Mind on money: plan in advance for potential IRMAA trouble

Mind on money: plan in advance for potential IRMAA trouble
By: Marc Ruiz Last Updated: January 27, 2020

There’s an issue affecting my retiree clients more and more nowadays, and it’s an issue that really chaps the hide of many. The issue is Medicare premiums and more specifically the income adjusted related monthly adjustment amount, otherwise known by dreaded government acronym of IRMAA.  

First a little bad news for all Medicare recipients, if you haven’t already realized it, the monthly Medicare Part B premium has risen to $144.60 in 2020, a slight increase over last year. Hopefully for most beneficiaries of both Social Security and Medicare this increase will be offset by the 1.6% cost of living increase awarded to Social Security recipients which, based on the average social security check, will increase the monthly payment by about $24. So even after the Medicare increase a slight monthly raise should be perceived by most when it comes to the two benefit programs. 

But IRMAA is another issue entirely. IRMAA is perceived by many as a penalty, but the government actually considers in an additional cost sharing program for higher income Americans. When it kicks in IRMAA increases the amount of the Medicare Part B premium initially by $57.80 a month, and on the top end can increase premiums by a whopping $347 a month, and this increase applies to both spouses for a married couples. 

IRMAA begins to phase in when single incomes reach $87,000 and joint incomes for married couples reach $174,000. And the income number the government uses to determine IRMAA is the complicated Modified Adjusted Gross Income or MAGI. While we won’t go into MAGI here, this alternative income number adds back a number of tax deductions used to reduce taxable income on a tax return. 

So if you’re reading this thinking, “Marc, that’s not my problem, it's only for the rich people,” I assure you, some of the folks my firm works with who ended up being affected by this issue thought the same thing. The reason: “one off” financial events, here are a couple examples. 

Both spouses were working and retire at the same time. The retirement involves a lump sum vacation pay or immediate vesting and distribution of a deferred compensation plan or stock options. Income during the year of retirement goes over the thresholds. Hello IRMAA.

A retired family wants to pay off a house using an IRA or 401(k) withdrawal, or make a special withdrawal to buy a vacation home.  Combine this special income with their regular Social Security or pensions. Hello IRMAA.

A frugal family who has saved and invested wisely have a big retirement account and have never taken withdrawals. They reach the age of 72 (or 70 ½) and have to take big required minimum distributions. Hello IRMAA.

A family doing some forward planning involving IRA to Roth IRA conversions which increases income during the conversion years. Hello IRMAA.

And perhaps my favorite. A family has a lake cabin, farm land or rental property that has been in the family for many years. The property is sold, realizing a huge capital gain. Hello IRMAA.

There is an appeals process for having IRMAA charges removed, but it is not retroactive or quick.  Once IRMAA is assessed to a family, it seems to me that it usually stays in place for two years during appeal.

Financial windfalls are of course wonderful events, but that seems to only take a slight edge off the irritating nature of IRMAA. In my opinion, the best thing retirees can do to manage IRMAA is work with a qualified team of tax and financial advisers to manage income and windfall transactions. With some planning, often times IRMAA can be avoided. The first step is just being aware. 

Opinions are solely the writer's and are for general information only is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Neither Oak Partners or LPL offers tax advice. Contact Marc at marc.ruiz@oakpartners.com. Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.