Nice Problem to Have – IRRMA

THERE ARE TWO THINGS that Americans loathe paying: taxes and health care costs. When those two come together, watch out. That brings us to IRMAA, short for income-related monthly adjustment amount, the steeper Medicare premiums paid by retirees with high incomes. Those who pay IRMAA are often livid about the extra cost. I looked up my Social Security records.

Over my working career, I paid $98,062 in Medicare taxes and my employer paid $97,735, for a total of $195,797. Yes, that’s a lot of money. But my wife, who didn’t have any earned income after 1970 and thus paid minimal Medicare taxes, has incurred bills paid by Medicare well in excess of $300,000.

Many retirees can say the same and most paid far less in Medicare taxes than I did. Keep in mind that the current taxes funding the Medicare hospital trust are inadequate. The trust will run out of money in about four years. The standard Medicare Part B premiums only fund about 25% of the program’s costs. The balance comes from general federal government revenue.

In that context, the IRMAA surcharges don’t seem so terrible. Yet, when I pointed out to a group of retirees that the income-based premiums affected only 7% of retirees, many weren’t impressed. Many also discounted the fact the premiums start at $91,000 for individuals and $182,000 for couples, well above the typical U.S. household income.

Here are some of the replies I received from various Facebook groups:

“I think Medicare and IRMAA are a scam.”

“Considering that all those years I paid the maximum into Social Security and Medicare and now am having Social Security taxed but also having Social Security income increasing my IRMAA, it just wasn’t worth it to me.”

“I consider it a federal fine for being successful.”

Affluent current and future retirees seek ways to avoid or limit IRMAA. One strategy is to fund Roth accounts or to make Roth conversions two years in advance of Medicare. Tax-free distributions from Roths aren’t counted when determining income for IRMAA purposes, but tax-free municipal bond interest is. Go figure.

I think keeping your income low to avoid paying $816 a year more in Part B premiums—that’s the sum if you breach the first IRMAA income threshold—is a losing proposition. But this Facebook commenter didn’t think so: “The last thing you want is to make $1 more than the [IRMAA] bracket. That’s really feeling screwed.”

Yes, IRMAA is a so-called cliff penalty. Even if you’re just $1 above the threshold amount, you get charged the full extra premium for that income level. The premium surcharges could have been better designed. Still, is it so unreasonable for high-income retirees to pay more for Medicare?

Read more by Richard Quinn

Source: Nice Problem to Have – HumbleDollar

9 comments

  1. You ask: Still, is it so unreasonable for high-income retirees to pay more for Medicare?

    In a word, yes!

    The tax payments you listed are incomplete.
    – While you were working, that was you paying not only FICA-Med, but also 75% of the cost of Medicare Part B for others and if you are still paying income taxes, you’re still paying the other 75% of the cost of Medicare Part B.
    – For the last few years prior to your retirement, that was you paying not only FICA-Med, but also 75% of the cost of Medicare Part D – and, again, if you are still paying income taxes, you’re still paying the other 75% of the cost of Medicare Part D.
    – You need to adjust your FICA-Med, general revenues for Part B and Part D for the time value of money.

    My estimates are that you and your spouse could never receive Medicare benefits that come close to approaching the funding from your FICA-Med and general revenue (income taxes) plus earnings.

    Myself, I am still working, currently covered under Part A, B and D. So is my spouse. I have paid in a little more in FICA-Med (in nominal dollars) than you did. I’m still paying in.

    So, believe it or not, when I get hit with IRMAA in 2023, I paid for A and B throughout my working career (1969 – today), and for part D since 2006 to today, and with the imposition of IRMAA next year (based on the last year our household had full time earnings), we will be paying well in excess of 100% of the cost of our Medicare coverage.

    And, assuming I continue employment through 2026, I’m expecting to see two changes:
    First, an increase in FICA-Med taxes once the trust fund reserves are exhausted, and
    Second, a lowering of the IRMAA income threshold.

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    1. I suppose you also feel it is unfair to pay higher income tax rate on part of your high income. At the same time I am assuming you are not campaigning to adjust capital gains rates to be more in line with income tax rates. And you are probably one of those people impacted by SALT deduction limit for itemized deductions. SMH

      Liked by 1 person

      1. “ At the same time I am assuming you are not campaigning to adjust capital gains rates to be more in line with income tax rates.”

        There are reasons for different income/long term capital gains rates. First of all, LTCG are subject to the effects of inflation since you have to hold your asset for more than a year (unlike income which can be spent immediately). Secondly, LTCG encourages less froth in the market. It also encourages a longer term outlook by the company rather than immediate, short term return.

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  2. I recently read a strategy about not waiting until RMD to withdraw from your 401K more than you need. If you are over the 15% income tax bracket and you start withdrawing that may put you into a higher income bracket. If all the sudden you go from filing joint to single income taxes, your tax bracket may jump. I guess it will affect your IRMAA too.
    One solution that was offered was withdrawing from your 401K before collecting Social Security which will also drive up your income for tax purposes. Don’t spend the withdraw but re-invest it into the same funds that you have in a brokerage account. Most people will only pay 15% capital gains on the money if they withdraw from the brokerage account. May a large RMD withdraw , along with Social Security, and any other pension might put you above 20% tax bracket?
    I see that they are trying to raise the RMD to age 75. I think that might do more harm than good. Yes people can leave the money alone if they don’t need it in their 401K but when they are forced to withdraw they are more than likely a widow and will jump into a higher tax brackets and be force to take larger amounts out at one time too.
    I still have about a dozen years to go for the RMD. And paying taxes is a good problem to have vs applying for assistance. I’ll have to add the affects on IRMAA as well as taxes for any RMD withdraws. I have to do more research but it is something to think about.

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    1. It is better to withdraw from your 401K before collecting Social Security to reduce tax-deferred balance prior to RMD age, but to convert what you don’t need to spend directly to a Roth IRA so your re-investments avoid capital gains taxes.

      Liked by 1 person

      1. Good to know, thanks. I haven’t ask my financial advisor yet, but at least I am starting to the right questions to ask and what I should hear.

        Liked by 1 person

  3. I suppose you could say it is a good problem to have if there is such a thing as good problems. Certainly having a high enough retirement income to be affected by IRMAA is a blessing rather than a problem.

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