As Medicare enrollment for 2026 approaches on October 15, many Americans may be unaware that their income from two years prior, specifically 2024, will directly determine if they face higher Medicare premiums. This additional charge, known as the Income-Related Monthly Adjustment Amount (IRMAA), can significantly increase the cost of Medicare Part B and prescription drug coverage, potentially reducing the benefit of Social Security cost-of-living adjustments (COLA).
Key Takeaways
- Your 2024 taxable income dictates if you pay Medicare IRMAA in 2026.
- IRMAA can more than double standard Medicare Part B premiums.
- The number of people paying IRMAA is projected to rise significantly by 2034.
- Strategic financial planning, including Roth conversions, can help reduce future IRMAA.
- Life-changing events may allow for an appeal of IRMAA charges.
Understanding Medicare's Income-Related Surcharge
The Income-Related Monthly Adjustment Amount, or IRMAA, is an additional premium that certain Medicare and Medicare Advantage beneficiaries must pay if their taxable income exceeds specific thresholds. This surcharge applies not only to Medicare Part B, which covers medical services, but also to Medicare Part D, which covers prescription drugs. It is added on top of standard premiums.
For many retirees, Medicare premiums are deducted directly from their Social Security benefits. This means a higher IRMAA can substantially impact their net Social Security income. John Jones, an investment adviser at Heritage Financial, highlighted this concern, stating,
"Medicare is taken out of Social Security, so it can be very painful. Social Security could do nothing but pay for Medicare."
IRMAA Impact on Seniors
- Only about 8% (5.1 million) of Medicare enrollees currently pay the Part B surcharge.
- This number is a significant increase from 1.7 million when IRMAA began in 2007.
- Projections show the number of IRMAA payers rising to 8.6 million by 2034.
- For Part D drug plans, approximately 4.5 million Americans pay the surcharge, expected to reach 7.7 million by 2034.
Projected IRMAA Thresholds and Costs for 2026
While the final IRMAA income thresholds for 2026 have not yet been confirmed, the Medicare Trustees Report has provided estimates. These estimates, alongside an expected standard monthly Medicare premium of $206.50, indicate the potential financial burden for high earners. IRMAA can increase the monthly premium for health coverage by more than double and nearly double the drug premium.
For example, individuals with incomes between $109,001 and $137,000, or couples filing jointly with incomes between $218,001 and $274,000, may face an additional $82.60 per month for health coverage and $14.50 for drug coverage. As income rises, these surcharges increase significantly. The highest earners, individuals making $500,001 or more, or joint filers earning $750,001 or more, could pay an extra $495.60 per month for health coverage and $85.80 for drug coverage.
The Two-Year Lookback Rule
Medicare uses your modified adjusted gross income (MAGI) from two years prior to determine your IRMAA. This means your 2024 income will affect your 2026 Medicare premiums. This two-year lookback period makes proactive financial planning crucial.
Strategies to Reduce Medicare Surcharges
Many Americans focus on saving for retirement but often overlook IRMAA, leading to unexpected costs. Michael Chuah, an attorney at Paxterra Law, emphasized,
"People need to plan. Since IRMAA is a two-year lookback, what you do today affects what premiums look like tomorrow."Financial advisers suggest several strategies to manage and potentially reduce IRMAA.
Roth Conversions and Asset Location
One key strategy involves Roth conversions. This process moves money from traditional pre-tax retirement accounts, like 401(k)s, into post-tax Roth accounts. While the conversion itself is a taxable event, future withdrawals from Roth accounts are tax-free and do not count as taxable income for IRMAA calculations. This can keep future income lower, helping to avoid or reduce IRMAA.
Advisers recommend planning Roth conversions strategically, especially during years with lower income, such as during layoffs or when taking time off to raise children. Nick Bour, CEO of Inspire Wealth, stressed the importance of asset location as retirement approaches. He suggested aiming to contribute up to one-third of retirement savings to Roth accounts before retirement. Early retirement years, when income might be lower, can also be opportune times for Roth conversions.
Required Minimum Distributions (RMDs)
At age 73, individuals typically must begin taking Required Minimum Distributions (RMDs) from tax-deferred retirement accounts. These distributions are considered taxable income and, if high enough, can trigger IRMAA. Roth accounts are exempt from RMDs, offering another advantage for long-term planning.
Timing and Appeals
For those closer to Medicare enrollment age (65), it may still be possible to mitigate IRMAA. Advisers suggest considering working less to lower income in the two-year lookback period. While significant shifts may not be possible in a short timeframe, even small adjustments can help.
Another option is to appeal IRMAA charges. The Social Security Administration (SSA) allows appeals for certain life-changing events that significantly reduce household income. These events can include:
- Marriage
- Divorce or annulment
- Death of a spouse
- Work stoppage or reduction
- Loss of income-producing property
- Loss of an employer settlement payment
- Receipt of a settlement from an employer
John Jones mentioned a strategy where individuals could undertake large Roth conversions, spiking their income in one year, and then appeal IRMAA the following year if a qualifying life event occurs and their income drops. This could potentially lead to a refund of the surcharge for one or two years.
Understanding the intricacies of IRMAA and planning ahead can help retirees manage their healthcare costs more effectively and preserve their Social Security benefits.
