Week 43 Day 6: Medicare IRMAA: The Surcharge You Do Not See Coming

You do a $150,000 Roth conversion, pushing your income from $180,000 to $330,000. Two years later, Medicare sees that $330,000 income. Your Part B premium jumps from $175/month to $560/month. For a couple: $385/month extra = $4,620/year extra, for two years. The Roth conversion may still be worth it (tax savings > IRMAA cost), but you must factor IRMAA into the calculation.

IRMAA brackets (2024, married filing jointly): MAGI <= $206,000: standard premium ($174.70/month Part B). $206,001-$258,000: +$69.90/month. $258,001-$322,000: +$174.70/month. $322,001-$386,000: +$279.50/month. $386,001-$750,000: +$384.30/month. Above $750,000: +$419.30/month. These apply PER PERSON. A married couple in the $322,001-$386,000 bracket pays $279.50 x 2 = $559 extra per month = $6,708/year. Key details: (a) IRMAA uses a 2-year lookback. Your 2024 premiums are based on your 2022 income (the most recent tax return available). (b) IRMAA applies to Part B (doctor visits) AND Part D (prescriptions). Part D IRMAA adds $12.90-$81.00/month per person on top of Part B surcharges. (c) You can appeal if you had a 'life-changing event' (retirement, divorce, death of spouse) that reduced your income below the threshold. File Form SSA-44. (d) IRMAA thresholds adjust for inflation. Planning around IRMAA: (1) If your income is near a threshold, consider deferring Roth conversions or capital gains to keep MAGI below the bracket. The 'cost' of crossing $206,000 is approximately $1,677/year (for a couple). (2) If you are doing a large Roth conversion, consider whether the IRMAA cost changes the breakeven analysis. Usually, the Roth conversion still wins if it saves more in lifetime taxes than it costs in 2 years of IRMAA. (3) Time conversions to bunch income in a single year (crossing the bracket once rather than hovering near it for multiple years).

IRMAA (Medicare Modernization Act of 2003, codified in 42 USC 1395r(i)) is a means-tested premium adjustment that effectively creates a marginal tax on income above the thresholds. The economic structure is that of a 'cliff' rather than a graduated system: exceeding the threshold by $1 triggers the full surcharge for the bracket. This creates sharp incentive effects near the thresholds. The total IRMAA surcharge for a couple at the highest bracket is approximately $12,000-$14,000/year (Part B + Part D combined), which persists for the year of the income spike plus the 2-year lookback lag. The interaction between IRMAA, Social Security taxation, Net Investment Income Tax (3.8%), and state taxes creates complex marginal rate schedules for high-income retirees. For example, a married couple with $200,000 in income considering a $60,000 Roth conversion to $260,000 total faces: (a) 24% federal marginal rate on the conversion, (b) approximately 5% state rate, (c) $1,677/year IRMAA surcharge for 2 years (amortized: approximately $279/year per $10K of conversion if it trips the bracket), and (d) potential 3.8% NIIT if investment income exceeds $250,000. The total marginal rate can exceed 35%. However, if the alternative is withdrawing the same money from the traditional IRA in a future year at 32% federal + 5% state + 3.8% NIIT = 40.8%, the conversion at an effective rate of 35% is still advantageous. The planning decision requires projecting future income, tax rates, and IRMAA exposure over the full remainder of the retirement horizon -- a multi-period optimization problem that tax planning software (Boldin, Holistiplan, I-ORP) handles effectively.