Medicare isn’t always as free as you think. In this episode, we'll explain IRMAA—the income-based surcharge that can raise your premiums and shrink your Social Security check. Learn what triggers it, who’s most at risk, and a few smart planning moves to help keep more money in your pocket.
 
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Disclaimer: PFG Private Wealth Management, LLC is an SEC Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.
 
Episode Transcript
Think Medicare is free once you hit 65. Well, not quite. If your income's too high, there's a hidden surcharge that can quietly shrink your social security check by thousands a year. It's called IRMAA, and we're going to talk about that today here on Retirement Planning Redefined. Hey everybody, welcome into the podcast. Thanks for hanging out with John and Nick and myself as we talk, investing, finance and retirement. And guys, we're going to talk about Aunt Irmaa this week instead of Uncle Sam. Seems like there's these two relatives that got their hand in your pocket. I've always been taught to call IRMAA, the Aunt Irmaa that comes by and pinches your cheeks really hard instead of the cool one that gives you candy when you're a kid. So we're going to talk about IRMAA, and what it is and why it exists and all that good stuff this week. How you doing, John?
 
John:
I'm doing all right. How are you?
 
Speaker 1:
Hanging in there. Doing pretty good. Looking forward to chatting with you guys about this, learning a little bit about what is IRMAA and what does it do to us. And Nick, my friend, how are you?
 
Nick:
Pretty good. Staying busy in the red zone for wedding planning and all that kind of stuff. And we are in football season so-
 
Speaker 1:
There you go.
 
Nick:
... I've had to adjust my sleep schedule a little bit.
 
Speaker 1:
Exactly. So between planning and football, you're burning the candle at both ends.
 
John:
Monday is a little slower for Nick-
 
Speaker 1:
Little slower. Gotcha.
 
John:
... the last three weeks, especially with the Bills, how good they look.
 
Speaker 1:
Yeah, for sure. Yeah, my Lions look pretty good on Monday night this pastime.
 
Nick:
You sure do.
 
Speaker 1:
Yeah. Well, let's get into the conversation a little bit, guys. What is IRMAA and why does it exist? Whoever wants to start?
 
Nick:
All right, I'll go ahead and start. So essentially IRMAA is an acronym that refers to essentially an income related monthly adjustment for the cost of Medicare part B and D. So essentially back in '03, as the plans both Medicare and social security continually get reevaluated due to the pressure that they're under from the standpoint of expenses and flows in, they decided to put this into place where to kind of tier it where people that were earning income currently, so if you're single earning income greater than 106,000 or married filing jointly earning income greater than 212,000, the premiums for part B start to go up. So this is something that we've dealt with quite a bit with clients.
 
It's based upon modified adjusted gross income, which nobody knows what that means, but it is a term that everybody's heard or most people have heard. As a reminder part A, there is no premium charge as long as you worked you or your spouse or former spouse work 40 quarters. This applies to the part B and part D. And it's not a penalty from the perspective of how they look at it. It's not like you're doing something wrong. It's more along the lines of almost just like tax brackets where lower income, lower bracket, the same thing on this, lower income, lower premium.
 
Speaker 1:
Gotcha. Yeah. And that interesting piece that catches people is that it's a two year ago look back. So they're going to adjust it based on what you made two years back. So as you move into retirement, that could feel a little... You're like, wait a minute, why is this going up? But they're looking at maybe the last couple of years.
 
Nick:
Yeah, for sure, and there is a form that people can fill out. We oftentimes help people fill them out. I think we've done it twice in the last two weeks where you can basically contest it. So especially if you've just retired and you were previously high income and they look back those two years, you can let them know that, "Hey, moving forward, this is going to be my income, it's going to be reduced."
 
Speaker 1:
Gotcha.
 
Nick:
Explain why, and oftentimes you can get it amended moving forward.
 
Speaker 1:
Okay. And John, so hit us with some numbers here. So who's at risk paying the most? Obviously, there's some data in here and Nick explained that the more you make, but what's some of those guidelines?
 
John:
Yeah. So just looking at the base levels here, single father who's modified adjusted gross income is over 106,000. Then they're going to be at risk of basically, we know it's not a penalty, but basically paying more for part B.
 
Speaker 1:
Right.
 
John:
And if you're married filing jointly, it's over 212,000. And the more you make, there's different phases of it where you might pay $74 and then it'll go up a little bit more as the modified adjusted gross income is up.
 
Speaker 1:
Yeah, we'll talk about that here in just a second. So obviously it's not hard to get to 212 for a lot of couples, so this could impact a lot of people obviously.
 
John:
Yeah, so no, we do see this coming up quite a bit lately, and where we see it is when someone hits RMD age, where if they've been sending so much money into pre-tax buckets and all of a sudden it's, hey, you have a 50, $60,000 RMD, you have two social securities, and with the cost of living adjustments the last five or six years, some of these social security payments are getting pretty large compared to what they were about six or seven years ago, with the run-up in the market, these are getting really large. So that's where we start to really see it come into play is high income earners have been saving a lot into their pre-tax accounts, and all of a sudden, it's time to pull out of those. You can be forced into this.
 
Speaker 1:
Gotcha. Yeah.
 
Nick:
A couple other areas I would say too is if there's a situation where for whatever reason there's one spouse and a married filing jointly situation where one spouse is still working, other spouse is retired, and we've seen people, especially if they do it before they come and speak with us where they look and see like, "Oh, I should only pay the one 70 a month for part B," and not realizing that there is this test and the retired spouse goes on Medicare instead of going on their spouse that's still working's plan, health plan and not realizing that the income is going to take them over the threshold and they're going to pay more on part B than they would have if they were just a part of the plan at the work. And then...
 
Speaker 1:
It's kind of sizable too, right? I mean, you're talking-
 
Nick:
Oh, yeah.
 
Speaker 1:
... it could be some big chunks of money here.
 
Nick:
Yeah, for sure. I mean, especially if you get to... So single 167 to 200K is almost an additional $300 a month for part B and 57 on part D. So that's another $4,000 a year on an expense aside. Married filing jointly at that same amount, 334 to 400, and we'll see issues like this too, where maybe there's a small business owner or self-employed or maybe them in one or two employees and their premiums, they had been running through the business and they attempted to switch over to Medicare at 65 and/or fed some issues with people almost being, not necessarily forced, but almost forced that way with their policies when they are over the age of 65, if it's a small or a one person individual plan and not realizing that, again, that their premiums are going to be substantially higher than they expected. So it definitely happens more than people realize.
 
Speaker 1:
Yeah. Well, John, you talked about what triggers it, a lot of the times being RMDs, people moving into that. What are some other things that might trigger IRMAA?
 
John:
Yeah. So what we've seen in the past where people run into trouble, and this is where if you listen to our podcast, we always talk about being able to prepare for unexpected events and having a balance. But let's say someone has most of their money in pre-tax and their dream home comes up and they really want to buy it and they got to jump through some hoops to potentially get it. They can afford it, but the majority of the money is in the pre-tax account and they got to pull it out, maybe a down payment or whatever it might be that could put your income up more than you expected. The unforeseen medical expenses where all of a sudden things are going along great, and emergency happens, you need to pull 20, 30 grand out to cover some medical expenses. That happened. I mean, oddly enough, I just had someone I think have to pull out almost 40, 50 grand for dental expenses unexpectedly, which as everyone knows typically not covered by any type of insurance, even if you have dental insurance, it's not covering that-
 
Speaker 1:
Right. Right.
 
John:
... what you need that for. So things come up, family emergencies. Another scenario I've seen in the past, just trying to give people some examples of things to consider before they make any moves that are permanent. Home sales, let's say if you had a second property, you've been depreciating it and all of a sudden it's like, "Yeah, it's time to sell this," or you're forced to sell it. There could be some pretty large capital gains that would actually put you above these thresholds as well.
 
Speaker 1:
Yeah. So basically it's income generating items, right? That's what's going to trigger it. So I guess the opposite being said, Nick, is that things like Roth IRA withdrawals for example, wouldn't trigger it, right? Because it's tax, it's not against your income.
 
Nick:
Yeah, Roth IRA withdrawals, HSA distributions, income that you might receive from a reverse mortgage and then a life insurance policy loan are all things that could be helpful. One thing I'll say additionally is in line with this and with some of the reasons that will cause this. We've had clients quite a bunch recently where they've got substantial non-qualified money, so non-retirement money and they're looking to get a new home and/or they're in the process of selling their current home, looking at the new home, trying to avoid costs associated with mortgage, et cetera. And instead of selling the holdings, which oftentimes, especially over the last 3, 4, 5 years have substantial gains built in that then have this cascading effect that would impact this and that sort of thing where we've been using essentially what's called a pledge asset line or a line of credit on non-retirement accounts.
 
So they can take a loan bridge that period of time, get the access to the funds, have to pay interest, but it's non-taxable transaction, and then use that money, do it, wait for the sale of the original property and then just pay back the loan. And that's a perfect example of where with IRMAA where that could be an unforeseen consequence of somebody just maybe doing a traditional way, "Hey, I've got this money here, I'm just going to cash out. Yeah, I'll have to pay taxes." But that's in their case or their thought process, they might prefer that versus having to get a mortgage or paying a bunch of extra fees and expenses associated with the mortgage or having to go through the process of underwriting, et cetera, and this additional impact on IRMAA for a year.
 
Speaker 1:
Gotcha.
 
Nick:
So yeah, it's just one of those things where it's almost like a multiplier effect that falls down and just kind of a snowball going downhill.
 
Speaker 1:
Well, let's talk a few strategies guys as we wrap up this week on ways to maybe avoid or at least lower IRMAA, again, if it's income related. Obviously, John, you talked about the RMDs. Obviously, conversion could be one way to do that, a Roth conversion. Yeah?
 
John:
Yeah. And this goes back to the stressing, making sure that you have a plan in place to adjust to any situation. So what we find is let's say someone retires 62, 64 when we're doing the plan, we can estimate their taxes, what they're going to be now and in the future. And if we see a period where it's like five or six, seven years before RMD age is like, "Hey, we could start doing some Roth conversions here," and what we'll do is we'll estimate how much of a conversion to do to make sure they don't jump up into a higher tax bracket. So what that will do, ultimately, it'll give them a little bit more tax-free income so we don't trigger the IRMAA and then also it will lower their RMD. So IRMAA doesn't get triggered by that. So again, that's a great way to try to avoid any future IRMAA surprises basically.
 
Speaker 1:
Yeah. Yeah. And Nick, what's some other ones besides that? I mean, obviously, that's going to be probably a bigger one for many people, but I mean like tax loss harvesting, things of that nature.
 
Nick:
Yeah. So if you have non-qualified assets and you're working with somebody that manages your account and/or you're handling it yourself, you want to make sure that you're taking advantage of tax loss harvesting in that account. Inevitably, any portfolio is going to have some winners and losers at the end of the year. If you can sell off some of the losers to offset previously recognized gains and/or get yourself some losses on paper to use to offset future gains, that's something that you can absolutely do. The qualified charitable deduction, being able to send money directly from your IRA qualified charitable distribution to reduce your taxable portion of the RMD that you have to take can be a great tool as well.
 
So you just want to... We always talk about with clients that it's really essential, should we have the time, you really want to have the three buckets of assets to generate income and retirement, those being pre-tax Roth and unqualified assets. And this is kind of a perfect example. I had a conversation with a client earlier, them just wrapping their mind around, hey, a distribution from a non-retirement account doesn't necessarily mean that it's taxable. And oftentimes those are some of the most flexible accounts and could provide quite a bit of a lot of different options on how to take income and reduce some of these hidden expenses like IRMAA.
 
Speaker 1:
Yeah. So, I mean, it's a sneaky one that can get some folks, and again, we want to make sure we're being as efficient as possible with anything, and that's why a good strategy for your situation is important. I mean, these things can exist to affect all of us, but how you handle it, how you work with it, and based on your income and so on and so forth, and how you're pulling money and where you're pulling money and when you're pulling money can go a long way. So it's something worthwhile to make sure you're sitting down and having a conversation about that hidden Medicare penalty, if you will. However, you want to look at it. It's still something that frustrates people.
 
So if you need some help, get yourself onto the calendar. Don't let it sneak up on you and eat into your income. Reach out to Nick and John and have a chat today at pfgprivatewealth.com, that's pfgprivatewealth.com or call them at 813-286-7776. That's 813-286-7776. Or again, just go to pfgprivatewealth.com, schedule that 15-minute chat, have that 15-minute chat and subscribe to the podcast on whatever app you enjoy using, Apple, Spotify, so on and so forth. Guys, thanks for hanging out and breaking it down. Always appreciate it. We'll see you next time here on Retirement Planning Redefined with John and Nick.
 

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