As you plan for retirement, healthcare is often one of the most significant expenses to consider. For individuals aged 65 and older, Medicare provides essential coverage for hospital stays, medical care, and prescription drugs. While most Medicare beneficiaries pay a standard premium, higher-income individuals may face an additional charge known as the Income-Related Monthly Adjustment Amount (IRMAA). Understanding how IRMAA works and planning ahead can help you manage these expenses and avoid unexpected costs.
What is Medicare?
Medicare is a federal health insurance program primarily designed for individuals aged 65 and older. The program is divided into several parts, each covering different aspects of healthcare:
- Part A (Hospital Insurance): Covers inpatient hospital stays, care in a skilled nursing facility, hospice care, and some home healthcare.
- Part B (Medical Insurance): Covers outpatient care, doctor visits, preventive services, durable medical equipment, and some home healthcare services.
- Part C (Medicare Advantage): An alternative to Original Medicare (Parts A and B) that is offered by private insurance companies approved by Medicare. Medicare Advantage plans often include additional benefits for vision, dental, and hearing, and may also be bundled with Part D prescription drug coverage.
- Part D (Prescription Drug Coverage): Provides coverage for prescription medications and is available through private insurers approved by Medicare. Beneficiaries must enroll in a Part D plan separately unless it’s bundled within a Medicare Advantage plan.
While Medicare significantly reduces healthcare costs, it does not cover all expenses. Individuals are still responsible for premiums, deductibles, co-pays, and other out-of-pocket costs. Additionally, higher-income individuals may be subject to IRMAA, which increases premiums for Part B and Part D.
What is IRMAA?
IRMAA, is a surcharge applied to Medicare Part B and Part D premiums for individuals whose income exceeds certain thresholds. Each year, the Social Security Administration (SSA) reviews your modified adjusted gross income (MAGI) from two years prior to determine whether you are subject to IRMAA. For example, your 2025 Medicare premium will be based on your 2023 income. If your MAGI exceeds the income thresholds, you will be required to pay an additional premium on top of the standard Medicare Part B and Part D premiums.
The following chart outlines the 2025 IRMAA income thresholds and costs:
Single | Married Filing Jointly | Part B Income-Related Monthly Adjustment Amount | Part D Income-Related Monthly Adjustment Amount |
Less than or equal to $106,000 | Less than or equal to $212,000 | $0.00 | $0.00 |
Greater than $106,000 and less than or equal to $133,000 | Greater than $212,000 and less than or equal to $266,000 | $74.00 | $13.70 |
Greater than $133,000 and less than or equal to $167,000 | Greater than $266,000 and less than or equal to $334,000 | $185.00 | $35.30 |
Greater than $167,000 and less than or equal to $200,000 | Greater than $334,000 and less than or equal to $400,000 | $259.00 | $57.00 |
Greater than $200,000 and less than $500,000 | Greater than $400,000 and less than $750,000 | $406.90 | $78.60 |
Greater than or equal to $500,000 | Greater than or equal to $750,000 | $443.90 | $85.80 |
How to Appeal IRMAA
If your income has decreased significantly due to a life-changing event (e.g., retirement, divorce, or death of a spouse), you may be able to appeal the IRMAA surcharge. The SSA provides Form SSA-44 to request a reduction in IRMAA due to life-changing circumstances. Filing an appeal can potentially lower your Medicare premiums and help manage your healthcare costs more effectively.
Planning to Minimize Medicare Surcharges
For higher-income individuals, IRMAA surcharges can add to healthcare costs in retirement. However, there are several strategies you can use to minimize the impact:
- Manage Your Withdrawals: Required Minimum Distributions (RMDs), which begin at age 73, can significantly increase your taxable income. To reduce their impact, consider taking smaller distributions in the early years of retirement, before RMDs become mandatory. This can help manage your income and reduce the likelihood of triggering IRMAA surcharges.
- Roth IRA conversions: Converting assets from a traditional IRA or 401(k) into a Roth IRA before enrolling in Medicare can help reduce your taxable income in retirement. Since withdrawals from a Roth IRA are not counted when calculating your MAGI for Medicare, this strategy could help you avoid IRMAA surcharges. However, it’s important to carefully time the conversion, as the income from the conversion itself could temporarily push your MAGI above the IRMAA threshold.
- Watch for One-Time Income Events: Large capital gains from the sale of real estate or highly appreciated stocks can elevate your income temporarily, triggering IRMAA surcharges. If possible, spread these sales over multiple tax years, or utilize tax strategies like charitable donations or tax-loss harvesting to offset gains and minimize their impact on your MAGI.
- Charitable Contributions: For individuals who are subject to Required Minimum Distributions (RMDs), Qualified Charitable Distributions (QCDs) can help reduce taxable income. QCDs allow individuals aged 70½ or older to donate up to $105,000 annually from their IRA directly to a qualified charity, without counting it as taxable income. This can reduce the taxable portion of your RMDs and help you stay under the IRMAA thresholds.
Managing healthcare costs in retirement requires careful and strategic planning to help support your financial security. Proactively addressing how your income impacts Medicare premiums, including potential IRMAA surcharges, can provide opportunities to better manage your expenses. Your Aldrich Wealth advisor can collaborate with you to create a comprehensive plan that incorporates healthcare costs into your broader retirement strategy, with the goal of aligning your financial priorities.
