Understanding IRMAA: Income Related Monthly Adjustment Amount for Medicare

By info@landmarkwealthmgmt.com,

In 2003, in order to address a shortfall in Medicare, Congress passed the Medical Modernization Act of 2003.  In it, they created a progressive monthly surcharge to Medicare Part B coverage (which covers outpatient services) called the Income Related Monthly Adjustment Amount or IRMAA.  The surcharge began affecting those on Medicare in 2007.  In 2010, with the passing of the Affordable Care Act, they instituted a progressive surcharge on Medicare Part D premiums (which covers prescription drugs).  The premiums are based upon your annual income from two years prior to the current year, which is derived automatically by reviewing your tax return from two years earlier.

As it relates to IRMAA, income is defined as adjusted gross income plus tax exempt interest, also known as modified adjusted gross income (MAGI).

In the year 2023, if your income dating back to 2021 as a single filer was $97,000 or less, or if you’re married filing joint income was $194,000 or less, then your monthly premium is $164.90.  This increases to $230.80 after $97,000 or $194,000 filing jointly.   It tops out at $560.50 if your income as a single filer is above $500,000 or if your joint income is above $750,000.  This is also per person, so a married couple each pays this additional charge.

Medicare Part D surcharges begin for single filers with income over $97,000, and $194,000 for married filing jointly.  The first bracket surcharge is $12.20 per month and increases to $76.40 per individual if income is over $500,000 as a single filer, or $750,000 if married filing jointly.  A married couple could end up paying $1,273.80 per month in Medicare Part B and Part D premiums if in the highest tier!

The premiums and income brackets are as follows:

 

 

Premium             Part D Surcharge              2021 Income was:

                                                                                        Single                                                   Married Filing Joint

$164.90                                                                    $97,000 or less                              $194,000 or less

$230.80                 $12.20                                   $97,001-$123,000                     $194,001-$246,000

$329.70                 $31.50                                   $123,001-$153,000                   $246,001-306,000

$428.60                 $50.70                                   $153,001-$183,000                   $306,001-$366,000

$527.50                 $70.00                                   $183,001-$500,000                   $366,001-$750,000

$560.50                 $76.40                                   Above $500,000                           Above $750,000

Married Filing Separately

Premium             Part D Surcharge              2021 Income was:

$164.90                                                                    $97,000 or less

$527.50                 $70.00                                   $97,001-$403,000

$560.50                 $76.40                                   Above $403,000

 

As you can see, premiums can get quite expensive for retirees and if not properly planned for, can potentially derail a client’s retirement plans.

Retirees often express their frustration when they realize that despite contributing to a system throughout their lives, diligently saving and making wise financial plans, they are still required to pay additional premiums for Medicare at age 65. This added cost is imposed solely because they have been fortunate or have responsibly saved for their future, even though they receive the same benefits as others.  Often the question arises, what can be done to plan for this potential outcome.

The first thing to know is what income is used to determine your Modified Adjusted Gross Income.  Examples of income are wages, business income, dividends, interest both taxable and tax exempt, pensions, social security, rental income, and taxable distributions from retirement accounts such as IRA’s or 401k’s.  Distributions from Roth IRA’s, Health Savings Accounts and Life Insurance are not includable.

So, planning to reduce your income to avoid the surcharge is a potential way to plan around the assessment.  Remember, IRMAA looks at the income from two years prior.  Consider the timing of your income if you can.

As an example, if you have a gain that you’re anticipating, perhaps recognize the income earlier in life or being smart about recognizing it in a year where you have losses to offset the income.  Other considerations are Roth conversions to reduce future income from retirement accounts, actively using tax loss harvesting to reduce your current income or future capital gain income, gifting assets to reduce income recognition, charitable giving, either itemizing to reduce your current year income or using a Qualified Charitable Distribution to avoid the income from an IRA.  Using one or more of these strategies can potentially save a significant amount of money.

In some cases, you may have nominal control over the timing of income.  However, in the case of items such as stock options, stock grants, non-qualified deferred compensation plans, and other investments, there is a greater degree of control as to the timing of when you realize income, and how you may be able to spread out that tax liability.   Some advanced planning several years prior to age 65 can be impactful.

Remember that the income used to determine your income is from two years ago.  This means that in 2023, the premium is based on looking at your final 2021 income, not an average income since 2021.  As you can imagine, that can pose many issues as most people retire, then apply for Medicare.  They might have had their highest earning years in those years before retirement due to level of career success achieved later in life, additional hours worked, vacation payouts, option exercises, deferred compensation payouts or any other number of compensation arrangements.

As you retire, your income could be fixed and significantly reduced, and you’re possibly faced with higher monthly premiums than you anticipated.  In order to apply for relief, you can file with the Social Security Administration using form SSA-44.  This is used to notify Social Security of your income change due to a life changing event.  The life changing events that qualify are death of a spouse, getting married, divorce, reduction in work, complete stopping of work, loss or reduction in pension or loss of income from property due to things out of your control such as a natural disaster.

In the event your income naturally declines due to a life event such as retirement, your Medicare premium increase will adjust when your taxable income declines.  However, because of the two-year look back on income, someone retiring at age 65 may have as much as two years of substantially higher premiums.   Once your new income is updated, there is NO REFUND for the higher premiums paid over that two-year period.  Instead, only your future premiums will decline.  As a result, filing the IRMAA appeal can be highly beneficial.

As with all planning, it’s important to know the rules that you need to navigate.  If you’re unsure, consider working with a Certified Financial Planner® who is familiar with the rules and has experience in working with clients in retirement.

 

 

 

 

 

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What to Do When you Inherit Assets

By info@landmarkwealthmgmt.com,

If you are expecting to inherit a sum of money, there are many key considerations to be aware of in order to make the most of your inheritance regardless of the amount.  As you can imagine, the decisions can be tough but as with anything, going in with a plan is the best course of action.

 

Communicate with the Executor or Trustee

If someone has passed and you’re expecting an inheritance, you will be notified by the person in charge of the estate. In the case of an estate that is being probated, the Executor will administer the estate.  When an estate is settled via a trust, it would be the trustee.   They are going to provide you with the information that you need, where to open accounts, what type of accounts, and any money or assets that you’re due, if they know.  Sometimes, they might not know the exact amount due to market fluctuations, possible sales of assets at unknown amounts or even taxes and fees that may be due from the estate.

 

Determine your Responsibility

Where are assets?

Depending on the type of asset, the type of account you need to open may be different.  If the estate has a bank account, it could be very simple in that the estate might just provide a check to you.  If the estate owns stocks or bonds, and they decide they are going to bequeath those positions to you, you will need a brokerage account to accept those positions.  If you are inheriting an IRA, then you may need to set up an Inherited IRA to accept those assets.  From there you can decide what to do with the IRA assets, whether you want to receive a distribution or if you want to stretch those distributions out according to allowable IRS guidelines.  There are some relatively complex rules governing the IRA along with potential tax implications.  Suppose you inherit a car, or a home.  You will have to update the title to those assets.  Make sure you register the car, properly insure any assets that need insurance, and update your estate plan!

Distribution requirement

As mentioned earlier, if you inherit an IRA or become an Income Beneficiary to a trust, receiving a distribution will be required.  It’s very important to know your responsibilities if you inherit an IRA.  Your distribution requirement is determined by your status of being an Eligible Designated Beneficiary or a Non-Eligible Designated Beneficiary assuming the person passed in 2020 or later.  An Eligible Designated Beneficiary is a spouse or minor child of deceased, disabled or chronically ill individual or an individual that is not more than 10 years younger than the IRA owner or plan participant.  It’s important to note, a minor child is required to take the distribution over ten years once they turn age of majority.  The Eligible Designated Beneficiary can take the distribution over their life expectancy, or the ten-year rule, whichever is longer.  You can always take more out if you need it, it just becomes taxable so try to time your distributions appropriately.   If you are going to receive distributions from a trust, they could be taxable income.  You would receive the proper tax forms but it’s important to know that up front for planning purposes.

A Non-Eligible Designated Beneficiary must take their distributions over the ten-year rule, which essentially means that all the funds must be distributed at the end of ten years.  You may need to take annual distributions during that 10-year period.  If the IRA was a pre-taxed account as opposed to a Roth IRA, then the distributions will be treated as ordinary income.

Set Up New Accounts

If you are required to set up a new account, you will need to provide your information along with identification.  Reach out to the firm to ensure you have the necessary documentation and any additional information such as your bank or beneficiary information.

 

Titling of Assets

When you inherit assets, you must determine how the assets will be titled.  You may be able to own certain assets individually, joint or through a trust.

If you do decide to title an asset in individual ownership, you should be aware it may pass through probate.  In order to prevent probate, make sure you add a beneficiary if you can, or have a trust own the asset.  The benefit to having one owner is that you can determine who the asset will go to and may be prevented from having been declared a spousal asset in the event of a divorce or passing.

If you choose to own an asset in joint titling, there is more than one way to title an asset jointly.

You can use Joint Tenants with Rights of Survivorship (JTWROS).  This means that upon your passing, the other joint tenant inherits 100% of the asset.

There is also the option of Joint Tenants in Common, in which your share passes to your estate, while the joint tenants inherits their share.

When using JTWROS, which is the most common, remember you’re giving up a portion of the asset to the other party, and that can pose a risk.  It’s important to think through how the title could affect those assets.  Although titling assets in joint name can help as both can access and use the asset, it would be inherited completely by the other party if something happens to you.  The new owner can determine the new beneficiary.  That could pose a problem in a second marriage if kids that are not yours inherit these assets.

Another method would be to title the assets via the use of a trust.  Perhaps the assets are required to move to a trust.  With proper planning, you can determine if a trust is a better way to title the assets such as in a second marriage situation, creditor and spendthrift protection.  As always, it’s important to have a discussion with professional guidance in order to ensure the titles align with your goals.

 

Taxes

The federal government does not assess an inheritance tax and only six states have an inheritance tax as of this writing.  However, as referenced earlier, if income is received from the assets, then that income will accrue to you, and you will have to account for that income for tax purposes.  It’s important to be aware of the income and the tax nature of that income.  Make sure you have proper withholdings in place.  As with IRA’s, plan out when you can receive that income in the best year to the extent possible.

 

Set Goals

As with all planning, receiving any money is impactful to improving financial plans.   As with any financial plan, it’s important to set goals, determine where the money will go, whether it’s used to pay off debt, build an emergency fund, pay for or save for college, retirement, vacations, renovations, charitable causes or other purchases.  It may be that your goals are some or all of the above.   The appropriate type of account would be determined based on the stated goals.

 

Make Prudent Decisions

Work with professionals.

As with any asset, you should use this opportunity to improve your overall financial plan.  In order to make sure you have a second set of eyes and help with making sure you don’t make any mistakes, we would encourage you work with the proper professionals such as your Estate Attorney, Accountant and your Financial Planner.   It can be a blessing to receive a windfall, and the proper planning can avoid irreversible mistakes.

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