Paying more for Medicare? What to know about Medicare surcharges

Health care is likely one of your largest expenses in retirement. And if you exceed a certain amount of income, you may be paying a Medicare premium surcharge, which can be significant.

The income-related monthly adjustment amount, known as IRMAA, is a surcharge assessed to Medicare Part B and Part D premiums. IRMAA is calculated based on your modified adjusted gross income (MAGI), backdated two years.* For example, the government would look at your 2022 tax returns to determine whether your 2024 Medicare premiums would be subject to IRMAA.

What makes up your MAGI?

Your MAGI† consists of: 

• Your adjusted gross income (AGI), which commonly includes: 
  • Earned income from employment
  • Social Security income (many people will have 50% to 85% of their Social Security benefits taxed) 
  • Distributions from traditional retirement accounts, such as IRAs and 401(k)s 
  • Investment income, such as dividends and capital gains
  • Pension income 
• Tax-exempt interest income (e.g., municipal bond interest)
• Interest from U.S. savings bonds used to pay higher education tuition and fees
• Earned income of U.S. citizens living abroad that was excluded from gross income
• Income from sources within Guam, American Samoa, the Northern Mariana Islands or Puerto Rico not otherwise included in AGI 

^{*The government uses different measures of MAGI for different purposes. The MAGI used to determine IRMAA is different from the MAGI used to determine IRA contribution eligibility and deductibility, Affordable Care Act (ACA) insurance premium subsidies, Medicaid qualification, etc.}

^{†Congressional Research Service, “The Use of Modified Adjusted Gross Income (MAGI) in Federal Health Programs.”}

This table shows the amounts added to the base Medicare Part B and D premiums for 2024.

How do you know if you’re subject to IRMAA?

The Social Security Administration (SSA) will send you a notice explaining whether IRMAA will apply and what information was used to calculate it. This notice will also include instructions on how to appeal the determination if you wish to do so.

One of the more common reasons to appeal is when someone retires and enrolls in Medicare at age 65, but their IRMAA is assessed from MAGI when they were still working (and their income was higher). For this and other life events, you can appeal the IRMAA determination, provide documentation that your income is lower and potentially reduce or eliminate your premium surcharge.

You have 60 days from receiving your initial determination notice from the SSA to appeal. To start, you’ll need to contact the SSA. You may need to file Form SSA-44 and provide supporting documentation.

Managing your MAGI may help reduce IRMAA

A lower MAGI may help you avoid IRMAA or, if you’re already subject to the surcharge, keep from moving into a higher bracket. Your financial advisor can help identify strategies that may apply to your situation, and a tax professional can help calculate the impact of each.

Here are a few strategies to consider, generally listed in order of priority.

• Health savings account (HSA) distributions — If you have an HSA, you can use distributions from it to cover qualified medical expenses without increasing your MAGI. This includes paying premiums, deductibles and copays for Medicare Parts A, B, C and D (but not Medigap premiums).

  By using taxable income to cover those expenses, that income could then result in higher Medicare premiums. Using HSA distributions allows you to cover medical costs while managing MAGI.

• Qualified charitable distributions (QCDs) — If you’re charitably inclined and 70½ or older, and you have a traditional IRA, a QCD may be useful. This is especially true if you have reached age 73 and must take required minimum distributions (RMDs).

  A QCD can help you satisfy your RMD and give to your charity of choice without increasing your taxable income (up to $105,000 in 2024, indexed annually). You’ll want to consult with your tax professional, as the rules for QCDs can be complex.

• Minimizing large, taxable income-generating activities — Certain situations are likely to increase your MAGI bracket. Examples include completing a sizable Roth conversion, selling investments that trigger substantial gains or taking a larger-than-usual distribution from a traditional retirement account. You should be aware these actions may result in higher Medicare premiums.

  Your financial advisor and tax professional can help you identify the impact of these types of actions and explore options like splitting the action over two (or more) taxable years.

• Roth distributions — If you have assets in a Roth IRA and are close to exceeding an IRMAA threshold, you may be able to use the tax-free distributions to keep from crossing it.

Using Roth distributions may sound counterintuitive because the rule of thumb for spending in retirement is often:

1. Taxable accounts
2. Traditional/tax-deferred accounts
3. Roth/tax-free accounts

But not triggering IRMAA (or staying in a lower IRMAA bracket) may be worth tapping into these assets. Just keep in mind, this would mean fewer tax-free assets for you to use in future years or to pass along to your heirs.

Working to help you avoid surprises

Navigating Medicare and managing your health care expenses in retirement can seem daunting. Your financial advisor and tax professional are ready to work with you to help you feel more prepared and in control.