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Transcript

Stop Avoiding IRMAA! · Retirement Answers

• 0:01
  Jacob: Now you're not so caught up in, my goodness, I've got to pay a thousand dollars extra for my Medicare premiums, as opposed to, oh my goodness, because I did that, now I get this 50,000, a 100,000, however many thousands of dollars of benefit from saving on taxes throughout the rest of your life. That is what you're actually planning for. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place. Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement.
• 0:38
  So let's go ahead and get started with today's show. Hey, friends, and welcome back to another episode of Retirement Answers. My name is Jacob Duke, your host as always. And, maybe the, title of this episode got your attention. So you're you're wondering, Jacob, what are you talking about?
• 0:56
  Why should I stop avoiding IRMAA? And that's what I want to talk about today. I think IRMAA is something that maybe is perhaps blown out of proportion just a little bit in my world as a financial advisor. I often talk about this with my clients and something I want to pay attention to, but there might be some, I guess, ramifications or negative impacts of avoiding IRMAA at all costs. So the title of today's episode is Stop Avoiding IRMAA.
• 1:20
  Now to get started, what is IRMAA? I'm going give you a quick refresher. Not to dive in deeply, but IRMAA stands for Income Related Monthly Adjustment Amount. And what this is tied to is your Medicare premium. So when it comes to original Medicare Part A and Part B, you pay a premium every year in retirement or when you're 65 or older or whenever you are actually on Medicare, you pay a Part B premium.
• 1:43
  In 2024, that premium is $174.70 per month. So that is how much you pay every month for Part B. Now that premium is gonna be increasing slightly every year due to inflation. So typically it goes up just a little bit. But just know that that premium I just quoted you, that is the one for 2024 and in 2025, it will be a different premium.
• 2:05
  So whenever we're talking about IRMAA, what we're really talking about is your Medicare Part B premium and your Part D premium potentially as well. We're just gonna focus on Part B to keep it simple for you, is that's the base premium. So $174.70 for Part B in 2024, that's the base. The thing here with IRMAA is that it can actually be increased due to your income. So if you make too much money, your Part B premium can be increased, and that's where IRMAA comes into play.
• 2:31
  It's essentially a surcharge or an additional premium that you have to pay because you make too much money or you made too much money two years ago. Now, this is an important fact for you to understand. Now, whenever we're talking about IRMAA and how much you have to pay this year for your Part b premiums and whether or not you do owe IRMAA on that at all, it's gonna be based on the income you earned two years ago. So here in 2024, it's not based on how much money you earn in 2024 from a taxable standpoint, it's based on how much money you earned in 2022. So your modified adjusted gross income in 2022, that's the numbers that we're looking at to see if you owe an IRMAA surcharge in 2024 on your Medicare Part B premiums.
• 3:09
  So now that we know kind of how IRMAA works and what it's tied to, it's tied to your Medicare premiums. What are the increases? What are the surcharges? So I'm going kind of read this out. And again, if you want to see this, I've sent this out to a few of you who've already reached out regarding this in the past, but I've got a cheat sheet here for you.
• 3:24
  And if you wanna look at this, it'd be really helpful to see what the base premiums are, but then also the different income tiers, because it's not just if you go over certain income limit that you have a premium, there are different income limits and higher premiums that go up accordingly. So now that we know what the base premium is and kind of what we're talking about here, what are the different income thresholds? How much money can I make before I have to pay this IRMAA surcharge? Well, in 2024, if you earned less than $206,000 in 2022, married filing jointly, then you do not owe any surcharges, meaning you're gonna pay the base Part B premium. If you're single and you made less than $103,000 in 2022, you're not gonna pay any surcharges.
• 4:08
  As soon as you go over those income limits, so two zero six for married filing jointly, this is modified adjusted gross income, and then one zero three for single tax filers, Once you go over that, you will pay an additional amount on top of the base premium for part b. So what is that amount and what is what are those ranges? Well, the the amount increase is $69.90 per month. So if you are, let's say you're single, and you earned $120,000 in 2022, and you're on Medicare Part B, your base premium in 2024 would be $174.70. And then because you are over that $103,000 limit, you will pay an additional surcharge and that is $69.90 So what is your total amount?
• 4:56
  Well, your total amount would be 2 and $44.60 per month for your Medicare Part B premium rather than 174. So what this ends up being is about $838 more for the whole year on your Part B premium because you went over that income threshold back in 2022. So you might be thinking, Jacob, that's not too bad. $8.38 more dollars, not the worst thing in the world. You're exactly right.
• 5:20
  I don't think it's the worst thing in the world either. We're gonna talk about that more in a moment. So that's just if you're single, obviously, if you're married filing jointly and you went over the $206,000 which is the income threshold there, then your amount extra you pay double $8.38, and that's how much you'd pay for each of you combined. Now that's just the first level of these IRMAA surcharge income brackets. So the first one, if you're under 103, then you're good, no surcharge.
• 5:46
  If you make from 103,000 to 129, that's where the $69 comes into play. Once you go above that 129, so the range from 129,000 of income to 161, essentially you're paying a double payment because your surcharge is now 174.70, which is the same as your base premium. So you're paying double if you fall into that range, and as soon as you go from 161 to 193, it goes up to $2.79 and so forth. Again, if you wanna see the whole chart of this, shoot me an email, it should be linked down below in the description, and I'll send this over to you so you could see that for yourself. But just know that these are increasing, these surcharges go up as you earn more money.
• 6:26
  So if you make more than $500,000 in any given year, looking back two years, obviously, your additional premium in 2024 would be $419.30. So that's on top of the $1.74 70 that you owe every month for Part B. So that's north of $500 a month for your Part B premium. That does not include any other sort of Medigap or Part D premiums that you would have as well if you do have those different coverages. So just know that can get expensive if you do have those really high income years, but here's what I really wanna focus on today.
• 6:58
  I wanna focus on the fact that we as advisors, we talk about IRMAA a lot because we think you should know about it. We think you should understand how it works and you should be aware of it that we don't get caught off guard because I think that what really troubles a lot of people is whenever they get that surprise IRMAA surcharge, they didn't expect to get it, they didn't plan on getting, they didn't know they're gonna get it, and they see, oh, I thought that my premiums in 2024 were $174.70 but actually I'm paying 2 and $44.60 because my income two years ago was slightly higher than it otherwise should have been, so I'm paying the surcharge and now I'm mad about it. That's the thing that I think is most troubling for most people is that they were just unaware of the fact that they would have a surcharge. So knowing about it is important. Now, I think that what we've done here is we've actually swung the pendulum pretty far and to say, when we talk about these things, and a lot of retirees are understanding this as avoid IRMAA at all costs, and I don't agree with that.
• 7:52
  I think that IRMAA is not a bad thing on its face. It can actually be helpful for you if you've got other strategies that you're doing such as perhaps a Roth conversion. And just to kind of make this point here, let's just say that you're willing to go over these income limits to have IRMAA for a year, two years down the road. So you're saying, hey, wanna do a Roth conversion so that I can move more money from my tax deferred account over to a Roth account, and then I can save on taxes throughout the rest of my life or upon RMDs or for my kids or my spouse or something like that in the future. So Roth conversions, maybe we've all heard of that.
• 8:22
  If you haven't, I've got episodes on it, you can go check it out. But Roth conversions are a pretty common tax planning thing for retirees. But what we run into a lot is we run into the fact we've got maybe other income, we've got some other things going on in your life to where we can't do as much of a conversion as we otherwise like to before we hit those IRMAA income brackets. And so the question is, is do we go over the IRMAA income brackets or do we stay under them and do a smaller conversion? And so that's kind of the decision that we have to go through a lot, but let's say that you are needing to convert $300,000 okay, from a traditional IRA to a Roth IRA to help you say, we'll just use $50,000 in taxes over the rest of your life.
• 9:01
  And we can kind of map this out using some software and tools that I have for my clients. And so let's say you convert 300,000 from a traditional IRA to a Roth IRA, and by doing so you create taxes, you pay taxes now on that, but you're gonna save yourself 50,000 of taxes over the rest of your life. So there's a $50,000 benefit to doing this Roth conversion strategy. But you have to go over these IRMAA income brackets in order to get that benefit, in order to do the full conversion that we're trying to do. And so what I've seen people do and heard about people doing is avoiding the IRMAA surcharge, avoiding this $838 here in '24 for the first level, avoiding $838 of additional premiums for a whole year, and what they're doing is they're giving up $50,000 potentially, this is just an example, but giving up $50,000 of tax benefits throughout the rest of their life because they don't wanna pay more for their Medicare premiums for just twelve months.
• 9:54
  And that's an important factor here that you have to understand. Whenever you have these IRMAA surcharges, it's not for the rest of your life, it's only for this twelve month period. It's only for one year. So in theory, if we do a Roth conversion now and we say in 2024, I'm gonna do a Roth conversion with the client, we know we're gonna have an IRMAA surcharge in 2026, we understand that, we're okay with that because of the benefits we see and we're planning on getting due to the conversion. So in 2026, when that rolls around, it's like, oh, this is perfect, we anticipated having IRMAA surcharges here, we're okay with that because we planned on it and we know about it.
• 10:27
  And what that does is, is now you're not so caught up in, oh my goodness, I've gotta pay a thousand dollars extra for my Medicare premiums as opposed to, oh my goodness, because I did that, now I get this 50,000, a 100,000, however many thousands of dollars of benefit from saving on taxes throughout the rest of your life. That is what you're actually planning for. So that's just an example of why maybe you need to reconsider avoiding IRMAA at all costs is because the benefit of the strategies you could be implementing by going over the IRMAA income brackets can far outweigh any savings you would have by staying under the income brackets. Now, another thing I wanna mention here in regards to IRMAA and avoiding it or actually going over limits intentionally is that a lot of people are gonna end up paying IRMAA now or they're gonna pay it later. Here's how that would work.
• 11:14
  Let's say you've got a million dollars tax deferred and you're in retirement, you're 65 plus, you've got your Part B premium, you wanna pay the base premium and you only need to pull, I don't know, dollars 30,000 from your traditional IRA every single year and you got a million. So that means you're not gonna deplete your asset, your IRA, you're not gonna deplete that fast enough before you get to RMD age, which means your RMDs will be rather large. Now, whether you're married or you're single, that's, maybe an important point here, but we won't consider it at this point. But the thing to kind of consider is I'm trying to stay under these IRMAA income brackets now at 65, 66, 67, but what happens whenever my RMDs kick in? What if I've got social security?
• 11:57
  What if I've got a pension? What if I got distributions from my IRA that are now forced because of these RMDs and that pushes me over these IRMAA brackets in the future? What if my traditional or tax deferred accounts are so large that the RMDs themselves are gonna push me over these IRMAA brackets and I have no way of ever getting under the IRMAA income brackets again because my RMDs are too large. And so the thing you've gotta evaluate here is, is it worth paying IRMAA now for a year or or two or three in order to avoid paying IRMAA for the rest of my life? And so RMDs can kind of cause this IRMAA trap, if you will.
• 12:33
  Another thing that can cause it is the widow's tax trap. And what this is, is let's say you are married, you've got a million dollars, you're both 70 years old, and that million dollars is split $50.50, husband's got 500,000 to his name, wife's got 500,000 to her name, and while they're married, their RMDs wouldn't be large enough to really push them over these IRMAA income brackets because the married filing jointly brackets are double that of the single filers. But let's say that their RMDs kick in one day in the future and husband gets hit by a bus and now a wife assumes ownership of his IRA and now they've actually grown a little bit. So I've got north of a million dollars total, but now she owns all of the assets. Well, her RMDs are gonna be the same amount, whether she's married or not in terms of the household itself, but now she's gonna be filing as a single tax filer rather than married filing jointly.
• 13:20
  So her RMD will be the same total, but her tax brackets in general, her normal tax brackets are gonna be compressed or lower, but also her income brackets for IRMAA are gonna be lower or compressed there as well. So she could be forced into these IRMAA surcharges by not planning ahead or thinking about this thing called the widow's tax trap. It ultimately forces more taxes and perhaps these IRMAA surcharges on the surviving spouse. And that's just another example of why, you you've got to evaluate, am I gonna pay IRMAA now or am I gonna pay IRMAA later? What are the risks that are involved here?
• 13:54
  So hopefully these couple of examples just briefly show you what some of the things you might be needing to think about regarding IRMAA. IRMAA is not something to avoid at all costs. I know that we talk about it maybe in that way, but I think it's a much smaller problem than we really think it is. And it's something that I would say you should evaluate. And in fact, maybe there's times where you intentionally go over the IRMAA income brackets by doing a Roth conversion strategy like I mentioned before, in order to save thousands of dollars on taxes in the future, rather than saving a thousand dollars or so right now by having those lower premiums.
• 14:30
  So IRMAA is not the worst thing in the world, might be worth paying in order to save a lot in the future. And really you've got to consider just your whole plan. Like what does your situation dictate? What are the things you specifically need to do? If that's something you don't have, if you don't have a plan in place, reach out to me, shoot me an email, schedule an intro call there on my calendar link, which is down in the description.
• 14:50
  Happy to have a conversation with you. It's completely free, no obligations. Want to hear more about your situation. If there's any way I might can help in that situation and just provide some value to you if I can. So don't hesitate to reach out if you're looking to build a plan, happy to see what that might look like.
• 15:04
  But really, think the worst part of IRMAA is the surprise that comes up whenever you're unaware of the fact that there is IRMAA or additional surcharge that could be on top of your normal Medicare premiums if you just don't know about it entirely, or if you accidentally go over these income brackets in any particular year that would cause you to pay IRMAA in the future. So, be intentional about it, know about it, but don't think that IRMAA should be avoided at all costs because it can be beneficial if you've got other strategies going on that you're executing. So hopefully this gives you a good framework or mindset around IRMAA and the fact that it's really not the worst thing in the world, it's not detrimental to your retirement plan, and if something happens where you go over the limit for one year, that's fine. Again, not a big deal, it's not gonna throw you off the tracks in terms of your retirement success, but we do wanna be aware of it and plan around it and be intentional with it. So hopefully this helps.
• 15:52
  If you have questions, shoot me an email. Again, if you want this resource I've got for you, shoot me an email. I'll send it straight over to you. Other than that, I hope you have a great week and we will talk to you again next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you.
• 16:07
  If you have a question and you would like to have it answered here on the show, please email me at Jacob@retirementanswers.net. And I'd love to answer that question for you right here on the show. Also, I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.
• 16:28
  Look forward to talking with you again next week.