For many retirees, Medicare represents a degree of predictability in what is otherwise a complex healthcare landscape. For higher-income individuals, however, premiums can vary significantly based on income, thanks to a provision known as the Income-Related Monthly Adjustment Amount, or IRMAA.
Understanding how IRMAA works and how it interacts with broader financial decisions can help reduce costly surprises and create more room to plan.
What Is IRMAA and Who Does It Affect?
IRMAA adds a surcharge to standard Medicare Part B and Part D premiums for individuals above certain income thresholds. The adjustments are tiered, meaning premiums increase as income rises across several brackets.
What often comes as a surprise is not just that the surcharge exists, but how it is calculated. IRMAA is based on modified adjusted gross income (MAGI) from two years prior. Medicare premiums in 2025, for example, are determined by income reported on a 2023 tax return.
That two-year lag means decisions made today—such as realizing capital gains, taking large withdrawals, or converting retirement assets—can have implications that extend beyond the current tax year.
The Cliff Effect: Why Small Income Changes Matter
The tiered structure of IRMAA creates what planners often call a “cliff” effect. A relatively small increase in income can push an individual into the next bracket, resulting in a disproportionate jump in premiums.
For high earners, several types of income can move the needle:
- Required minimum distributions (RMDs)
- Social Security benefits (the taxable portion)
- Investment income, including capital gains
- Roth conversion amounts
- Large one-time withdrawals
Some of these income sources offer more flexibility than others. That distinction is where planning begins.
A Window Before RMDs Begin
Individuals who have retired but not yet reached the age when RMDs become mandatory often have a period of lower taxable income. This window can be valuable.
During these years, partial Roth conversions may allow individuals to move assets from pre-tax retirement accounts into Roth accounts at a lower tax cost, while staying within a targeted IRMAA tier. Once RMDs begin, those withdrawals are mandatory and fully taxable, which reduces flexibility in managing overall income levels.
Acting earlier, while income is more controllable, tends to produce better outcomes than waiting.
Managing Capital Gains Across Years
The decision to realize a capital gain in a given year should account for more than tax brackets. It should also factor in the potential Medicare premium impact two years later.
In some cases, spreading gains across multiple tax years can help avoid crossing into a higher IRMAA bracket. This approach requires coordination between investment decisions and income projections, but it can meaningfully reduce total costs over time.
Charitable Giving as an Income Management Tool
For individuals who are charitably inclined, qualified charitable distributions (QCDs) offer a planning opportunity worth examining. A QCD allows individuals age 70½ or older to transfer funds directly from an IRA to a qualified charity.
These distributions can satisfy all or part of an RMD without adding to taxable income. Because the funds go directly to charity rather than passing through the individual’s account, they are excluded from MAGI, which may help reduce IRMAA exposure.
Requesting a Reassessment After a Life Event
IRMAA determinations are not necessarily fixed. Certain qualifying life events may entitle individuals to request a reassessment based on more recent income, rather than the two-year-prior figure used by default.
Qualifying events can include:
- Retirement or reduction in work hours
- Death of a spouse
- Divorce or loss of pension income
- Other significant income changes
If any of these apply, submitting a life-changing event form to the Social Security Administration may result in lower premiums. Knowing this option exists is an important part of staying proactive after major financial changes.
Keeping IRMAA in Context
It is worth noting that avoiding IRMAA is not always the right goal. In some cases, strategies that temporarily increase income, such as Roth conversions, may produce long-term benefits that outweigh the short-term premium increase.
The more useful frame is alignment. Does managing IRMAA exposure support the broader financial plan, or does it conflict with other priorities? That answer will look different for every individual.
What tends to hold true across situations is the value of coordination. Tax decisions, investment timing, retirement income sequencing, and healthcare costs are interconnected. Evaluating them together produces better results than addressing each in isolation.
Working with an Advisor
For higher-income retirees and those approaching retirement, IRMAA planning is one area where working with an experienced advisor can make a measurable difference. The two-year lookback means that decisions need to be made with foresight, and the range of income sources that affect MAGI requires a coordinated approach across multiple areas of financial planning.
If you are uncertain how your income may affect your Medicare premiums, or whether a life event may qualify you for a reassessment, speaking with an advisor sooner rather than later leaves more options available.
Schedule a conversation with an HBKS advisor to review your retirement income strategy.
Frequently Asked Questions
Q: What is IRMAA and when does it apply?
IRMAA is a surcharge added to Medicare Part B and Part D premiums for individuals above certain income thresholds. It applies when modified adjusted gross income exceeds the base bracket, and the amount increases as income rises through several tiers.
Q: How far in advance does income affect Medicare premiums?
Medicare premiums are based on income from two years prior. This means the income you report today will affect your Medicare costs two years from now, making proactive planning essential for high earners.
Q: Can IRMAA surcharges be reduced after a major life change?
Yes. Individuals who experience qualifying life events, such as retirement, the death of a spouse, or a significant reduction in income, can request a reassessment from the Social Security Administration to have premiums recalculated based on more recent income.
Q: Is it always worth trying to avoid IRMAA?
Not always. Some strategies that raise income in the short term, such as Roth conversions, may provide long-term financial benefits that exceed the cost of temporarily higher Medicare premiums. The right approach depends on individual circumstances and overall planning goals.
Important Disclosure:
The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.
HBKS Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.
The historical and current information as to rules, laws, guidelines, or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified but was obtained from sources believed to be reliable. HBKS Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.
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