If the Social Security Administration (SSA) considers you a “high-income beneficiary,” you’ll pay a surcharge known as the Income-Related Monthly Adjustment Amount – IRMAA for short.
That’s right, many soon-to-be retirees may not realize that they will have to pay more for Medicare Part B if their income exceeds a certain amount in a given year.
How High is High-Income?
There are five tiers of modified adjusted gross income (MAGI) that the SSA uses to determine your IRMAA.
The first tier starts at a MAGI of more than $88,000 for single filers or more than $176,000 for those who are married filing jointly.
One thing to note is that the SSA uses your income from two years ago for this calculation. This year’s determination is based on your 2018 tax return.
How Can I Reduce My IRMAA?
With exceptions for “life-changing” events such as a divorce or death of a spouse, you can only reduce your IRMAA by lowering your income or through careful financial planning.
Even if your income is typically below the first MAGI tier, without proper planning, you may end up having to pay an IRMAA because of a one-time event.
Some common situations that can bump up your income include:
- Selling a home
- Taking a required minimum distribution (RMD)
- Converting traditional IRA assets to a Roth IRA
- Realizing a large investment or capital gain
- Winning the lottery (yes, it’s true!)
The good news is that if your income decreases, so will your IRMAA, albeit with a two-year delay.
Three Strategies for Reducing Your IRMAA
Roth IRA Conversions
A large, one-time Roth IRA conversion will inflate your taxable income in a given year.
This doesn’t mean you should avoid Roth conversions altogether.
By making smaller incremental conversions over several years, you can avoid hitting the high-income threshold in any one year.
Roth IRAs have many benefits – and not just for avoiding IRMAA surcharges. Withdrawals from Roth IRAs aren’t taxable and there are no distribution requirements.
If you can convert all of your pretax assets to a Roth prior to age 72, you’ll never have to take a Required Minimum Distribution (RMD). That means your income won’t spike because you had to take an RMD.
But what if you missed the boat on making smaller, incremental Roth conversions before (or right after) you retire?
You should still consider making a one-time conversion.
Remember that IRMAA is determined on an annual basis, and that the calculation is based on your income from two years prior.
Yes, you may have to pay an IRMAA two years after making that big Roth conversion, but you’ll never have to worry about it after that.
Health Savings Accounts (HSAs)
Younger workers who have a high-deductible health plan can choose to max out an HSA rather than contributing to an IRA.
Contributions to an HSA are tax-deductible, their earnings grow tax-deferred, and withdrawals are also tax-free if they cover IRS-qualified medical expenses.
Because qualified withdrawals don’t affect adjusted gross income, they impact your IRMAA calculations.
Qualified Charitable Distributions (QCDs)
If you’re 70 ½ or older, you can make a Qualified Charitable Distribution (QCD) of up to $100,000 in a single tax year.
The catch is that it must be made to a 501(c)(3) charity – not a private foundation or donor-advised fund.
The QCD will satisfy your RMD, and if you do it properly, it won’t increase your adjusted gross income.
Prepare in Advance with a Financial Plan
With good financial planning, you can minimize your IRMAA – and your tax bill — well in advance. You’ll get the added benefits of reduced financial anxiety and increased peace of mind.
Get started today by requesting a no-cost, no-obligation consultation with one of our advisors.