Latest / The Financial Freedom Podcast with Fexingo: Quitting Your Job, Living Off Investments, Independence / How to Avoid the Medicare Surcharge Surprise in Early Retirement
Transcript
- Lucas: You're in your early sixties, you've got a solid nest egg, you're living off a mix of Roth conversions and capital gains — and then you get a letter from the Social Security Administration saying your Medicare premiums are about to double. That's the IRMAA surprise, and it hits a lot of early retirees who don't see it coming. Luna: IRMAA — Income-Related Monthly Adjustment Amount. It's essentially a surcharge on Medicare Part B and Part D premiums for higher-income beneficiaries. And the kicker is they look at your tax return from two years ago. Lucas: Right. So the year you're making a big Roth conversion or realizing a bunch of gains, you might think, 'I can afford the tax hit because my income is low this year.' But Medicare doesn't care about this year — they're looking at your modified adjusted gross income from two years prior. And if that spikes, you get hit with the surcharge for the current year. Luna: This is really important for our audience, because a lot of people following the FIRE path plan to do Roth conversion ladders in their fifties and early sixties. If that conversion pushes their MAGI above the threshold, they could be paying thousands extra per year once they hit sixty-five. Lucas: And if our money conversations have helped you think about a decision differently, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it really does make a difference. And we keep it ad-free because of that support. Lucas: So let's dig into the actual numbers for 2026. The standard Part B premium this year is about $174 a month. But if your modified adjusted gross income from 2024 — that's the two-year lookback — was between $106,000 and $133,000 as an individual, your Part B premium jumps to roughly $244 a month. That's an extra $70 a month, or about $840 a year, just for Part B. Luna: And there are multiple tiers. If you're between $133,000 and $167,000, the surcharge gets bigger. And if you're over $500,000, you could be paying over $500 a month for Part B alone. That's a huge hit to your withdrawal rate. Lucas: Part D has its own surcharge too, tacked onto your prescription drug plan premium. So you could easily be paying an extra two to three thousand dollars a year in total Medicare costs — just because of one high-income year years earlier. Luna: Let's make this concrete. Take a hypothetical early retiree, let's call him Mark. He retired at fifty-five, lives on $50,000 a year from a mix of dividends and a part-time gig. He decides at sixty-three to convert a chunk of his traditional IRA to Roth — say $100,000. That pushes his MAGI for that year to $150,000. Lucas: So now, when Mark turns sixty-five two years later, Medicare looks back at that $150,000 MAGI year. His Part B premium jumps to about $244 a month instead of $174. And his Part D surcharge kicks in too. That extra cost is permanent for that year — and it adjusts annually with inflation. Luna: And it's not just one year. If he does another big conversion the next year, he could have multiple years of surcharges. It's a compounding problem. Lucas: Exactly. So the first strategy is to plan your Roth conversions with the two-year lookback in mind. If you're sixty-three and you want to move money to Roth, maybe you spread that $100,000 conversion over two or three years instead of doing it all at once. That keeps your MAGI under the first IRMAA threshold. Luna: But what if you're already past sixty-five and you realize you triggered a surcharge? Is there any way to undo it? Lucas: There is a process. You can file an IRMAA appeal using Social Security form SSA-44. You need a life-changing event — like retirement, divorce, death of a spouse, or loss of income property. If you retired in the year of the lookback and your current income is lower, you can ask them to use your current income instead. But it's not automatic, and you have to provide documentation. Luna: So it's worth doing, but it's better to avoid the surcharge in the first place. Which means careful tax planning in the years leading up to Medicare enrollment. Lucas: Right. And there's another nuance: IRMAA thresholds are not indexed to inflation the same way tax brackets are. They get adjusted but often lag. So the real value of the thresholds erodes over time, meaning more people get caught each year. For 2026, the first threshold for an individual is $106,000 — that's actually up from $103,000 in 2025, but still, a modest retirement income plus a conversion can push you over. Luna: Another strategy is to use your low-income years before Medicare to do Roth conversions, but keep them below the threshold. For a married couple, the first threshold is $212,000 in 2026. That gives a lot more room. Lucas: And if you're married and one spouse is still working, you might want to coordinate. If you file jointly, your combined MAGI determines the surcharge. So a working spouse's income can push you into IRMAA territory even if the retiree's income is low. Luna: That's a great point. I've seen cases where a couple retires, does a big conversion in the same year, and then both get hit with surcharges. They could have waited a year, or done the conversion before the spouse stopped working. Lucas: There's also the option of using a Health Savings Account, or HSA, if you have one. HSA contributions reduce your MAGI, so maxing out your HSA in the years before Medicare can keep you just under the threshold. And after sixty-five, you can use HSA funds tax-free for Medicare premiums and medical expenses. Luna: And one more thing — if you're already collecting Social Security before sixty-five, the IRMAA surcharge is deducted from your monthly benefit. So you don't get a separate bill; it just shows up as a smaller deposit. That can be a nasty surprise. Lucas: Exactly. So the key takeaway: if you're planning an early retirement and you expect to use Roth conversions or have variable income, map out your tax returns from age sixty-three onward. Keep your MAGI under the first IRMAA threshold if you can, or plan for the surcharge. If you can't avoid it, maybe the extra tax cost is worth it because the Roth growth will outweigh the surcharge over time — you just need to know the numbers. Luna: And don't forget that IRMAA applies to Part D too. So if you're on expensive medications, the surcharge can be really significant. You might want to choose a Part D plan with a lower premium to offset some of the surcharge. Lucas: Good point. So let's say Mark decides to do the conversion anyway. He computes that the extra $2,000 a year in surcharges for two years is less than the future tax savings from the Roth growth. That's a valid calculation. But he needs to know it's coming and budget for it. Luna: Right. The worst case is the surprise. So as you approach sixty-five, check your tax returns from two years prior. If you had a high income year, start planning for the surcharge. And if you're still in your fifties, keep IRMAA in mind when you do your Roth conversion ladder. Lucas: One more strategy: if you're charitably inclined, consider using qualified charitable distributions, or QCDs, from your IRA after age seventy and a half. Those reduce your MAGI because they don't count as income. But that only helps after you're seventy and a half, so it's not a solution for the early Medicare years. Luna: So the bottom line: IRMAA is a hidden tax on early retirees who do Roth conversions or have variable income. Plan around the two-year lookback, spread out conversions, and use tools like HSAs and QCDs where possible. And if you do trigger a surcharge, appeal if you have a qualifying event. Lucas: Exactly. It's one of those details that can really mess with your withdrawal plan if you ignore it. But with a little foresight, you can either avoid it or account for it. And that's the whole point of the financial freedom path — knowing the potholes before you hit them.