Retirement may mark the end of your regular-paycheck days, but you're still likely receiving income, and in the eyes of the government, that income can take various forms that could lead to a jump in your monthly Medicare premiums.
To understand how this could happen and prepare, getting to know how "IRMAA" works is a good place to start. If you're on Medicare or Medicare Advantage and your income rises above a certain threshold, the Social Security Administration adds an extra charge to the standard Plan B or Plan D premiums based on IRMAA, or the Income-Related Monthly Adjustment Amount.
"The character and amounts of your income can change significantly when you enter retirement," says Chris Kawashima, a senior research analyst at the Schwab Center for Financial Research. "That makes it critical to get a firm handle on your expected income streams—an unexpected bump could trigger an increase in your Medicare premium payments."
IRMAA surcharges are based on your modified adjusted gross income (MAGI) from two years prior, and apply to both Medicare Part B, which covers outpatient care, and Medicare Part D, which covers prescriptions. And the higher your income, the bigger your surcharge.
In retirement, the concept of "income" tends to be a little more expansive than the paycheck you bring home during your working years. In fact, you might be surprised by what the Social Security Administration includes when calculating Medicare premiums.
Here are some things to consider:
More basics of IRMAA
Your MAGI amount is calculated anew each year, so your IRMAA can change, or even disappear, depending on how your income fluctuates. What is the threshold? In 2023, a married couple filing jointly would be subject to an IRMAA surcharge if the MAGI on their 2021 tax filing was $194,000 or above. For individuals, IRMAA would kick in if their 2021 filing showed a MAGI of $97,000 or above.
What does that mean in practice? In 2023, the standard premium for Part B is $164.90 a month. However, for those above the IRMAA threshold, premiums range between $230.80 and $560.50 a month, depending on income. For Part D, the IRMAA surcharges range from an additional $12.20 to $76.40 per month, depending on income. In other words, the highest earners could end up paying an extra $472 a month in premiums for Part B and Part D plans. (Check the Social Security Administration for details.)
The trailing nature of the threshold partly explains how surprises can happen. And then there are the income sources that can be included.
Common scenarios that could trigger unexpected increases include:
- Income in the year you stopped working. If you retire at the same time you enroll in Medicare and your last few years of salary were high, it could affect your premiums for your first two years of retirement. Other income-boosting scenarios include vesting of restricted stock, exercising stock options or other forms of deferred compensation.
- Required minimum distributions (RMDs). If you have substantial tax-deferred savings, the start of RMDs at age 731 could trigger a sudden surge in your taxable income. That surge could be even larger if you opted to delay your first RMD until April 1 of the year after you reached RMD age, because you would have had to take two distributions that year.
- Home sales. If your capital gain from the sale of a home exceeds the exclusion amount ($250,000 for individuals, $500,000 for joint filers), it will be treated as taxable income. So, if you made a sizeable profit after downsizing, it could show up in your IRMAA calculation two years later.
- Municipal bond income. Interest from muni bonds may be tax-free for income tax purposes but not for IRMAA calculations. Muni interest income is added back to your MAGI.
- Roth conversions. The amount you convert to a Roth is considered taxable income in the year you make the conversion. If you converted some savings or are planning to do so, be aware that the sum you convert could push you over the IRMAA threshold.
- Inherited IRAs. Withdrawals from inherited IRAs are considered taxable income that must be added to your MAGI.
Here's an example of how this might work: In 2021, Mary earned $50,000 as consultant, received pension payments totaling $40,000, and did a $20,000 Roth conversion, giving her a MAGI of $110,000. As a result, she is subject to an IRMAA surcharge in 2023.
For Part B, Mary's base premium is $164.90, and the IRMAA is $65.90, bringing her monthly premium to $230.80. For Part D, she would pay an additional $12.20 monthly surcharge.
How your wealth advisor can help
Your Schwab Wealth Advisor can help you develop a retirement income plan and walk you through ways to prepare for Medicare.
What can you do?
Paying IRMAA surcharges may be unavoidable in many cases. After all, having higher income, generally, is desirable. But keep in mind that one year's IRMAA might drop off the year after. Plus, you may have options for managing the burden. For example:
- Request a new determination. If you feel the Social Security Administration has erred, perhaps because your tax return was inaccurate or out of date, or if you've experienced a life-changing event such as work stoppage, divorce, death of a spouse, disease, or fraud, you can use Form-SSA-44 to apply for an exemption or reduction of your IRMAA surcharges. If you don't qualify, don't panic: You can appeal. "Medicare does recognize some circumstances and makes exceptions, and it could give you a break and allow you to pay a premium based on the current year," Chris says. "Your chances to get an exception may be pretty good."
- Manage your income. If you're planning a Roth conversion or foresee a home sale, think about taking care of those before you turn 63 so you can get ahead of the two-year MAGI "lookback." You pay tax at the time of the conversion, but you can potentially avoid unnecessarily increasing your Medicare premiums. A $50,000 Roth conversion in 2023, for example, would be included in MAGI to determine your Medicare premiums in 2025, but wouldn't be counted in 2026.
One note: If you're receiving retirement benefits from Social Security and already have your Medicare Part B and Part D premiums deducted from your Social Security payment, you don't have to take action if you owe IRMAA, because your IRMAA will automatically be deducted from your Social Security benefit.
Assessing your future Medicare costs is like anything else with retirement – plan carefully, Chris says. "Work intelligently on your tax and retirement income planning but be prepared for the prospect of higher premiums due to IRMAA. You want to position yourself for the true costs of Medicare."
1Effective January 1, 2023, SECURE Act 2.0 changed the age at which RMDs kick in from 72 to 73. An individual who turned 72 in 2022 is covered by the prior RMD rules. An individual who was born after 12/31/1950 and before 01/01/1959 is covered by the new RMD rules. Starting in 2033, the RMD age will increase to 75 for an individual born after 12/31/1958.
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