Imagine this. You’re retired. You planned well. Your retirement income allows you to live a great life. Then, you get a letter saying your Medicare Part B premiums are going up 220%! After you pick yourself up off the floor and the panic has subsided a bit, you try to figure out why.
You may say, “But my income is about the same as it’s always been. How did this happen?” It could be a couple of reasons—both common to retired folks—selling a house or taking a large distribution from a tax deferred account. Either one has the possibility of kicking you into “the Surcharge Zone.”
Officially it’s called an Income Related Monthly Adjustment Amount, more commonly referred to as IRMAA. It’s a surcharge on high income Medicare beneficiaries applied on top of regular Medicare Part B and Part D premiums.
Although Medicare sets Part B premiums, the Social Security Administration looks at your income from the previous year to see if you owe a surcharge for next year. The SSA usually sends notices in late November to Medicare recipients who meet the surcharge criteria.
Many of the IRMAA surprises come from one-time spikes in income. For example, you sell the house you’ve lived in for a long time and the value is so high you have to pay capital gains on the sale. Or you take a large distribution from your tax-deferred retirement account. Both are taxable events and when Social Security checks your return for that year it looks like you made a lot of money, so you become one of the “lucky” recipients of an IRMAA door prize.
But there is good news. You may not be stuck with the IRMAA forever. You can ask Social Security to reduce or eliminate the surcharge if your income goes back down or you experience a life changing event, as defined by the SSA; events which include death of a spouse, marriage, loss of an employer pension, and others. You can also ask for a new determination if Social Security used outdated or incorrect information when calculating whether you owe a surcharge. The request can be submitted on Form SSA-44 or you can schedule an appointment with the SSA.
Selling your home doesn’t automatically kick you into IRMAA. According to the IRS, you can exclude the first $250,000 of capital gains from you the sale, $500,000 if you’re married, if the house is your primary residence and you’ve lived there two of the past five years.
Now that you know about IRMAA, consider some advanced planning to avoid the surcharge from showing up on your door step. For example:
- Reduce your income by making a qualified charitable distribution from your IRA directly to a charity
- Do tax-loss harvesting—sell investments in your portfolio that have a capital loss
- Pull income forward into this year by taking extra IRA distributions to cover next year’s expenses, do a partial Roth conversion, or sell some investments that have a capital gain