When it comes to planning for your retirement as a CPA or helping clients stay in a lower tax bracket, Medicare premiums are an essential factor to consider. The amount you pay in Medicare premiums directly correlates to your income in the form of Income-Related Monthly Adjusted Amount (not so lovingly known as IRMAA).
So what is IRMAA, exactly? Simply put, IRMAA is a provision of the Medicare program that applies to individuals with higher incomes. Specifically, if you have a Modified Adjusted Gross Income (MAGI) above a certain threshold, you may be subject to an additional monthly charge for your Medicare Part B and Part D premiums.
The threshold for IRMAA depends on your filing status and your income. For example, in 2023, if you earn over $97,000 as a single filer or over $194,000 as a joint filer, then IRMAA applies to you.
IRMAA TABLE
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Full Part B Coverage
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Beneficiaries who file individual tax returns with modified adjusted gross income:
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Beneficiaries who file joint tax returns with modified adjusted gross income:
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Income-Related Monthly Adjustment Amount
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Total Monthly Premium Amount
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Less than or equal to $97,000
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Less than or equal to $194,000
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$0.00
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$164.90
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Greater than $97,000 and less than or equal to $123,000
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Greater than $194,000 and less than or equal to $246,000
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$65.90
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$230.80
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Greater than $123,000 and less than or equal to $153,000
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Greater than $246,000 and less than or equal to $306,000
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$164.80
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$329.70
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Greater than $153,000 and less than or equal to $183,000
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Greater than $306,000 and less than or equal to $366,000
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$263.70
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$428.60
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Greater than $183,000 and less than $500,000
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Greater than $366,000 and less than $750,000
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$362.60
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$527.50
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Greater than or equal to $500,000
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Greater than or equal to $750,000
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$395.60
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$560.50
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So, if you are in the highest IRMAA bracket, you’ll be paying more than three times the base price!
It’s important to note that these thresholds and additional charges are subject to change over time, so it’s necessary to stay up-to-date on the latest information from the Social Security Administration and Medicare program.
If you’re subject to IRMAA, the additional charges for your Medicare Part B premiums will be deducted from your Social Security payments. This means that if you’re already living on a fixed income, IRMAA could reduce the amount of money you have available for other expenses. If you aren’t already receiving Social Security payments, you will be billed quarterly until you enroll for Social Security benefits.
Social Security Deductions
To make matters worse, the income used to determine your IRMAA is based on your tax return from two years prior. If your income has decreased since that time, you may still be subject to IRMAA. However, the Social Security Administration may hear you out and decide differently on your IRMAA.
In any case, there are concrete steps you can take to minimize the impact of IRMAA on your retirement planning.
Utilize Roth Accounts
Roth accounts allow for tax-free growth and withdrawals in retirement. They also have other benefits that make them particularly useful regarding retirement planning.
1. There are no Required Minimum Distributions.
As of 2024, this is also true for Roth 401(K)s! By not having a Required Minimum Distribution, you can let your Roth account grow and grow. In fact, you can even leave it behind as a tax-free inheritance.
2. With a Roth, you know exactly how much money you have.
There’s no need to worry about present or future tax rates, allowing you to create an exact budget.
3. You can withdraw contributions at any time.
You can only start removing earnings tax-free after reaching age 59 ½. Plus, the Roth account must be at least five years old. So, if you open a Roth account at age 57, you won’t be able to withdraw earnings until your 62nd birthday. Contributions, on the other hand, can be removed at any time.
Income Limitations
Roth contributions are only available if your income falls below a certain threshold. If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $153,000 for tax year 2023. If you’re married and filing jointly, your MAGI must be under $228,000 for tax year 2023.
Backdoor Roth Conversion
However, if you’re a high-income earner, you can contribute through a Backdoor Roth Conversion strategy. You can do this by putting post-tax funds into an IRA and converting them into Roth. You’ll owe taxes on any gains, which may affect your tax status. However, keeping any funds in a traditional IRA after a backdoor conversion isn’t recommended because you will be subject to the Pro Rata Rule, so be sure to do a complete conversion. Then, fill out Tax Form 8606 to show that the funds you converted were indeed post-tax, and you won’t owe any conversion taxes.
Roth conversions
Any funds withdrawn from your Roth account aren’t counted as taxable income, so they won’t push you up a tax or IRMAA bracket. Therefore, it may make sense to execute a series of Roth conversions before retiring to have as much tax-free income as possible in retirement.
There are some important considerations, however. Any Roth conversions in retirement are counted as taxable income, so it can push you up an IRMAA bracket. Also, you can’t touch any funds from a Roth conversion for five full years. Doing so risks a 10% penalty and taxes on withdrawn portions.
Keep taxable income low
A correct order of withdrawal strategy will minimize the amount of taxable income you receive. For example:
- Pull from non-qualified accounts (those with capital gains taxes)
- Pull from tax-deferred 401(K)s and IRAs
- Pull from Roth or other tax-free accounts
Try to strike a balance between pulling out enough to live but not too much that you go up a bracket while living off of your taxable accounts. Let your Roth grow as long as possible – there are no Required Minimum Distributions, so if you can save that for last, you’ll have a sizeable tax-free nest egg for your twilight years.
Use RMDs as Qualified Charitable Distributions
You can donate up to $100,000 annually from your IRA account to a qualified charity. This donation can cover all or part of your RMD. This means you can donate just the right amount to keep your taxable income low enough to avoid IRMAA.
Another option is to consider alternatives to Medicare Part B and Part D, such as Medicare Advantage plans or prescription drug plans that may be less expensive.
In Conclusion
By partnering with a financial advisor and staying up-to-date on the latest changes and regulations related to IRMAA, you can provide valuable advice and guidance to your clients to help them make informed decisions about their retirement planning, plus ensure that your own retirement plan takes into account all possible factors.
