Should We Even Worry About IRMAA? Ep #308

As a financial advisor that thinks a lot about the Medicare surcharge IRMAA, an article titled Stop Worrying About IRMAA written by a source I trust certainly caught my eye.

In this episode, we’ll explore what IRMAA does, reflect on the article, and discuss whether the IRMAA surcharge is worth worrying about. If you have questions about IRMAA or are starting to approach Medicare age you won’t want to miss out on this episode.

Outline of This Episode

[1:22] How Medicare works
[5:33] How IRMAA works
[8:09] My thoughts
[9:18] Action items
[14:50] How to pay taxes on Roth conversions

Medicare is not free

Many people mistakenly think that Medicare is free–it is not! Medicare is an insurance plan for older adults that offers affordable monthly premiums, deductibles, and copays.

If you have listened to previous episodes with Boomer Benefits’ Danielle Roberts you know a bit about how Medicare works.

Part A is hospital insurance and has no premium but does have an annual deductible.

Part B covers doctor visits and medical supplies. This Part requires a premium and annual deductible.

Part C is often overlooked and is commonly referred to as Medicare Advantage. This part of Medicare offers alternative plans covered by private insurers.

Part D is the drug insurance component which covers prescription costs.

IRMAA was designed to level the playing field

Even though IRMAA is a Medicare surcharge for higher-income individuals, it doesn’t include the word Medicare in its acronym. IRMAA stands for Income Related Monthly Adjustment Amount.

IRMAA serves as a means-tested method within the Medicare system, which ensures that individuals with higher incomes pay higher premiums for certain parts of Medicare: parts B and D.

The concept of means-testing implies that those who have greater financial resources contribute more to the program than those with lower incomes, thereby creating a more equitable distribution of costs.

Should you worry about IRMAA?

The way IRMAA works is by measuring different levels of income based on various AGI thresholds. The higher one’s AGI the higher IRMAA they can expect to pay. Many people feel that the IRMAA surcharge is unfair but if it is seen through the lens of an additional income tax expense, you may find that it remains a relatively small percentage of your total AGI.

Many retirees jump through complicated financial maneuvers to avoid paying IRMAA. This article warns against that. They suggest accepting IRMAA as an integral part of Medicare costs which, even with the additional charge, is still less expensive than acquiring private health insurance.

My thoughts

While I don’t recommend jumping through complicated financial hoops to completely avoid IRMAA, I do advise thinking through your income annually.

I do this with my clients during a regular end-of-year tax review session. During this session, we assess whether it makes sense to fill any IRMAA or tax brackets by doing Roth conversions. These conversions increase your tax flexibility and help you avoid tax increases down the road.

Listen in to hear how careful tax planning can be your biggest advantage over the IRS.