By Dr. Jim Dahle, WCI Founder
There is a lot of angst out there on the interwebs about IRMAA. So, I decided to look into it a little more deeply to see if I was missing something. Nope, I wasn't. What a silly thing to worry about. I can't believe people spend any time at all on this subject while doing their financial planning. Let me explain.
What Is IRMAA?
IRMAA stands for Income Related Monthly Adjustment Amount. Note that it is not IRMMA (just like HIPAA is not HIPPA). IRMAA applies to Medicare premiums. It is a method to means-test Medicare. Means-testing means that those with “means” (i.e. the wealthy) pay more than those without the “means” for the same product or service.
How Medicare Works
“Remind me again how Medicare works,” you say.
Don't feel bad. Even most doctors whose income primarily comes from Medicare don't actually understand how Medicare works. Here's a brief reminder of what you need to know about Medicare to understand IRMAA.
Medicare Part A is hospital insurance. You do not pay a Medicare Part A premium. It has a $1,600 per year deductible. Basically, if you go to the hospital on Medicare, you pay $1,600  and Medicare pays the rest. Congratulations! Thank you for working and paying into Medicare for so many years. This is a big part of what you get for paying 2.9% (3.8% for many of us) of everything you earned for decades into Medicare.
Medicare Part B is doctor insurance. It covers doctor visits (including specialists), ambulance services, vaccines, home health, and medical supplies. It does not cover hospitalizations, and it does not cover medications. The Medicare Part B deductible for 2023 is $226. Believe it or not, that's actually lower than it was in 2022. The “standard premium” is also lower for 2023 at $164.90 per month.
Medicare Part C is generally called Medicare Advantage. There are lots of different Medicare Advantage plans that cover all kinds of different things for different prices. Typically, people buy either Medicare Advantage or traditional Medicare parts A, B, and D. For today's discussion, we can ignore Medicare Part C.
Medicare Part D is drug insurance. It covers the cost of your prescriptions. Annual deductibles vary, but they can be no more than $505 in 2023. Unlike Parts A and B, Part D also has co-pays with a maximum out-of-pocket total of $7,400 in 2023. The “standard premium” for 2023 is $31.50 per month (also a decrease from 2022).
Medigap policies are sold by private companies, and they cover co-pays and deductibles that Medicare doesn't normally cover. It comes with an additional premium averaging $155 per month in 2023.
Note that all of these premiums, deductibles, and co-pays are PER PERSON, not per family or per couple.
More information here:
Yes, Medicare Costs Money
This is an important point that lots of people don't understand. You hear it all the time.
“I can't retire, I need the medical insurance.”
“I just need to get to 65 when I can get Medicare.”
“What do people do for health insurance when they FIRE?”
As you can see, Medicare isn't free. It might be a lot cheaper than buying insurance on your own, but it's still going to cost a couple at least $400 a month (plus deductibles and co-pays). Note that you can pay Part B, Part C (Medicare Advantage), and Part D premiums using a Health Savings Account (HSA), but you typically can't pay health insurance premiums (or Medigap premiums) with HSA dollars.
Where Does IRMAA Come In?
Now that you understand how Medicare works, you can understand IRMAA. IRMAA simply means that rich people pay higher premiums than poor people for Medicare Parts B and D. I can hear you grumbling now, given that the WCI audience is high-income professionals. But you shouldn't grumble very loudly. You have to be pretty rich for your premiums to go up at all, and even then, they don't go up very much. Let me show you using the charts for 2023:
Let me decipher this for you. Let's say you've done very well for yourself. You and your spouse are now retired, and you have an Adjusted Gross Income (AGI) of $200,000.
“Oh no!” you say. “We're making more than $194,000; we're going to get IRMAA'd!”
Yes, you are. You're going to get IRMAA'd. So, what does that mean? That means you are going to pay the following additional monthly amounts:
- Spouse #1 Part B: $65.90
- Spouse #2 Part B: $65.90
- Spouse #1 Part D: $12.20
- Spouse #2 Part D: $12.20
- Total: $156.20 per month
- Total annual amount: $1,874.40
Now ask yourself,
“How much financial planning am I willing to do in order to avoid this cost?”
This is less than 1% of your AGI (and we all know that a lot of your spending in retirement is not even included in your AGI—such as basis; Roth money; 15% of Social Security income; and borrowing against life insurance policies, your portfolio, or your house.) For me, the answer to this question is “pretty much nothing.”
Even at the top end of IRMAA, it really doesn't look too bad. We're talking about a single person with an AGI of $500,000+ or a married couple with an AGI of $750,000+.
- Spouse #1 Part B: $395.60
- Spouse #2 Part B: $395.60
- Spouse #1 Part D: $76.40
- Spouse #2 Part D: $76.40
- Total: $944 per month
- Total annual amount: $11,328
Again, that is no more than 1.5% of your AGI. This isn't exactly going to break the bank. Does it feel unfair because you paid in so much more to Medicare than anyone else and yet you are getting so much less out of it? Sure. That's why it's called Medicare TAX. You've been paying more to drive on the roads, to have a functioning 911 system, and to cover the national debt for decades. Why would it be any different now? But this little tax is just not a large enough amount to be worth revamping your financial life. Maybe you can figure out a way to get your AGI just below $750,000. Now you saved $1,000 in annual taxes. Big whoop. Not going to move the needle.
More information here:
Healthcare Is Expensive
I've been self-employed for more than a decade and have been buying my own health insurance that entire time. These days, we buy health insurance for our employees' families, too. We know exactly what health insurance costs. I always find it fascinating how inexpensive people think healthcare is. For some reason, they think it should resemble their cell phone bill or even their Netflix bill more than it does their grocery bill or even a small mortgage. That's not the case, folks. Healthcare spending makes up 20% of our nation's Gross Domestic Product (GDP). On average, Americans should expect about 20% of their monthly spending to be on healthcare between premiums, deductibles, and co-pays. It'll be a higher percentage for those with lower incomes and a lower percentage for those with higher incomes. But the point is that it will always be expensive because it is expensive stuff and because we consume a lot of it.
Those who pay for their own healthcare without any sort of government or employer subsidization know that it is typical to spend more than $1,000 per month on it (and not hard at all to spend $2,000 per month on it). Some families even spend $3,000 per month. When we're talking about your cost for it going up by $156 a month if you have taxable retirement income 50% higher than the average American household, it's hard to feel too much compassion. Even for those so well off that they have a seven-figure AGI in retirement, Medicare is still cheaper than going out and buying your own insurance.
More information here:
The counterargument is simply that IRMAA is one of the few places in the tax code where making just a few dollars more can cost you far more than you actually earned in additional income. Most tax rules phase in and phase out gradually, but not this. So, if your AGI is very close to these income levels ($97,000, $123,000, $153,000, $183,000, $500,000, or the MFJ equivalents) why not make a little change to avoid paying extra if you can? I don't see this as a particularly strong counterargument, but $1,900 is $1,900 and I've probably done more for less at some point in the past.
IRMAA is a surprise to many well-to-do retirees. While it is fun to gripe about it, don't spend much time and effort trying to avoid it with complicated financial planning. Doing so won't save you much money.
If you need extra help with planning for retirement or have
questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
What do you think? Am I downplaying IRMAA too much? Should people worry about it more? Comment below!