You’ve reached the golden age! However, just because you qualify for Medicare, it doesn’t mean that you’re done paying for health insurance. Medicare Parts B (outpatient) and D (prescription drugs) charge a monthly premium. If you are fortunate to have a higher-than-average income (more than $97,000 for an individual; $194,000 as a married couple), you may be required to pay an income-related monthly adjustment amount (IRMAA). Your modified adjusted gross income (MAGI) includes all taxable income including income from 401(k)s, IRAs, savings, the taxable portion of Social Security, and any income from working. It does not include withdrawals from Roth 401(k)s and/or Roth IRAs.

The IRMAA surcharge is determined by your earnings for two years prior to signing up for Medicare. Your income at 63 years old will affect what you pay for Medicare when you turn 65. For 2023, anyone with MAGI between $97,000.01 – $123,000 will pay the same monthly IRMAA premium.

Some strategies to avoid paying IRMAA are as follows:

• Convert some of your 401(k) or IRA investments to a Roth. You are required to pay the taxes at the time of the conversion and ideally, this should be done at least two years prior to signing up for Medicare. There are instances when it’s financially beneficial to make the conversion even later.
• If still employed, max out your 401(k) and/or IRA in order to bring you below the IRMAA limit.
• If you have appreciated stocks or funds in a taxable brokerage account, consider selling the shares before you retire and pay the gains. You would then immediately rebuy the shares which will reduce the taxes when you sell while on Medicare.
• Delay making withdrawals from your tax-deferred retirement accounts. This can keep you below the IRMAA limit and allow your savings to grow. Additionally, once you’re required to start taking required minimum distributions (RMD) at age 73, you have the option to donate up to $100,000 per year to a qualified charity.
• If you don’t need the additional income, delaying Social Security income until age 70 ensures that it won’t count toward IRMAA during the delay and the money will grow at 8% per year until age 70.
• Consider a Medicare Advantage plan instead of traditional Medicare which can have sizeable out-of-pocket costs in addition to the monthly premium. Oftentimes retirees choose to buy a Medigap plan through a private insurance company to cover these out-of-pocket costs. If you’re healthy and facing high costs from IRMAA, compare the prices of Medicare Advantage plans. It could be a significant savings over paying for both Medicare and a Medigap policy.
• If you have a life-changing event, such as divorce, retirement, death of a spouse, or a lost pension, and your income is significantly lower now than two years ago, you have the option to appeal the surcharge. You can also appeal if you feel the calculation is incorrect.

Navigating IRMAA can be challenging but it will be readjusted every year so it’s important to be informed. You may decide to pay more taxes and surcharges at the beginning of your retirement in exchange for lower costs and flexibility later in retirement. Ultimately, when it comes to IRMAA, your choices can be re-evaluated and adjusted the following year.