Most federal retirees are eligible to receive a monthly Social Security retirement benefit, starting as early as age 62. Many retirees wait until at least their full retirement age (FRA) (currently, age 66 years and eight months for individuals born in 1958, will be age 66 years and 10 months for individuals born in 1959, and age 67 for individuals born after 1959) to start receiving their monthly benefit. During 2024, the average monthly Social Security retirement benefit is $1,900.
In addition, most federal retirees enroll in Medicare when they are age 65. In particular, Medicare Part A (Hospital Insurance) and Medicare Part B (Medical Insurance). Since a federal retiree has paid the Medicare Hospital Insurance Tax (HIT) for at least 10 years during their working years, there is no monthly premium for Medicare Part A. But there is a monthly premium for Medicare Part B. Medicare Part B pays for doctors’ visits, outpatient care, laboratory fees, and other medical insurance claims. During 2024, the standard monthly premium for Medicare Part B is $174.70. The Medicare Part B monthly premium is usually deducted from a Social Security recipient’s monthly retirement benefit check.
However, not every Medicare Part B beneficiary pays the standard $174.70 monthly premium during 2024. Those beneficiaries with high incomes pay more for Medicare Part B health insurance coverage. During 2024, retirees with high incomes are paying as much as $594 a month, or $1,188 for a high income married couple in which both spouses are enrolled in Medicare Part B, if they are subject to the Income-Related Monthly Adjusted Amount (IRMAA). Fortunately, an understanding of IRMAA rules can help Medicare Part B beneficiaries and their advisors to minimize IRMAA and pay more for Medicare Part B.
This column discusses what federal retirees can do to minimize IRMAA charges in the future.
Understanding IRMAA
IRMAA was created by Congress under the Medicare Modernization Act of 2003 and took effect in 2007. At that time, IRMAA applied only to Medicare Part B premiums. Under the Affordable Care Act, IRMAA was expanded to include Medicare Part D (Prescription Drug Coverage) monthly premiums and took effect in 2011.
As a matter of fact, the federal government pays on average 75 percent of the calculated full cost for Medicare Part B premiums and Medicare Part B beneficiaries pay the remaining 25 percent through the standard premium ($174.70 per month during 2024). However, for Medicare Part B beneficiaries who are subject to IRMAA, the federal government subsidy gradually decreases, resulting in higher income beneficiaries paying a higher percentage of the full Part B premium costs. The affected Medicare Part B beneficiary percentages increase in tiers to 35 percent, 50 percent, 55 percent, 80 percent and 85 percent, of the calculated actual monthly Medicare B monthly premium.
In addition, it should be noted that the Social Security Administration (SSA) requires that Medicare Part B premiums (including IRMAA surcharges) be automatically deducted from a Medicare Part B beneficiary’s monthly Social Security benefit. If the total of the Medicare Part B monthly premium is larger than the Social Security monthly benefit, the federal Centers for Medicare and Medicaid Services (CMS) will bill the Medicare Part B beneficiary for the balance due of the monthly Medicare Part B premium.
It is also important to note that while Medicare Part B results in a reduction of a monthly Social Security retirement benefit, the reduction in the benefit is not deductible for federal income purposes. The following example illustrates:
Example 1. Gloria’s full (gross) monthly Social Security retirement benefit during 2024 is $3,000. As much as $2,550 (85 percent of the $3,000 before Medicare premiums are paid) may be included in Gloria’s 2024 taxable income, regardless of the net amount of Social Security amount she receives. If $454 a month comes out of Gloria’s monthly Social Security benefit to pay her monthly Medicare Part B premium , then Gloria will receive a net monthly payment of $3,000 less $454, or $2,546. Gloria will include in her 2024 federal income tax return as much as $2,550 of her monthly Social Security payment, even though her payment was reduced by $454 to pay the monthly Medicare Part B premium.
Understanding How IRMAA is Related to MAGI
IRMAA applies if modified adjusted gross income (MAGI) exceeds certain thresholds. MAGI for IRMAA purposes is determined by taking adjusted gross income (AGI) and adding tax-exempt investment interest and dividend income. This means that investing in municipal bonds (paying federal income tax-free interest) and municipal will not help in minimizing exposure to IRMAA.
During 2024, Medicare beneficiaries with MAGI up to $206,000 (married couples filing jointly) or $103,000 (single or head of household tax filers) will not be subject to IRMAA. But higher income may fall into five “income tiers.” An additional $1 of income can create IRMAA exposure. The following example illustrates:
Example 2. Carl files his federal income tax as single. During 2022, Carl’s MAGI was $103,000. Carl owes the standard Medicare Part B premium of $174.70 per month.
Another single tax filer, Noreen, had $103,001 of MAGI during 2022. As a result of her MAGI exceeding $103,000 (just $1!) Noreen owes an IRMAA of $69.90, resulting in her paying $244.60 monthly ($174.70 plus $69.90) for her Medicare Part B premium during 2024.
Note that there is a two-year lag between MAGI and IRMAA. For both Carl and Noreen in example 2 above, their 2022 MAGI was reported on their tax returns filed in spring 2023. That information will be used to set Carl’s and Noreen’s IRMAA premiums during 2024. Therefore, MAGI is used as early as age 63 for individuals who enroll in Medicare Part B in the year they reach age 65 and continues year after year.
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Strategic Planning and Tracking Income to Minimize IRMAA Surcharges
While delaying the receipt of Social Security retirement benefits past one’s full retirement age until age 70 may be desirable because it can maximize monthly Social Security benefits, it can also lead to higher MAGI (recall that 85 percent of a Social Security benefit is includible in taxable income). This is especially the case once a federal retiree reaches his or her Required Minimum Distribution (RMD) age, at which time traditional IRA and traditional TSP RMDs start. Between larger monthly Social Security payments and RMDs, the additional income can lead to larger IRMAA. This means that federal retirees who will collect sizeable Social Security benefits should consider several ways to limit MAGI in the future. The following are some suggestions for federal retirees to limit their current and future MAGI:
- Roth IRA conversions. Converting monies from before-taxed traditional IRAs to Roth IRAs may reduce future traditional IRA RMD that will be included in MAGI. The disadvantage is that Roth IRA conversions result in current year income that will add to MAGI in the year of conversion. Therefore, it makes financial sense to begin partial Roth IRA conversions as early as practical, ideally before age 63 at two years before one enrolls in Medicare Part B.
- Building up Health Savings Accounts. Federal employees may want to enroll in a qualified high deductible health insurance plan and make tax-deductible contributions to a tax-favored Health Savings Account (HSA). The HSA accrues earnings which grow over time and, when withdrawn together with HSA contributions, are tax-free to pay for uncovered medical care costs in retirement. This strategy may ease the pressure to request taxable traditional IRA and traditional TSP distributions before enrolling in Social Security, thereby holding down MAGI and exposure to IRMAA.
- Using Qualified Charitable Distributions (QCDs) Starting at age 70.5, traditional IRAs can make QCDs directly to qualified charities. QCDs count towards traditional RMDs but are excluded from taxable income, thereby not included in MAGI. Recent legislation has increased the annual cap on QCDs to $105,000 per donor during 2024, increased from $100,000 during 2023.
- Moving traditional IRA money to a qualified longevity annuity contract (QLAC). Money transferred from a traditional IRA, up to $200,000 per individual during 2024, will not count for RMD purposes or MAGI until QLAC payouts begin, which can be as late as age 85. Traditional TSP participants can request a direct rollover of their traditional TSP account to a traditional IRA from which a QLAC transfer can be made.
Whether any or all of these suggestions reduces one’s MAGI and therefore reduce or eliminate exposure to IRMAA, federal retirees may still need to withdraw from their traditional TSP and traditional IRAs (fully taxable and includable in MAGI) in order to help pay their expenses in retirement. That being said, it is important for federal retirees enrolled in Medicare Part B to continuously keep the annual MAGI income tiers limits in mind in order to minimizing their chances of being bumped up into higher IRMAA “income tiers” and paying more monthly Medicare Part B premiums.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
