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“We are all ignorant; just about different things.” -Mark Twain
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Like most phases of my life, my retirement has been a period of discovery and learning.
I have spent the better part of my adult life trying to familiarize and educate myself in all areas of finance. At age 72, I have already navigated Medicare at age 65, and I began claiming Social Security at age 70.
Both of these retirement milestones were difficult to navigate, but I felt I was adequately educated and prepared to address any problems surrounding the initiation of Medicare or Social Security.
However, I was flat-footed when I met IRMAA (not Irma! )
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Who or What is IRMAA?
IRMAA is the abbreviation of the title: Income Related Monthly Adjustment Amount.
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What Exactly is IRMAA?
The simplest explanation of IRMAA is that it is a surcharge applied to high-income Medicare recipients. To understand IRMAA one must have a basic understanding of Medicare and Medicare provisions.
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What is Medicare?
Medicare is a federal health insurance program for people reaching age 65 and over and those with certain health conditions. Medicare is available to all eligible Americans starting at age 65. Some exceptions and conditions make it possible for others to access Medicare before age 65, or without being an American citizen, but these exceptions aren’t covered here.
Let’s say that when Americans turn age 65 they can begin receiving Medicare. Most Americans pay a monthly premium for this federal health insurance coverage.
For most people, this premium will provide for Medicare Part B and Part D coverage. Medicare Part A normally has a 0$ premium for most people (because they paid Medicare taxes long enough while working – generally at least 10 years).
This chart by Boomer Benefits provides the different premium levels for Part B coverage in 2024:
As the chart above outlines certain amounts of IRMAA surcharges apply at certain income levels. The more income, a person or a couple has, the greater the IRMAA surcharges become.
It is extremely important to understand that these income levels are termed Income Cliffs. What this means is that if a person has one dollar of additional income and moves into the next bracket, then all income becomes subject to that Irma surcharge. For example, a couple with an income of less than $206,000 would pay a monthly Medicare premium of $174.70. If the same couple’s income goes up to $206,001 then their Medicare premiums move up to $244.60 per month, an increase of almost $70 per person per month.
It’s also important to understand that IRMAA surcharges are recalculated annually based on the tax return filed two years before the current tax year.
In the example used above, the couple’s premiums could go up or down in the following year, depending on the amount of income in the year used to evaluate the next year’s Medicare premiums.
Policyholders do not have to worry about determining IRMAA surcharge amounts as they are automatically added to the base Medicare premiums.
As we approached age 65 my wife and I were insured through a high deductible health plan that cost the two of us over 1K$ per month with a $6000 deductible.
Using the 2017 Part B premium rate of $134.00 per person, the monthly cost of $268.00 for my wife and I would be significantly less than 1K$ per month.
I was excited by the prospect of a significant premium reduction as my wife and I became Medicare eligible. After becoming Medicare eligible and applying for Medicare, I received the notice of acceptance into the Medicare program and the premium notice included with the letter. My wife and I would each be assessed a monthly premium of $134.00 for part B Medicare coverage. Our premium for part D coverage would be 0$. As stated above, this represented a significant decrease in premium payments as compared to our high deductible health plan (Our annual premiums were going to be reduced from over $12,000.00 per year to approximately $3,300.00 per year.)
My happiness was short-lived as about a month later I received a supplemental notice of an IRMAA surcharge that was being added to our base Medicare Part B and Part D premiums. Our monthly premium was increased from $134.00 per month to $504.20 per month. Our Part D premium went from 0$ to $76.20 per month. My annual premium payments went from $3,216.00 to $13,929.60.
HELLO IRMAA!
Even though my earned income was substantially less than when working full time, my total taxable income was still high due to the Roth IRA conversions that I was implementing.
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What Happened?
My strategy was to make significant annual Roth conversions from age 62, when I retired, to age 70, when I would begin receiving Social Security. What I didn’t know at the time was that IRMAA surcharges are based on total taxable income and not strictly on earned income. The Roth contributions are considered taxable income, even if you don’t access or use the funds. The process of the Roth conversion creates a taxable event. Every dollar converted into a Roth account is taxed as ordinary income. My taxable income was inflated by the Roth conversions, and as such was subject to IRMAA surcharges.
I quickly found out that in addition to the IRMAA surcharges, there is a two-year look-back period which meant that for tax year 2017 when I turned 65 and qualified for Medicare, the SSA was using my 2015 tax return to determine the amount of my IRMAA surcharges (if any.)
That meant that even if I discontinued converting funds into my Roth account (which I didn’t do), I would still be paying higher IRMAA surcharge fees for the 2016 and 2017 tax years in which I did Roth conversions.
My lack of total understanding was costing me thousands of dollars a year in additional IRMAA surcharges. In order to maximize the amount of money going into the Roth account I paid the taxes with after tax dollars and not from the Roth conversion dollars. This was a “double whammy,” as I was now paying more in taxes and drawing money from my after tax savings account.
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What Did I Decide?
Although it is counterintuitive, I decided to increase my Roth conversions to the top of my current tax bracket instead of decreasing Roth conversions. Using this technique, I was able to complete my Roth conversions ahead of schedule.
By staying within the existing tax bracket, I was also able to accelerate Roth conversions without paying higher IRMAA surcharges. I still had to pay the taxes due on the Roth conversions, just not any additional taxes due to being in a higher tax bracket.
The acceleration of Roth conversions allowed me to complete the conversion process in the calendar year 2021.
Tax returns for calendar year 2023 (which I haven’t yet filed) should reflect the last year in which the Irma surcharges should apply at the current levels. Taxes for the calendar year 2024 should reflect a lower level of income because of the completion of Roth conversions in 2021.
Both principal and earnings in my Roth account are now tax-free and will have no adverse effect on my tax liability in future years.
The lack of an increasing tax liability as the result of the Roth conversions should have a smoothing effect on my future taxes. The growing income inside my Roth account is not taxable and will not affect my future tax liability, therefore a smoother and more consistent tax bill in the future.
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Paying Taxes Now Versus Paying Taxes in the Future.
There are two divergent schools of thought about whether it makes sense to do Roth conversions and pay taxes now versus waiting for MRDs and the required withdrawal of taxable distributions.
The first school of thought reasons that future taxes are unknown, and it is better to pay a known amount of taxes than an unknown amount of taxes on a larger distribution in the future.
The second school of thought reasons that it’s unwise to pay more taxes than necessary at any point and that total taxes paid will be less if paid at the time of MRDs (even at a higher rate.) The second school feels the aggregate lifetime taxes using the distribution method will be less, even at a higher tax rate.
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Who’s Right?
Without the ability to see the future and future tax rates, it’s impossible to know now who will ultimately be correct. Each school of thought has a reasonable argument.
Since I will most likely be using Roth funds for legacy giving, I wanted to make sure that I was bequeathing tax-free funds to my heirs. I am also in the first school of thought and reason that I would rather pay a known amount of taxes now, instead of leaving my heirs some unknown tax bill in the future.
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Final Thoughts
Even though there was some real financial pain at the time of the Roth conversion, I am glad now that I did the Roth conversions.
Using the Roth conversion technique will allow me to pass an income tax-free inheritance to my wife and/or children at the time of my death.
Each person must evaluate their tax status and determine if doing Roth conversions and triggering IRMAA surcharges is the right technique for them. In hindsight, I’m glad that I did what I did at the time.
If you feel that IRMAA surcharges have been incorrectly levied, there are ways to appeal the SSA determination.
The first situation will apply if the Social Security Administration used incorrect information, if the information that was used is out of date, or if the tax return was amended after the determination of surcharges was made, a proper appeal may reverse the application of surcharges.
The second situation where surcharges may be reduced or eliminated involves what are deemed to be life-changing events. There are several qualifying events: marriage, divorce or marriage annulment, death of a spouse, reduction or cessation of work, loss or reduction of specific types of pensions, or loss of income from an income-generating property.
The form used to appeal an Income-Related Monthly Adjustment Amount (IRMAA) surcharge is Form SSA-44, also known as the Medicare Income-Related Monthly Adjustment Amount-Life-changing Event form.
Taxpayers who feel an IRMAA surcharge has been incorrectly levied have 60 days to appeal the decision of the SSA after receiving a written IRMAA surcharge determination.
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