“Save as much as you can for retirement.”

That’s the message that has been drilled into the mind of every American worker for decades. There’s something to be said for that, of course. Financial security is important to all of us.

But what many people may NOT realize that they will pay a premium for Medicare Part B (outpatient medical care) and Part D (prescription drugs) if they withdraw too much from their retirement savings in a given year.

That’s right. If the Social Security Administration (SSA) considers you a “high-income beneficiary,” you’ll pay the Income-Related Monthly Adjustment Amount—IRMAA for short.

How high is high-income?

There are five tiers of MAGI that the SSA uses to determine IRMAA surcharges.
The first tier starts at a MAGI of more than $85,000 (for single filers) or more than $170,000 (for those who are married filing jointly).

Here’s a chart showing the five IRMAA tiers for 2019. Note that the SSA uses your income from two years ago. So this year’s determination is based on your 2017 tax return.

How do I pay it?

IRMAA for Part B is automatically added to your Part B premium.

IRMAA for Part D must be paid directly to Medicare (not to your prescription drug plan). YOU are responsible for paying it—even if your employer covers your Part D premiums.

What if I don’t pay it?

If you don’t pay the surcharge, your Medicare coverage is cancelled. This can create a negative domino effect for you.

If you don’t have Medicare Part B, you can’t purchase a Medigap policy (which covers the costs associated with Medicare’s high deductibles and copays).

You also won’t be able to buy a Medicare Advantage plan (also known as Part C), which combines all parts of Medicare, but limits your healthcare provider options.

How can I avoid IRMAA?

First, know that it’s possible to appeal your IRMAA surcharge on account of “life-changing events.” The SSA recognizes the following as such:

Marriage
Divorce
Death of spouse
Work termination or reduction
Loss of income-producing property
Loss or reduction of pension income (as a result of plan termination)
Employer settlement payment (as a result of closure, bankruptcy or reorganization)

Otherwise, to avoid IRMAA, you’ll need to carefully plan how much income you’ll receive in a given year. This may be trickier than you think.

Why? Because there are a number of common life or financial events that can spike your income in a single year:

Selling your home
Taking a required minimum distribution (RMD) once you turn 70 ½
Converting traditional IRA assets to a Roth IRA in a single transaction
Realizing a large investment or capital gain
Winning the lottery (hey, we can dream, right?)

The good news is that, in years when your income dips, your IRMAA surcharge will also adjust downward—two years later.

Now, let’s talk about three ways you can avoid paying IRMAA.

Roth IRA conversions

A large, one-time Roth IRA conversion will increase your taxable income for the year in which it is processed.

Does this mean you should avoid Roth conversions altogether? No!

Instead, think about making smaller incremental conversions over a number of years. If you do this, you can avoid exceeding the high-income threshold in any given year.

Roth IRAs have many benefits. Withdrawals from Roths aren’t taxable—and they’re not subject to RMDs. If you can convert all of your pretax assets to a Roth prior to age 70 ½, you’ll never have to take an RMD. That, in turn, means you won’t see a spike in your income after you turn 70 ½.

If you missed the opportunity to make small, incremental Roth conversions before (or right after) you retire, not to worry. Doing a one-time conversion—even if it’s a large one—is still something worth considering. IRMAA is determined on an annual basis, and the calculation takes into account your income from two years ago. While you may have to pay IRMAA two years after making that big Roth conversion, you’ll never have to think about it again after that.

Health Savings Accounts (HSAs)

If you’re on the younger side, still work, and have a high-deductible health plan, you may choose to max out an HSA rather than fund an IRA.

Contributions to an HSA are tax-deductible, earnings within the account grow tax-deferred, and withdrawals from account are also tax-free (as long as they cover IRS-qualified medical expenses).

If your HSA withdrawal is for qualifying purposes, it won’t affect your adjusted gross income. As such, it also won’t cause a change in your IRMAA calculations.

Qualified Charitable Distributions (QCDs)

If you’re 70 ½ or older, you can make QCDs of up to $100,000 in a single tax year to an unlimited number of 501(c)(3) charitable organizations. Donations made to a private foundation or donor-advised fund will not qualify.

The QCD will satisfy your RMD. If you do it the right way, it won’t increase your adjusted gross income or your IRMAA status.

The process for completing a QCD can be tricky. You’ll want to work closely with the custodian of your IRA. The most important thing is that your IRA custodian MUST make the check payable to your charity of choice—not to you personally.

In most cases, you’ll have a choice of where the check is mailed—either directly to the organization itself, or to you (so that you can forward it to the organization).

You’ll also need to let your accountant know about your QCD. Although you’ll receive a Form 1099 for it, the way it’s reported may not make it obvious. If it’s not accounted for properly on your tax return, it won’t qualify as a write-off.

As we mentioned earlier, avoiding the Medicare surcharge takes careful planning. In some cases, working with a financial professional may make the most sense. If you’d like some help (or a second opinion) on your financial plan, drop us a line at info@phillipjamesfinancial.com.

3 Ways To Avoid Paying the Medicare Surcharge