By Ted Stricker, CFP®
A critical part of retirement income planning is to be aware of the nuances of healthcare costs and how your premiums will be assessed, and incorporate this into your planning analysis. We reviewed such uncovered costs in a previous post (see here). One expense often overlooked by many is the surcharge that is applied to your Medicare Part B & D premiums.
Officially called the Income-Related Monthly Adjustment Amount (IRMAA), the surcharge is an additional premium you might pay monthly on your premiums for Traditional Medicare coverage. Combined surcharge amounts for both Parts B & D range from about $88–$485 per month per individual, based upon the Modified Adjusted Gross Income (MAGI) two years prior.
Let’s discuss Medicare, how premiums are assessed and calculated, and what steps you might take to avoid incurring more of this surcharge than you need to.
About Medicare and Medicare Premiums
Medicare is the federal health insurance program for those age 65 and over, those with certain disabilities or those with end-stage renal disease. Medicare has four parts: Traditional Medicare Part A covers hospital stays, skilled nursing care, and home care, and Part B covers doctor visits, outpatient care, and medical equipment. Part C is Medicare Advantage—a bundled program with private insurers that could include ancillary benefits, and Part D is the prescription drug program of Traditional Medicare (with Parts A & B).
Most covered people choosing Traditional Medicare do not pay any premiums for Part A, but do so for Part B. For 2025, the IRMAA is assessed on top of the normal Part B premium, and as a separate charge for Part D, for those using Traditional Medicare coverage whose single-taxpayer MAGI is above $106,000 (or $212,000 for those married couples filing jointly). Covered persons receive a notice from the Social Security Administration (SSA) if they are being assessed an IRMAA.
How IRMAA Is Calculated and Why Your MAGI Is So Important
After the first surprise about IRMAA itself, the second surprise experienced is how the surcharge is assessed. The SSA uses the filed tax return from two years ago to determine whether you are assessed. So, if you receive Medicare benefits in 2025, your filed tax return (and therefore your MAGI) in 2023 will determine your assessment and the monthly premium surcharge you must pay (in addition to deductibles and co-pays). Your assessment is recalculated annually, again using the next MAGI from the prior two years (the 2026 assessment will be based on the 2024 tax return). The brackets are adjusted annually for inflation.
There are six IRMAA-based brackets used in the calculation to assess the extra premium. For 2025, the second bracket ($106,001–$133,000 individual and $212,001–$226,000 married filing jointly) assesses an additional $74 per month for Part B (on top of the regular $185 premium) and $13.70 for Part D. If your MAGI is more than the top limit of a bracket (even by just one dollar!) you fall into the next higher bracket and greater assessment.
Pitfalls That Could Trigger Higher IRMAA Surcharges
IRMAAs not only provide an additional reason for retirees and those near or over 65 to be “tax-savvy,” they show why careful tax planning is important every year.
Here are some pitfalls that could raise your MAGI in a year and trigger IRMAA surcharges in the future:
- Withdrawals from investment accounts: Withdrawals from 401(k) accounts, tax-deferred IRAs, and tax-deferred annuities are all included in ordinary income for tax purposes. With every withdrawal, you are not only closer to ascending to a higher income tax bracket, but you may be jumping to a higher IRMAA assessment bracket too.
- Required minimum distributions (RMDs): Currently, those over 73 years old are required to take RMDs from 401(k), traditional IRA, and other such retirement savings accounts. Since RMDs are required, there’s no getting around the distribution, taxed at ordinary income rates and added to Social Security, pensions, and other taxable income.
- Excessive taxable investment income: Capital gains, dividends, and other investment income could push you into higher IRMAA brackets.
- Roth IRA conversions: Converting traditional IRAs into Roth accounts could be a wise tax strategy, but be careful: the strategy is fully taxable in the year converted and added to other income for tax purposes. If the conversion is large enough, you could not only be bumped into a higher marginal tax bracket, but a higher IRMAA bracket as well.
- One-time events: Selling an investment property, a business, or a home (whose gain over basis exceeds the capital gains shelter for selling your residence) could also cause you to move up to a higher IRMAA assessment in two years.
Steps You Can Take to Avoid Paying More
Coordinating your tax planning and retirement income can help avoid excess IRMAA surcharges in the future. Here are just a sampling of the strategies we often recommend:
- In your income tax planning, be aware not only of jumping to the next highest tax bracket, but also the next IRMAA bracket as well. Review the bracket limits each year.
- Be selective about drawing from investment accounts. If you have both taxable brokerage and tax-advantaged investment accounts, consider both the income tax and IRMAA implications before taking distributions from one account or the other.
- Minimize capital gains in your taxable investment accounts. We offer some tips here.
- Work with your tax professional before implementing a tax-related strategy such as a Roth IRA conversion. Consider the implications on future IRMAA assessment and what other strategies could be used to offset the MAGI effects of the conversion.
- Structure retirement income planning with IRMAA assessments in mind. Many financial planning programs do not include IRMAA assessments. Remember to include these potential surcharges as part of your retirement expenses, if applicable.
- Work with your tax and wealth management professionals to lower taxable income throughout, but especially toward the end of each year.
Still Unsure if You’re Ready for Retirement? Talk With Us.
Understanding how Medicare premiums and IRMAA surcharges fit into your overall plan is just one part of a comprehensive approach to retirement. At Bernath + Rosenberg, financial and retirement planning are core services, and we’re here to help you put the pieces together.
Our experienced team of Certified Public Accountants and CERTIFIED FINANCIAL PLANNER® professionals stays current with the latest in tax laws and financial strategies to help you pursue a rewarding and comfortable retirement, save on tax liability, and plan for your family’s future, according to your unique and special objectives.
To get started and make the most of your hard work, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining comprehensive approaches and strategies that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER® practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
Professionals associated with Bernath & Rosenberg P.C. may be either (1) registered representatives with, and securities and advisory services offered through LPL Financial, Member FINRA/SIPC, a registered investment advisor; or (2) solely tax professionals of Bernath & Rosenberg P.C., and not affiliated with LPL Financial. Tax/accounting/CPA-related services offered through Bernath & Rosenberg P.C. is a separate legal entity and not affiliated with LPL Financial. LPL Financial does not offer tax advice or tax/accounting/CPA-related services.
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