Managing Medicare Costs: Strategies to Tackle IRMAA

Senior man on computer

In the finance arena, Medicare is often (or even primarily) spoken about through the lens of tiers, costs, and coverages. All sorts of questions naturally arise when thinking about Medicare: Will I automatically be enrolled at 65? Does Medicare cover dental? What’s the difference between Medigap and Medicare Advantage? Will Medicare cover Long Term Care?

And yet, too often we overlook the very real human fears, uncertainties, and anxieties that can accompany not knowing how to navigate a seemingly maze-like system. There’s a poignant vulnerability that can accompany aging, and this vulnerability can be amplified by not having a true understanding of what costs and coverages actually mean.

That’s a big reason why navigating the complexities of healthcare costs during retirement can feel like such a daunting task, especially when it comes to Medicare. Broadly speaking, while Medicare provides essential healthcare coverage for retirees, it’s critical to be fully aware of potential additional costs. 

Talking about the nuts and bolts doesn’t mean overlooking the human side, rather, it’s always our hope that clear explanations and straightforward knowledge genuinely helps bring about a better sense of comfort and security.

In this vein, one of the potential and more significant additional costs to know regarding Medicare is the Income-Related Monthly Adjustment Amount (IRMAA). Our comprehensive guide below will carefully explore what IRMAA is, how it can affect your Medicare premiums, and provide strategies to mitigate its impact.

Focus on what matters most.

Speak with a Financial Advisor today.

Understanding IRMAA

IRMAA stands for Income-Related Monthly Adjustment Amount. It is a term used in the United States in the context of Medicare, the federal health insurance program designed primarily for individuals aged 65 and older, as well as for younger individuals with disabilities. IRMAA refers to an additional amount that higher-income Medicare beneficiaries may have to pay for their Medicare Part B and Part D premiums. 

Part B of Medicare covers outpatient services like doctor visits, preventive care, and durable medical equipment. Most people pay a standard premium for Part B. However, if your income exceeds a certain threshold, you may be subject to IRMAA, which means you’ll pay an extra amount on top of the standard premium.

Part D of Medicare covers prescription drug coverage. Like with Part B, if your income is above a certain threshold, you may have to pay an extra amount for your Part D premiums in addition to the standard premium.

IRMAA Income Thresholds

The income thresholds for IRMAA are determined by your modified adjusted gross income (MAGI) from your tax return from two years ago. The Social Security Administration (SSA) sends you a notice if you need to pay IRMAA based on your income.

IRMAA is meant to help fund the Medicare program by requiring higher-income individuals to contribute more towards their premiums. The IRMAA amounts are typically updated annually, and they are in addition to the standard premiums you pay for Medicare Part B and Part D.

It’s relevant to note that IRMAA only affects a relatively small percentage of Medicare beneficiaries who have higher incomes. Most people on Medicare do not pay IRMAA and only pay the standard premiums for Part B and Part D.

The exact amount of IRMAA you might be required to pay depends on your MAGI as reported on your federal tax return two years ago. You’ll be subject to higher Medicare premiums if your MAGI exceeds specific thresholds. The income thresholds and IRMAA amounts can change based on legislation, making it crucial to stay informed about potential adjustments that can affect your Medicare costs.

Strategies to Reduce IRMAA Impact

If you find yourself subject to IRMAA, there are several financial planning strategies you can consider to reduce its impact on your retirement budget:

1. Tax Planning and Income Management 

Strategically managing your income by deferring or reducing income in the years used to determine IRMAA can help you stay below the threshold. This might involve timing withdrawals from taxable accounts or using tax-efficient investment strategies. If possible, consider planning ahead and make sure you know what other tax planning opportunities are available for people nearing retirement.

2. Roth IRA Conversions 

Converting traditional IRA funds into a Roth IRA might increase your income for a specific year, but it won’t impact your MAGI used to determine IRMAA. This can be an effective strategy to balance your tax planning and reduce future IRMAA costs.

3. Retirement Account Withdrawal Strategies 

Plan how to strategically withdraw funds from your retirement savings accounts to keep your income below the IRMAA thresholds. This may involve a combination of taxable, tax-deferred, and tax-free withdrawals to optimize your income profile.

4. Charitable Giving 

Consider making direct charitable contributions from your IRA through a Qualified Charitable Distribution (QCD). This doesn’t count towards your taxable income and could help reduce your MAGI, lowering your IRMAA.

5. Health Savings Account (HSA) 

If you are still working and have a health savings account (HSA), contributions to your HSA can reduce your taxable income and potentially your MAGI. This strategic use of HSAs can provide both healthcare savings and IRMAA relief.

These strategies are not one-size-fits-all solutions; they demand careful consideration and planning based on your unique financial circumstances, healthcare needs, and retirement goals. It’s essential to consult with a qualified tax advisor, financial planner, or Medicare counselor before making any decisions, as they can provide personalized guidance to help you navigate the complex landscape of IRMAA and Medicare costs.

Navigating IRMAA In Your Retirement Planning

As you plan for retirement and consider your healthcare needs, you must know potential cost factors like IRMAA. While IRMAA may increase your Medicare premiums, proactive financial planning and strategic decision-making can help mitigate its impact on your retirement budget. 

By understanding the income thresholds, staying informed about potential legislative changes, and implementing the right strategies, you can optimize your retirement finances and ensure that healthcare costs remain manageable throughout your golden years. 

Above all, being knowledgeable can help reduce potential anxieties and vulnerability as you approach a new life chapter. If you’re curious how Abacus might help to humanize your unique retirement planning experience, reach out today and schedule a free call with an Abacus advisor.


What’s your financial archetype?

Simplify your life with a plan

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.