Medicare Premium Surcharges (IRMAA): How Income Raises Part B and Part D Premiums

Most people pay the standard Medicare Part B premium. People with higher incomes pay more, through an income-related monthly adjustment amount, usually called IRMAA. It applies to both Part B and Part D premiums, and it surprises many retirees because it's based on income from two years earlier.

How it works

Modified adjusted gross income for IRMAA is generally your adjusted gross income plus tax-exempt interest income. Thresholds and surcharge amounts are set annually; current figures are published by Medicare and the Social Security Administration.

The cliff effect

IRMAA uses brackets, not a smooth phase-in. Going even $1 over a threshold can move you into the next bracket and add the full surcharge for that tier, for both Part B and Part D, for the whole year. For a married couple both on Medicare, the surcharge applies to each person.

That's why one-time income spikes can matter, such as:

• large Roth conversions;
• selling a home or investments with big capital gains;
• a large traditional IRA or 401(k) withdrawal;
• a final year of salary or bonuses before retirement.

The two-year lookback

Because IRMAA uses income from two years earlier, the year you retire may be judged on income from your last full working year. A large drop in income since then doesn't automatically lower your premium.

Appealing with a life-changing event

You can ask the Social Security Administration to use more recent income if your income dropped because of certain life-changing events, including:

• work stoppage or reduction, including retirement;
• marriage, divorce, or annulment;
• death of a spouse;
• loss of income-producing property;
• loss or reduction of certain pension income;
• certain employer settlement payments.

There's a specific form for this request, and you'll need documentation of the event and your income. If you disagree with an IRMAA determination for other reasons, such as incorrect tax data, you can also request reconsideration.

Planning around IRMAA

People sometimes manage income in the years before and during Medicare to limit surcharges:

• Spreading Roth conversions across years rather than doing one large conversion.
• Timing capital gains across tax years.
• Qualified charitable distributions from IRAs, for those eligible, which aren't included in income.
• Coordinating withdrawals between taxable, traditional, and Roth accounts; see traditional vs. Roth.

IRMAA is one factor among many; avoiding it at the cost of higher lifetime taxes isn't necessarily a good trade. A tax professional can model the trade-offs.

The takeaway

IRMAA adds income-based surcharges to Part B and Part D premiums using income from two years earlier, with bracket cliffs that make small income differences matter. If your income has dropped because of retirement or another qualifying life change, you can ask Social Security to use more recent income.

Sources

• Medicare.gov: Avoid late enrollment penalties
• SSA: Medicare (publication)