IRMAA 2024 and Roth Conversions

IRMAA stands for Income-Related Monthly Adjustment Amount. What a mouthful-She is a modest penalty for a high-income retiree to swallow. What you do now affects your IRMAA Brackets two years from now!

Two aspects make IRMAAs particularly unpalatable: She is an income cliff penalty. One dollar over the limit could cost you 3.4 times more for the same Medicare services. And secondly, you need to do tax planning TWO YEARS in advance. Without even actually knowing where precisely the cliff will be!

What is IRMAA?

A nice way to put it: means-testing. That is another way of saying “taxing the rich.” The definition of IRMAA: a progressive, cliff tax on the rich.

IRMAA is a monthly surcharge to your Part B and Part D based on your income level two years ago.

OK, you assume 85% of your social security will be taxed. Now, do you need to worry if there will be surcharges on your Part B and Part D?

Here is how to avoid the IRMAA 2023 Cliff.

How is IRMAA Calculated? Where is the Cliff?

Thanks to the Affordable Care Act, IRMAA was frozen through 2019. However, in 2020, her cliff increased from $170k to $174k. In 2021, it grew to $176k. Now, starting in 2023, it is up again. Why is this important?

You pay surcharges on Medicare depending on your MAGI from two years ago. Income thresholds are set late in the current year, so they use your tax return from 2 years ago to determine your penalty.

What are IRMAA 2023 Brackets?

For 2023, the base tier is less than 97k or 194k, depending on your filing status. In addition, all individuals pay a surcharge of $170.10 for Part B, a 14% increase from the previous year. (you can easily google the brackets for visual representation)

Next is tier one, which starts at $1 above the base tier. That $1 over the cliff could cost you $816 (per person) in surcharges that year!

In tier 5, you pay an additional $4898 (per person) a year. Of course, that won’t break the bank if you have an income of over 750k a year, but you get nothing for the gift of paying more—just Medicare parts B and D.

And part D is separate. So how much does part D cost? Add $31.50, down 1.8% from the prior year.

Add IRMAA Part B and Part D for the total surcharge or tax.

Roth Conversion Consideration for IRMAA

Minimizing Taxes In Retirement is a sure way to increase your retirement income.

IRMAA, again, is a cliff penalty. One dollar over the limit, and you pay the penalty all year. The tax return from two years ago year is used. Tiers 1-4 are expected to increase by 2% year over year. So, we will figure out the cliff in December for this tax year. FOR NEXT YEAR.

What can you do if you are close to a cliff point?

How to Avoid the Cliff of IRMAA Brackets

QCDs

Qualified Charitable Contributions (QCDs) are probably the most powerful way to decrease income. You donate your Required Minimum Distribution (RMD) rather than recognize it as income. Since you never recognize it as income, it never hits your top line on the 1040, and thus, you pay less in taxes.

A couple of points about QCDs: First, make sure you tell your CPA that your RMD was a QCD. The 1099 reports a distribution; it doesn’t say where it goes. So, if your CPA doesn’t know that you gave the money away, you might get a surprise and still pay taxes.

Also, RMDs have to come out first. If you have already taken an RMD from your tax-deferred account, you can’t turn around and take a QCD or give that money to charity without recognizing the income from the RMD.

You can donate up to 100k per year per person so that a couple can earn 200k off their top line with QCDs.

HSAs

HSAs are always good! You can write off the (small) deduction, grow tax-free, and pay for qualified expenses without tax. Also, consider a one-time QHFD to decrease RMDs and fund your HSA.

You can use HSAs for the tax deduction and pay your Medicare premiums.

Tax-Deferred Retirement Accounts

If you are still working and can contribute to a retirement account, reducing your taxable income can help you avoid the cliff. For example, self-employed individuals may be able to contribute 58K or more based on their total income level. Another option, if your income is flexible, variable, and manageable, is to defer income into the following year to manage your tax bracket later in the year.

Other Ways to Avoid IRMAA

Other ways to avoid IRMAA:

Tax-Free income from a Reverse Mortgage
Tax-Free income from cash value Life Insurance
Tax-Free distributions from your Roth accounts
QLACs

Tax Planning Issues that Might CAUSE IRMAA

Roth Conversions

Partial Roth conversions are a great way to pay taxes now. Fill in your lower brackets and take advantage of the 10 and 12 percent brackets. But be careful you don’t generate so much income that it tips you into a higher tax bracket. Or, it makes you pay IRMAA all year! Luckily, the 174k limit is close to the IRMAA cliff and the top 22% tax bracket for joint filers.

Roth conversions cannot be recharacterized (reversed) or appealed, and you will be stuck paying surcharges for the whole year (two years from now) if you go over.

NUA

Net unrealized appreciation (NUA) is an excellent tool for changing ordinary income into long-term capital gains if you have employee stock in your retirement plan. However, NUAs are touchy and best done with a specialist’s help. They are also considered a one-time event and not appealable.

How Do you Know if you are Going off the cliff?

MAGI Calculation

Of course, Medicare can’t be simple. So, they use MAGI for the IRMAA cliff threshold.

MAGI includes your AGI (all income including required minimum distributions, taxable social security, and capital gains) plus tax-free (usually municipal bond) interest payments.

Appeal Especially for Specified Life Event

This is very important for your first two years after retirement! After that, if you no longer have W-2 income, file an appeal for IRMAA adjustment.

Other specific indications for an IRMAA appeal are marriage, divorce, death of a spouse, income reduction, loss of income such as rentals or royalties, or loss of a pension.

Please note that loss of rental income from property sales doesn’t count as a reason for an IRMAA appeal! In addition, higher health care costs and loss of alimony or child support don’t count either.

Medicare sends you a yearly notice about any changes in your IRMAA surcharge.

File form SSA-44 to appeal to SSA of any specific events that might get IRMAA waved. See here.

Conclusion: IRMAA

IRMAA is a tax on the rich. Services are the same, but surcharges are higher if your income increases. So, IRMAA is an important consideration.

Planning is essential because IRMAA affects surcharges (taxes) two years in advance. Also, IRMAA is a cliff penalty, meaning you will pay the surcharge all year if you are just $1 over the cliff. This can be an expensive mistake!

Consider controlling your MAGI two years before you enroll in Medicare to control your IRMAA.