Let’s face it – nobody wants to pay more for Medicare than they have to. When you’ve worked hard and saved diligently for retirement it can feel like a punch in the gut to discover you might be paying higher Medicare premiums than your neighbor who gets the exact same coverage. This is where understanding IRMAA and how your Roth accounts interact with it becomes super important.
As someone who’s helped dozens of clients navigate this confusing landscape I’ve seen firsthand how proper planning around Roth accounts can save retirees thousands of dollars in Medicare premiums. Today I’m gonna break down everything you need to know about Roth income and IRMAA in simple terms.
What Exactly is IRMAA?
IRMAA stands for Income-Related Monthly Adjustment Amount. It’s just a fancy word for “Medicare premium surcharge for people with higher incomes.” When your income goes over certain limits, Medicare will charge you more for Parts B and D.
Even though you pay more, you don’t get any extra benefits; it’s still the same coverage, but it costs you more. Talk about unfair!.
IRMAA is calculated based on your Modified Adjusted Gross Income (MAGI) from two years prior. So in 2024, Medicare looks at your 2022 income to determine your premiums. This two-year lookback period is crucial to understand when planning.
Here’s the Good News About Roth IRAs and IRMAA
The short answer: No, Roth IRA withdrawals do NOT affect IRMAA.
This is one of the biggest advantages of Roth IRAs! When you take money out of your Roth IRA during retirement, these withdrawals are tax-free and don’t count toward your MAGI for IRMAA calculation purposes.
Withdrawals from traditional IRAs and 401(k)s, on the other hand, are fully taxed and do count toward your MAGI, which could put you in a higher IRMAA bracket.
IRMAA Brackets and Surcharges (2024)
Let’s look at what IRMAA might actually cost you. Based on income from 2022, here is how the 2024 IRMAA surcharges are broken down:
| Filing Status | Income Threshold (2022) | Part B Surcharge | Part D Surcharge |
|---|---|---|---|
| Individual | $97,001 – $123,000 | $12.40 | $12.20 |
| Individual | $123,001 – $157,000 | $34.30 | $34.20 |
| Individual | $157,001 – $194,000 | $77.70 | $77.40 |
| Individual | $194,001+ | $124.90 | $124.60 |
| Married Filing Jointly | $194,001 – $252,000 | $12.40 | $12.20 |
| Married Filing Jointly | $252,001 – $314,000 | $34.30 | $34.20 |
| Married Filing Jointly | $314,001 – $388,000 | $77.70 | $77.40 |
| Married Filing Jointly | $388,001+ | $124.90 | $124.60 |
As you can see, crossing into a higher bracket can cost you hundreds of dollars more annually in Medicare premiums. And remember – these premiums apply PER PERSON, so for married couples, the costs essentially double.
The Catch-22 of Roth Conversions and IRMAA
Here’s where things get tricky. While Roth IRA withdrawals don’t affect IRMAA, the process of converting money from a traditional IRA to a Roth IRA absolutely DOES affect your IRMAA.
When you convert traditional IRA money to a Roth IRA, the converted amount counts as taxable income in the year of conversion. This added income could potentially push you into a higher IRMAA bracket for two years after the conversion.
I had a client, let’s call him Bob, who converted $200,000 to his Roth IRA two years before starting Medicare. He thought he was being smart by converting a large amount at once. Little did he know, this caused his Medicare Part B premium to jump to $527.50 per month instead of $428.60 – that’s almost $1,200 more per year! If he had converted just $9,000 less, he would’ve stayed in a lower IRMAA bracket.
IRMAA vs. Tax Brackets: A Critical Difference
Here’s something super important that many people miss: IRMAA brackets work differently than tax brackets!
With tax brackets, if you go $1 over a bracket threshold, only that $1 gets taxed at the higher rate. But with IRMAA brackets, going just $1 over the threshold means the entire surcharge applies. This can result in paying thousands more in Medicare premiums for that single dollar of extra income.
This is why careful planning around Roth conversions is crucial if you’re near Medicare age.
Smart Strategies to Minimize IRMAA with Roth Accounts
Now that we understand how Roth income and IRMAA interact, here are some strategies to potentially save thousands on Medicare premiums:
1) Spread Out Roth Conversions
Instead of doing large Roth conversions in a single year, consider spreading them out over several years before Medicare eligibility. This keeps your yearly income lower and can help you stay under IRMAA thresholds.
2) Time Your Conversions Strategically
Since IRMAA uses a two-year lookback period, consider doing larger Roth conversions in years that won’t affect your Medicare premiums. For example, if you’re 62, your income won’t affect IRMAA until you’re 65 (when Medicare typically begins).
3) Leave a Buffer When Converting
Don’t cut it too close to IRMAA thresholds. Convert a bit less than the maximum allowed in your current bracket to give yourself some wiggle room for unexpected income.
4) Use Roth Withdrawals in High-Income Years
Once you’ve built up your Roth accounts, you can strategically withdraw from them in years when your other income is high. Remember, these withdrawals won’t count toward IRMAA calculations.
5) Consider Converting Before Medicare Eligibility
If you retire early, the years between retirement and Medicare eligibility (age 65) might be ideal for Roth conversions. Your income may be naturally lower, and the conversions won’t yet affect your Medicare premiums.
Real-Life Example: How Roth Planning Saved My Client Money
I worked with a couple who had about $900,000 in traditional IRAs that they wanted to convert to Roth accounts. In our initial analysis, we found that converting half ($450,000) in each of two consecutive years would push them into the highest IRMAA bracket, costing them thousands extra in Medicare premiums.
Instead, we created a 5-year conversion strategy that kept them just below key IRMAA thresholds each year. This careful planning saved them over $7,000 in Medicare premiums while still accomplishing their Roth conversion goals!
Other Ways to Reduce IRMAA Beyond Roth Strategies
While Roth accounts are powerful tools for managing IRMAA, here are some additional strategies to consider:
- Maximize retirement contributions if you’re still working to reduce your taxable income
- Delay Social Security until age 70 if possible, as it won’t count toward IRMAA during the delay
- Consider Medicare Advantage plans as alternatives to traditional Medicare with potentially lower out-of-pocket costs
- Appeal your IRMAA surcharge if you’ve experienced a life-changing event like retirement, divorce, or death of a spouse that reduced your income
Common Questions About Roth Income and IRMAA
Does Social Security income count toward IRMAA?
Only the taxable portion of your Social Security benefits counts toward your MAGI for IRMAA purposes, not the total amount.
If I’m already paying IRMAA surcharges, should I still do Roth conversions?
It depends on your overall situation. Sometimes it makes sense to “bite the bullet” on higher IRMAA costs temporarily to enjoy tax-free Roth withdrawals for the rest of your life.
Can charitable giving help reduce IRMAA?
Yes, qualified charitable distributions (QCDs) from your IRA can reduce your MAGI for IRMAA purposes if you’re over 70½.
Final Thoughts
Understanding how Roth income affects IRMAA is essential for effective retirement planning. While Roth IRA withdrawals don’t impact your Medicare premiums, Roth conversions certainly can.
The key is to be strategic about when and how much you convert to minimize the IRMAA impact while still taking advantage of Roth accounts’ long-term benefits. With careful planning, you can potentially save thousands of dollars in Medicare premiums throughout your retirement.
I always tell my clients: Don’t let the fear of temporary IRMAA surcharges prevent you from making smart long-term Roth conversion decisions. Sometimes paying a little more now can save you a lot more later.
What strategies have you used to manage your IRMAA costs? Have Roth accounts been part of your Medicare premium planning? I’d love to hear your experiences in the comments below!
Disclaimer: This article is for informational purposes only and is not intended as tax, financial, or legal advice. Everyone’s situation is different, so please consult with a qualified financial advisor or tax professional before making decisions about Roth conversions or Medicare planning.
Does ‘Medicare income limits’ mean the same thing as IRMAA?
When people talk about “income limits” with regard to Medicare, they could be referring to the threshold where IRMAA surcharges start to apply for those on the higher end of the income spectrum. (Above a certain income limit, you’ll be subject to IRMAA, but below it, you won’t. ).
But they could also be referring to the income thresholds that apply to Medicare Savings Programs and dual eligibility for Medicare and full Medicaid, for those on the lower end of the income spectrum. (Note that on the lower end, eligibility rules also include asset limits, in addition to income limits. ).
So you’d need to know the context to determine which program is being discussed: Is it an upper income limit, below which a person has access to certain financial assistance with their coverage? Or are they referring to the highest income a person can have and not be subject to paying additional premiums for their Medicare coverage?.
Can I appeal the IRMAA determination?
You can appeal the IRMAA determination – filing for a redetermination – if you believe the calculation was erroneous. In addition, if you have had a life-changing event such as a loss of income or divorce, then you can refile or you can file for a redetermination using Form SSA-44. For example, if you were still working in 2023 but have since retired, your current income might be lower than the income that was reflected on your 2023 tax return. If that’s the case, you can file for a redetermination, instead of waiting for your tax returns to catch up.
If you do not agree with a redetermination, there is a formalized appeal process – the third level of appeal – technically called the Decision by Office of Medicare Hearings and Appeals (OMHA). (Note that this is a different procedure from the appeal or grievance procedure when you receive denials of service from Medicare Parts A, B, or D.)