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Retirement Simplified is the podcast dedicated to arming you with the tips and tactics necessary to realize your retirement aspirations. My mission is simple - to make complex retirement topics simple. My overarching objective for all my clients (and listeners) is to instill confidence in their retirement, and that starts with a rock solid strategy. Through weekly episodes, I provide the latest insights and strategies to create a retirement plan that gets you up in the morning. From investment pointers to tax planning, withdrawal tactics, insurance considerations, and Social Security insights—this podcast covers it all and more! Let's work together to optimize your golden years. By leveraging your resources and the strategies I discuss in this podcast, we can achieve just that!
Ryan Kolden:
Today, I'm going to go over a little-known Medicare surcharge that has the potential to eat into your Social Security as well as your retirement income. I'm also going to tell you about everything you need to know about the Income-Related Monthly Adjusted Amount, or IRMA for short. and what you can do to reduce this surcharge in your retirement. Welcome to Retirement Simplified, where we focus on making complex retirement concepts simple. I'm your host, Ryan Colden. Join us as we talk about the strategies and tactics that can help you achieve your retirement goals.
Disclaimer & Disclosure: Ryan Kolden is an investment advisor representative of RPG Family Wealth Advisory. Kolden Wealth is a DBA of RPG Family Wealth Advisory. The opinions expressed by the host and or guests in this podcast do not necessarily reflect the opinions of Kolden Wealth or RPG Family Wealth Advisory. No information on this podcast should be construed as investment, legal, tax, or financial advice.
Ryan Kolden: Today, I'm going to explain the income-related monthly adjusted surcharge, what it is, and how high income earners can reduce this Medicare surcharge in retirement. And before we dive into it, I want to start by saying what we're talking about today is just an open discussion, and it's simply for educational purposes only. It's not tax or financial advice. Always seek tax advice from a licensed advisor. Now, with that out of the way, let's discuss IRMA. Although it's technically labeled a surcharge, the IRMA surcharges, what they are, they're effectively an additional tax that qualifying Americans unfortunately have the pleasure of paying on their Medicare premiums. So you probably picked it up when I said qualifying Americans, right? So how does one technically qualify for the IRMA surcharge? Simply put, if you meet certain income thresholds, and these can change annually, and they do change annually, you pay more for your Medicare premiums while receiving the same exact coverage as all other Americans. government is in effect putting a wealth tax on Medicare. Again, they call it a surcharge. In my personal opinion, I call it a wealth tax. And I'm not going to spend a whole lot of time on the background around IRMA, but it's really no secret that Social Security is underfunded. In a 2024 report by the Congressional Research Service, they found that the Social Security Trust Fund will remain solvent until about the year 2033 to 2034. which at that point, social security benefits will have to be reduced by about 30% to keep the program funded for another 75 years or so. Now, in case you didn't know this, if you paid into social security and you earned it, you're gonna go ahead and get Medicare Part A for free. And when it comes to Parts B and D and Medigap, you have to pay a monthly premium for these services. and these parts, right? And these premiums are automatically deducted from your social security payment. And just to be clear, parts B and D are separate, so you have to pay a premium for both part B and then part D, and then also admit a gap as well. It's not all combined with one another, they're separate. And this is just my personal opinion, but the IRMA surcharge was put in place so Congress doesn't have to do the politically hard thing and cut social security benefits, which would anger their voter base. So rather than cutting social security benefits, they're increasing premiums on Medicare benefits to offset increases in social security and Medicare program expenses. And simply put, it's a way to collect a surcharge without calling it a tax or a wealth tax. So what is the IRMA surcharge based off of? Well, it's based off of your taxable income, but from two years ago. I'll go ahead and say that again in case you didn't catch it. It's based off of your taxable income from two years ago. And I encourage you to take a look at the IRMA income brackets, which you can find on the Social Security Administration website. I will go ahead and put that link in the description or the show notes, that way you can look at it. And then again, just to be clear, there are two separate surcharges. or possibly even three, depends how many additional parts of Medicare you want to add on. So the first additional part that you're most likely going to have is for your Part B premium, your Medicare Part B premium. And the second one will be for the Part D premium. And if you decide you want a more comprehensive coverage, you can get MediCap, and then there will also be a premium on that as well. in one short-term solution that you could possibly implement to reduce this surcharge. And again, I want to stress that this is a short-term solution only. This isn't going to protect you from future income creases due to things like, let's say, required minimum distributions. And we'll get into that in the income sources a little bit later. The short term solution is you can appeal your IRMA surcharge or the calculation if your income is significantly lower than it was in the two years prior or your financial situation has changed. And for most people, They go to retire, and so their financial situation has changed. Someone that may not qualify for that is someone who decides that they want to continue working past the age of 65 when you enroll. So your income is the trigger for whether or not you have to pay the IRMA surcharge. And more specifically, it's your taxable income. So let's go ahead and dive into some common triggers that can actually cause you to have to deal with this IRMA surcharge. So first off, you need to understand that your IRMA is calculated off of taxable income, specifically your modified adjusted gross income from two years ago. If your taxable income is high or increases in retirement, you will pay a surcharge on your Medicare premiums. Again, so it is possible to start off not paying this premium. And then over time through retirement, most people start taking the requirement of minimum distributions, which bumps them up into an IRMA bracket where they have to then pay the surcharge. So some other common IRMA triggers could be things like retirement pensions that are 100% taxable. required minimum distributions from qualified retirement accounts. And this is probably the biggest culprit of them all is the RMDs from retirement accounts. increases to social security payments. So if you didn't know this, every single year, social security qualifies for a COLA adjustment. That's cost of living adjustment, which is, you know, basically bumps up your social security payment over time to account for inflation. Some years you could get a hefty bump increase, some years it's zero. It all just depends on what the government allows for inflation that year. Some other things that can bump up your IRMA surcharges is if you are collecting a lot of rents, and then finally capital gains from asset or business sales. Now, you're probably thinking, okay, maybe the Medicare premium or the IRMA premium isn't that bad. So what's the cost and then who qualifies, right? For Americans who do qualify for IRMA, right, meaning that you fall in one of the income brackets that has to pay this, again, check the website for referencing the brackets. The additional expenses from IRMA can be staggering over a retiree's lifetime. So for financially successful Americans who have saved for retirement, IRMA can potentially double or triple the out-of-cost pocket Medicare expenses for a retiree on an annual basis. And to make matters even worse, and I'll get into this a little bit deeper, but just like there's a cost of living adjustment for social security, Medicare parts B and D are also indexed for inflation. So the cost goes up every year. So typically the increase in IRMA premiums will offset any social security cost of living adjustment increases and reduce the take home amount of your social security income for a person. So again, just to reiterate, your Medicare premiums will be deducted from your social security and the cost of living adjustment on average goes up at a slower rate than does the cost of your Medicare's Part B and D. So the cost of that premium or your expenses are getting higher and are moving, expanding at a faster rate than your income's growing. So I think you could see what the issue with that is. And in situations like 2022, where we had rampant inflation, the combination of inflation and less actual take home pay can really have a significant effect on a retirees quality of life and their ability to pay expenses. So what can you do? in your retirement plan to protect your income from the IRMA surcharge. So there's a couple of areas that you can do some planning around in order to fight this. They include the tax arena, legal, and finally financial planning, which we're going to focus mostly on financial planning. However, let's start with the accounting side. So on the accounting side, you can ensure that you have a good CPA who's aware of the surcharge and knows how to properly take and maximize your deductions to reduce your taxable income. So that's the first thing you can do. On the legal side of the house, you can ensure that asset ownership is properly structured within trusts or LLCs in order to reduce realized taxable income on both number one, asset revenue, and number two, capital gains. And finally, on the financial side of the house, you can eliminate taxable income streams prior to retirement. Additionally, and this is probably the biggest needle mover for most people, converting taxable retirement accounts to non-taxable retirement accounts. And this can include a lot of things, but for most people, it's gonna include things like Roth conversions prior to retirement. It's also gonna include things like the use of tax loss harvesting accounts, tax advantage investments, and investment credits, and taking advantage of depreciation generating strategies. Now, before I close things out, I want to leave you with a few things to think about. First, based on the government's current spending habits, In the future, do you think taxes are going to go up? Are they going to go down or are they going to stay the same? And if you said taxes are going to go up, and most people that I ask say that they're going to go up, do you think it makes more sense to pay a smaller tax now or to let it grow and pay a larger tax to the government in the future? I'll let you think about that. Now, according to the Social Security Board of Trustees, Social Security COLA, again, Cost of Living Adjustment, which is the percent increase to your Social Security each year to adjust for inflation, that Social Security COLA is projected to increase at 2.4% annually from now until 2030. The average projected increase for Medicare parts from now until 2030 are as follows. So Medicare Part B, that premium is projected to increase by 6.3% annually. Medicare Part D, that premium is projected to increase by 5.19% annually. And then Medigap Part G is projected to increase by 5.77% annually. And again, I spoke about this earlier, but in case you didn't catch what the issue is here, your Medicare premiums are projected to grow at double the rate of your Social Security increases. Your costs are going up more than your incomes at double the rate of your income. And again, This is just my opinion, but this is one of Congress's methods that they're using to address the shortfall in social security funding. Now, before you go ahead and get bent all a shape, this is a bipartisan issue. It's not specific to one political party. Both parties have participated in approving, setting up and implementing IRMA. Again, this is not bipartisan. To summarize what we went over today, effective retirement account and retirement income distribution planning can help high income earners avoid IRMA surcharges in retirement. IRMA surcharges can cost retirees six or seven figures of spendable retirement income if it's left unaddressed. Simply converting your 401k to a tax-free account prior to retirement may dramatically help high-income earners reduce their IRMA surcharges throughout their retirement. For high incomers, I cannot emphasize enough the importance of ensuring that retirement income is converted and paid on a non-taxable basis in retirement to minimize this expense. That's a wrap for today. If you'd enjoyed this video, please like and subscribe to the show and share this with anybody that you think could benefit from hearing it. And don't forget to check out my free resources, which you can find in the description in the show notes. Take care and I'll catch you next time. Hey, real quick before you go, thanks for listening and please remember to hit follow on your podcast player. You won't miss any episodes and it helps support us bring you the show. Today's show notes and resources are available to you by clicking the link in the description. The opinions and views expressed here are for informational purposes only and does not tax, legal, financial, investment or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and a potential for a loss of principle. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.