Did you know that tax planning can affect your future Medicare premium costs? If not, you are not alone. Part B and Part D premiums are determined by a number of factors, the most important one being your Income-Related Monthly Adjustment Amount or IRMAA.
What is IRMAA?
IRMAA was put in place to require wealthier participants to share more in the cost of Medicare premiums. How exactly is “wealthier” determined? This may surprise you – it’s based on your income from two years prior to the time the premium is determined. In other words, your 2022 premiums will be based on your 2020 tax return. For single individuals, the cost of your premiums will increase if you report 2020 modified adjusted gross income (MAGI) in excess of $91,001. For a married couple, a MAGI in excess of $182,001 will result in higher premiums. Below is a chart outlining Part B premiums for 2022:
HOW MODIFIED ADJUSTED GROSS INCOME (MAGI) IMPACTS MEDICARE PREMIUMS
IRMAA is particularly harsh because it operates on a “cliff”. One extra dollar of MAGI can be very costly. Consider a couple who has a MAGI of just over $170,000. Their premiums are more than $100 per month higher than a couple who has a MAGI just under $170,000. Managing your MAGI is key to managing the cost of your Medicare premiums. So how can you plan?
Roth IRA Conversions
Converting a traditional IRA to a Roth IRA is not ideal in your later years, specifically because of IRMAA. A conversion is considered additional income under IRMAA and could quickly propel you into a higher MAGI with the associated higher monthly premium. However, performing a Roth conversion well before your Medicare years is a great planning tool to avoid IRMAA issues. Why? Because qualified Roth IRA distributions are not included in your MAGI. Also, by shifting assets out of your traditional IRA, you are reducing the required minimum distributions that you’ll need to take during your retirement years.
Plan Your Income In Advance
While we don’t have complete control over life events, it is possible to control your future income. To the extent it makes tax sense to do so, consider accelerating other income items ahead of your Medicare years. For example, you may consider selling appreciated assets earlier than two years before you claim Medicare. The capital gain is included in MAGI, but your effective federal tax rate on the gain could be as low as 0%.
Working with your financial advisor to ensure that you understand how your holdings impact your MAGI is important as well. There are some holdings that are still good investments but are more tax-efficient than others. We can help if you have questions about tax planning in association with IRMAA considerations. Just call our office at (630) 953-4900.