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Mind on Money: Be sure to plan for potential Medicare 'surcharge'
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Mind on Money: Be sure to plan for potential Medicare 'surcharge'

In my practice, clients have been dealing with an expected planning issue that is occurring with more and more frequency. The issue is Medicare IRMAA, and unfortunately not being aware of, and if possible, attending to this matter can result in an expensive surprise.

Medicare Income Related Monthly Adjustment Amount, or IRMAA, is a premium increase for individuals with income over certain thresholds. Most retirees I work with view this adjustment as a Medicare “surcharge,” and as one might imagine, it is extremely unpopular and causes considerable angst among those who incur this extra cost.

The IRMAA premium increase applies to both Medicare Part B premiums and Medicare Part D premiums. It also applies to some portions of Medicare Advantage plans, which are becoming much more popular in our region.

The thought process behind IRMAA is that higher income retirees can afford to pay more for health insurance premiums. The law went into effect in 2007, and was expanded to include Medicare Part D by the Affordable Care Act.

The income thresholds for the IRMAA surcharge are based on a calculation called Modified Adjusted Gross Income, or MAGI. To make matters complicated, MAGI is Adjusted Gross Income or AGI, plus some items which are excluded from AGI added back in. We don’t have space in the column to go over this whole process, but an important example is that tax exempt bond interest is added back to AGI to calculate MAGI.

The incident that prompted me to remind readers about this issue involved a client whose story provides a good overview of why IRMAA is becoming more and more of an issue.

The client is a widow and retired Indiana teacher. Her income is derived from her Indiana state teacher’s pension and Social Security. She is comfortable, but views herself as middle income, and like many educators, makes frugal financial decisions.

Because of her frugality, she has not needed to take funds from her IRAs, and these accounts have continued to grow since she retired a few years ago. Next year, however, she will be required to take distributions (RMDs) from her IRAs due to her turning 72. The RMDs are the problem.

Because the client files a single tax return, the first IRMAA income threshold is only $88,000. With her pension, Social Security and RMD she will be well over this level, and if no planning is put in place, she will experience a total premium surcharge of $72 a month. Now, I know $72 a month isn’t going to put anyone in the poor house, but it will impact her budget, and it quite frankly is just irritating. What really concerns me, however, is the first income threshold for IRMAA is fairly narrow, and if her MAGI were to exceed $111,000 the surcharge is increased to $181 per month, which could impact her spending decisions.

On the positive side of the ledger, IRMAA is charged in arrears, and so if she goes over the income thresholds in 2022 the premium increase won’t be levied until 2025. This gives us some time to plan, perhaps using some Roth IRA conversions to control her RMD, or maybe even some charitable giving to reduce her taxable income.

In addition, if the IRMAA income threshold was exceed due to one-off non-repeatable income events, or if income is expected to be reduced due to events such as the death of a spouse, divorce or another loss of income, the Social Security Administration, which administers the IRMAA process, does offer an appeals process which is fairly straight forward and something a good planning firm or accountant should be able to assist with.

I think the first key to this issue is simply awareness. There’s plenty of information available online, and if IRMAA is something that may impact you in the future, the sooner you raise the topic with your advisor or begin planning for it yourself, the more options you will have to help manage the math associated with this unpopular rule.

This is a hypothetical situation based on real life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.

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