Have you ever heard of healthcare costs spiking for retirees or pre-retirees because of a thing called IRMAA? Whether you have or you have not, it’s worth knowing about so that you can make the best financial decisions for your situation. We’ve seen it happen quite a bit where people are surprised by the cost of their Medicare Part B premiums because of a financial decision that they’ve made years ago.
In this video I want to give you a look into this idea of IRMAA so that it doesn’t happen to you. If you’re older than 60, this is worth knowing right now, and if you’re younger than 60, watch this video and just store it in the back of your brain for a few years from now.
Health Insurance Premiums
First, let’s do a quick intro of health insurance premiums. If you’re under age 65, then the cost of health insurance is influenced by your age and where you live, deductible, and your income. Those are a few things that really impact health insurance costs. Then when you get to age 65, you start paying Medicare Part B (most likely), and the only factor that impacts that cost is income. Depending on your withdrawal strategy you use, this can really impact how much you pay for your health insurance premiums.
First off, what is IRMAA? It stands for Income-Related Monthly Adjustment Amount, and that’s the amount that you may pay in addition to your Part B or Part D premium if your income is above a certain level. It’s determined based on your MAGI, (Modified Adjusted Gross Income), which is on your tax return. So that MAGI number, the one that’s reported on your taxes from two years prior, is the number that is used when factoring in this IRMAA calculation.
If you’re 63 or older, this will most likely apply to you now. For our clients, we start thinking about this at age 60, especially if there’s a future transaction that’s going to cause a change in your income or you might be thinking about Roth conversions, or switching locations in the future.
If income is less than 194K per year, then no need to worry about IRMAA. What happens is a lot of people will have taxable income or MAGI less than that each year, but sometimes there’s something that could increase their income in one year and we’re going to go over those to just make sure that you’re aware of it. Then I want to show a few what-if scenarios to give you some more examples of what this could mean for you.
Now what’s the first thing that can really impact MAGI? Social Security. What you take from Social Security will increase MAGI, so for many, the Social Security that you get is going to be 85% of what you receive is taxable and is what gets added. Something that could increase MAGI is a home sale. Let’s pretend that you’re in retirement, and you’re receiving income from Social Security, and maybe some investments from your nest egg, and you’re ready to move to your retirement destination. If you’ve been in your home for a while, there’s a chance that you may have bought it at a much lesser value and now it’s a lot higher, so there’s a potential gain from what you bought it at to what the value is now. If that gain is greater than 500K, then you may have to pay tax on whatever the excess is. Let’s pretend the gain was $600,000. You may have to pay capital gains tax on 100K, which means you’re increasing your MAGI and could increase Medicare Part B premium. Now this has happened for a lot of clients who are in real estate and now in retirement, and they may start to sell some of the different assets because they want to simplify things and they just have to be prepared that the costs are going to go up when it comes to Medicare premiums.
When you think about it, is it a smart move to tell the buyer of your home, “Hey, could you buy the house for 100,000 less so that I can avoid an increase in Medicare costs?” Probably never. The cost increase might be a very small percent to what you’re actually getting from the gain. Just remember most of the time the increase in our income outweighs the cost of increasing Medicare costs, but there is an instance where you might not get immediate income or you might not get immediate benefit and still have a higher Medicare cost. If you want to apply this to your own finances or your own retirement plan, use the DIY retirement planner because it’s our favorite consumer-facing retirement planner that can factor in IRMAA as well.
Onto the one thing that could impact IRMAA and Medicare costs without any immediate benefit to you, and that is Roth conversions. Roth conversions can increase MAGI and Medicare Part B premiums two years following the year of the conversion. If you’re 63 and older, any conversion you do could start impacting that Medicare cost, so there are many things to factor in when you’re doing conversions. The main goal for Roth conversions is just to pay the least amount of tax possible over your lifetime, but I will say that a properly designed Roth IRA conversion strategy will include tax strategy and the impact on Medicare costs as well.
The big takeaway here when planning out healthcare premiums is don’t let IRMAA be the main driver of your decisions. Yes, it’s good to be aware of the impact of your financial decision so you’re not surprised, but don’t make a decision not to do something because of IRMAA. It’s a factor in the decision, not the deciding factor. And as always, talk to your financial team before doing anything. Look at all the options and pick the one that’s best for you.
If you don’t have a CFP who’s been doing this for a long time, reach out to us. If we’ve got space then we’d be happy to have a call. We don’t always, but I’ll get back to you either way.
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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.