Income Related Monthly Adjustment Amount,” or IRMAA. That’s the formal name for the additional premium that some individuals and couples who are enrolled in Medicare pay for their coverage. To be specific: Most beneficiaries in 2022 will pay $170.10 a month for Medicare Part B, which covers doctors’ fees and other expenses. But…if your income on your federal tax return for 2020 (more in a moment) exceeded $91,000 as an individual, or $182,000 as a couple filing jointly, your monthly premium this year likely will be larger than $170.10.

If, for instance, your income in 2020 exceeded the amounts noted above by so much as a penny, your monthly Part B premium jumps almost $70. From that point, the premium continues to climb in line with your income, eventually topping off at almost $580 a month. What’s more, a similar math applies to high-income beneficiaries enrolled in Medicare Part D, which covers prescription drugs; here, too, monthly premiums escalate along with income.

(snip)

Why the surprise? Because many retirees aren’t aware these surcharges even exist, or don’t understand how they’re triggered. Again, your income (specifically, your “modified adjusted gross income”) is the key. As such, large—and, frequently, one-time—financial events can push you into surcharge territory. Examples: Did you sell your house or a rental property and end up with a sizable capital gain? Did you withdraw a large sum from your IRA? Are you still working and earning a six-figure salary? Did you convert a large chunk of your traditional IRA to a Roth? Any of these circumstances could inflate your income substantially—and leave you blindsided by IRMAA.

The larger point: For anyone getting ready to enroll in Medicare, as well as current beneficiaries, “IRMAA planning” should be part of your tax planning—anticipating how financial transactions today can affect your taxes tomorrow. The good news: There are ways to get relief from, or lessen the impact of, Medicare surcharges; an online search—“how to avoid IRMAA”—can get people started.

https://www.wsj.com/articles/medicare-shock-retirees-tax-season-11643848093 (subscription)

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Wanted to add that these surcharges can be waived if there was a major life changing event like retiring.

[progree]

1. Yes, I'm getting "IRMAA'd" this year because of a Roth conversion I made in 2020

Last edited Mon Feb 7, 2022, 08:24 PM - Edit history (3)

but I knew about it in advance when I was making the Roth decision, and it came out as expected.

One of the costs of doing a Roth conversion that year, but I was also in a special tax situation that year (Roth conversions were, for me, effectively taxed at 70% of the marginal tax bracket rate that year, not including the IRMAA consequences), so it made sense to go ahead even with the IRMAA hit.

Edited to add: At the risk of being "spammy", Bob Carlson's Retirement Watch monthly newletter keeps me up to date about things affecting people nearing or in retirement, and the "working old". The last time I renewed, it cost me $126 for 2 years (=$63/year), so its not dirt cheap but well worth it to me.

[Hoyt]

2. If I make $91K in retirement, I'm not going to gripe about a $840 surcharge

when many don’t make anywhere near that amount, especially in retirement.

[Auggie]

4. +1

[I_UndergroundPanther]

3. I wonder is medicare

Made insanely complex and riddled with gotchas just to torment elderly people?

Sure seems like it.

[PoindexterOglethorpe]

5. My first year of retirement I had enough income from investments

that I got hit with the IRMAA, which was honestly a shock. I had not known about it until it hit me. And frankly, because of the way my income was, it was barely affordable. My supposed higher income was in sales within my investments, not a penny of which came to me. Sigh.

Since then my finances have become much simpler, which is nice. I have enough money to afford a basic life, with occasional luxuries such as going to one of my science fiction things, or a recent trip to the east coast to deal with some family health issues. The best part of that second thing was that I got to see My Son The Astronomer whom I had not seen since October, 2019. Hooray!

I know that I am extremely fortunate in that my basic expenses are well covered and I can do some extras. My health is for the most part very good and I have very low medical costs, lucky me.