How IRMAA Increases Medicare Premiums: Examples and Consequences

This is an educational and informational guide — it is NOT legal, tax, medical, or financial advice. Data may be outdated — always verify on the official site and with a licensed professional.

Introduction / Who is it for

If you are a Medicare beneficiary and are concerned that your premiums may increase due to IRMAA, this guide is for you. In particular, if you are planning one-time Roth conversions or are about to realize large capital gains, it is important to understand how these decisions can impact your premiums. In this article, we will explain the mechanism of IRMAA and provide specific examples to help you avoid unpleasant surprises.

What is IRMAA?

IRMAA, or Income Related Monthly Adjustment Amount, is an additional charge that higher-income individuals must pay when using Medicare. The amount of this charge is based on your income reported on your tax return from two years ago. If your income exceeds certain thresholds, your Medicare premiums can increase significantly, leading to substantial costs.

How does IRMAA work?

IRMAA is calculated based on your adjusted gross income (AGI). The income thresholds that determine whether you must pay additional premiums are set annually. For example, in 2023, single individuals with an income above approximately $97,000 may be required to pay higher premiums. It is worth noting that IRMAA is calculated based on income from two years prior, meaning your current financial decisions can affect your premiums in the future.

Example: Roth Conversion

Suppose you plan a one-time Roth conversion of $100,000. If your income before the conversion was $80,000, after the conversion your AGI will rise to $180,000. This may cause you to exceed the IRMAA threshold, resulting in additional costs. For example, if your new income threshold qualifies you for a higher Medicare premium, you may pay an additional $500 per year, which over 10 years amounts to $5,000.

Example: Large Capital Gains

Similarly, if you sell investments and realize large capital gains, your AGI may increase. For instance, if you sold a property with a gain of $50,000, and your income before the sale was $70,000, your AGI will rise to $120,000. This can also result in higher Medicare premiums. In this case, you might see an increase in premiums of $300 per year, which over 10 years totals $3,000.

Common Mistakes

• Unawareness of IRMAA thresholds and their impact on premiums.
• Planning large transactions without considering their effect on AGI.
• Failing to consult a financial advisor before making a Roth conversion.
• Not updating income information with Medicare.
• Not anticipating the consequences of selling investments.

What’s Next

1. Analyze your current income and potential future changes.
2. Consult with a licensed financial advisor to discuss your plans.
3. Monitor IRMAA thresholds and update your information with Medicare.
4. Consider a strategy of spreading large transactions over several years to avoid exceeding IRMAA thresholds.

Sources

For more information on IRMAA and Medicare, visit the official sites:

• SSA — Social Security Administration
• Medicare.gov