Medicare IRMAA: 7 Strategies to Avoid the High-Income Surcharge

Did you know Medicare IRMAA surcharges could cost high-income retirees tens of thousands of dollars over a decade — and most people don't find out until the bill arrives? In this episode, we break down exactly how these costly surcharges work, who gets hit the hardest, and seven proven financial planning strategies to help reduce or avoid them altogether. Whether you're approaching retirement or already enrolled in Medicare, understanding IRMAA is essential to protecting your wealth and keeping more of what you've worked hard to build. We cover income thresholds, two-year lookback rules, life-changing event appeals, and smart tax strategies that fiduciary advisors use to help clients navigate these hidden retirement costs. If you're focused on retirement planning in Florida or anywhere across the country, this episode is one you can't afford to miss. Ready to talk? Schedule a complimentary discovery call at TDWealth.net. For educational purposes only. Not investment advice. 📖 Full show notes: https://tdwealth.net/medicare-irmaa-7-strategies-to-avoid-the-high-income-surcharge/

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Transcript

SPEAKER_00 0:00

Imagine you make uh just a brilliant financial move today. You know, you finally sell that business you spent decades building.

SPEAKER_01 0:08

Right. Or maybe you cash in some stock you've been holding on to for years.

SPEAKER_00 0:11

Exactly. You celebrate, you pay your standard taxes, and you think you are totally in the clear.

SPEAKER_01 0:16

Yeah, you think you're done.

SPEAKER_00 0:17

But then exactly two years later, you get a letter in the mail from the government. And it turns out that single smart financial move you made just accidentally doubled or maybe even tripled your health care premiums.

SPEAKER_01 0:30

Aaron Powell Yeah, it's the ultimate delayed financial penalty. And honestly, it catches an incredible number of retirees completely off guard.

SPEAKER_00 0:38

Because it's invisible, right?

SPEAKER_01 0:39

Totally invisible.

SPEAKER_00 0:40

Yeah.

SPEAKER_01 0:40

Because the mechanism driving it, I mean, it operates entirely behind the scenes.

SPEAKER_00 0:44

Aaron Powell Well, we've customized this deep dive specifically for you, our listener, and we are stepping into a topic that is absolutely crucial for anyone tuning in to the 1715 Treasure Coast Financial Wellness Podcast.

SPEAKER_01 0:58

It really is a big one.

SPEAKER_00 0:59

So the team over at Davies Wealth Management, they're a fee-based fiduciary advisor in Stewart, Florida, they have outlined the mechanics of this delayed penalty. And more importantly, the strategies used to dismantle it.

SPEAKER_01 1:12

Because the penalty we are talking about, it's a hidden tax that can quietly drain tens of thousands of dollars from a high net worth retirement portfolio.

SPEAKER_00 1:21

Aaron Powell Tens of thousands.

SPEAKER_01 1:22

Oh, easily. And most people, uh, they don't even know what the acronym stands for until they actually open that bill.

SPEAKER_00 1:28

Aaron Powell So our mission today is to completely demystify the system. It goes by the name IRMAA, and we're going to equip you with the exact seven strategies that wealth managers use to legally reduce or eliminate it.

SPEAKER_01 1:40

Aaron Powell It's going to be a highly practical deep dive.

SPEAKER_00 1:43

Let's start with the mechanics. So IRMAA, that stands for income-related monthly adjustment amount. Right. At its core, it's a surcharge. It gets added to your standard Medicare Part B and Part D premiums if you're modified adjusted gross income, which we'll call your MAGI crosses certain invisible trick wires. Trevor Burrus, Jr.

SPEAKER_01 2:00

And we should probably pause right there on the term means tested, because, well, that's what Medicare is. Aaron Powell Right.

SPEAKER_00 2:06

It's not a flat rate.

SPEAKER_01 2:07

Exactly. The underlying philosophy of the system is that the more income the government determines you have, the more you are required to pay for the exact same medical coverage.

SPEAKER_00 2:17

Aaron Powell You don't get a private hospital room.

SPEAKER_01 2:19

No. No. You don't get shorter wait times, you don't get better doctors, you just pay more.

SPEAKER_00 2:24

Aaron Powell Okay, let's unpack this because the way the government determines how much income you have is uh it's the wild part. They use something called the two-year look back.

SPEAKER_01 2:32

The dreaded two-year look back. Trevor Burrus, Jr.

SPEAKER_00 2:34

The Social Security Administration bases your current Medicare premiums on your tax returns from two years prior. So your 2026 premiums are based entirely on what you earned in 2024.

SPEAKER_01 2:46

Aaron Powell Which trips so many people up.

SPEAKER_00 2:48

It does. I kept thinking about this like a like a bizarre toll booth. You pull up to the toll booth on the highway today, and the attendant points a radar gun into the past to see how fast you were driving two whole years ago.

SPEAKER_01 3:00

That's a great way to picture it.

SPEAKER_00 3:01

And then they base today's toll price entirely on that old speed.

SPEAKER_01 3:04

That analogy really hits the nail on the head because it highlights the disconnect in time. If we connect it to the bigger picture, that two-year look back creates a massive and frankly dangerous planning window for retirees. How so? Well, when you experience a large one-time income event, it turns what should be a windfall into a delayed trap.

SPEAKER_00 3:26

Oh, I see.

SPEAKER_01 3:27

Yeah, like you might take a massive IRA distribution to buy an RV, or you finally exercise those stock options we mentioned. You enjoy the money in the moment, but you've unknowingly set a timer.

SPEAKER_00 3:38

Right. The timer's ticking.

SPEAKER_01 3:40

Two years down the line, that toll booth attendant is waiting for you, and your healthcare costs are going to spike.

SPEAKER_00 3:45

We need to look at the actual financial stakes here to understand the damage. Because overall, only about 7% of Medicare beneficiaries actually end up paying an IRMA surcharge.

SPEAKER_01 3:56

True. 7% sounds small.

SPEAKER_00 3:58

But if you are a high net worth retiree, meaning, you know, you have over a million dollars in investable assets, that percentage just skyrockets.

SPEAKER_01 4:06

Aaron Powell It shifts from a rare occurrence to a near certainty. I mean, if your portfolio is generating significant required minimum distributions or uh you have rental property income or concentrated equity positions.

SPEAKER_00 4:18

Things wealthy people typically have.

SPEAKER_01 4:19

Exactly. There's a very high probability you are either sitting in an IRMAA penalty tier right now, or you are rapidly approaching the boundary of one without even knowing it.

SPEAKER_00 4:30

Let's put some real numbers to this and walk through the 2026 scale. So if you're a married couple filing jointly, tier one kicks in when your modified adjusted grass income hits two hundred and twelve thousand one one.

SPEAKER_01 4:42

Right. Hitting that first tier adds one thousand seven hundred and seventy-six dollars a year just to your Part B costs. And a crucial point to understand here is that these tiers, they are cliffs.

SPEAKER_00 4:54

Absolutely cliffs.

SPEAKER_01 4:55

If your income is two hundred and twelve thousand dollars flat, you pay the standard rate. If your income is two hundred and twelve thousand one one, you pay the full surcharge. One single dollar can cost you nearly two thousand dollars.

SPEAKER_00 5:06

The cliff effect is punishing. And as you move up the brackets, you know, the penalty compound.

SPEAKER_01 5:10

Yeah, let's talk about the top tier. So if that same married couple hits the top tier, tier five, which applies to incomes above seven hundred and fifty thousand dollars, they're paying an extra ten thousand six hundred fifty-four dollars a year just for part B.

SPEAKER_00 5:23

10 grand. And we haven't even factored in part D yet, right? The prescription drug coverage.

SPEAKER_01 5:27

Nope. That carries its own additional surcharge based on the exact same tiers.

SPEAKER_00 5:31

Unbelievable.

SPEAKER_01 5:32

So for a couple in that top bracket, the combined penalty can easily push past $12,000 a single year. If you have, say, a 15-year retirement, you are looking at well over a six-figure tax.

SPEAKER_00 5:44

Aaron Ross Powell, over $100,000 for the exact same Medicare coverage everyone else gets.

SPEAKER_01 5:48

Exactly.

SPEAKER_00 5:49

So what actually triggers this? I mean, we've got RMDs, which are those required minimum distributions the government forces you to take starting at age 73. Right. We've got selling a business, capital gains from mutual funds, concentrated stock, and view- Wait, and Roth conversions. Wait, let me push back on that last one.

SPEAKER_01 6:05

Go for it.

SPEAKER_00 6:06

I thought Roth conversions were the ultimate retirement hack. How does doing something fundamentally smart suddenly become a financial trap?

SPEAKER_01 6:12

Aaron Powell It's a great question. And that friction right there between a smart move and a costly trap, it really highlights the difference between mass market financial advice and true high net worth planning.

SPEAKER_00 6:24

Okay, break that down for me.

SPEAKER_01 6:26

So mass market advice often treats a rod conversion as a universally good thing. You know, they'll instruct you to just accept the IRMAA penalty because building tax-free wealth is worth the hit.

SPEAKER_00 6:38

Right. Just grit your teeth and pay the toll.

SPEAKER_01 6:40

Exactly. But high net worth planning, like the approach taken by Davies Wealth Management, it's about aggressively restructuring your income so you get the benefit of the Roth conversion without triggering the penalty at all.

SPEAKER_00 6:52

Oh wow. So you can have your cake and eat it too.

SPEAKER_01 6:55

Precisely. If you execute a Roth conversion without coordinating it against those IRMA thresholds, you inadvertently spike your MAGI and you basically just hand the government a massive surcharge two years later.

SPEAKER_00 7:06

It's a game of precision.

SPEAKER_01 7:07

It really is.

SPEAKER_00 7:08

Which transitions us perfectly into how wealth managers actually control these income levers. We can look at the proactive strategies first.

SPEAKER_01 7:16

Let's do it.

SPEAKER_00 7:17

Here's where it gets really interesting. Strategy one is IRMA aware Roth laddering. I want you to think of your income brackets like a glass of water. Okay. Proactive planning is about pouring income into your glass right up to the very brim of the tier without letting a single drop spill over into the next bracket.

SPEAKER_01 7:37

The water glass visual is exactly how you need to approach this. You want to convert your traditional IRA funds to a Roth up to the ceiling of your current IRMA tier, but you stop immediately before crossing it.

SPEAKER_00 7:48

Right. Before you hit that cliff.

SPEAKER_01 7:49

Exactly. You are intentionally filling up the lower tax and IRMA brackets. Typically, you know, advisors execute this in the prime pre-RMD years, usually between ages 60 and 73.

SPEAKER_00 8:02

Aaron Powell Well, your income is a bit lower.

SPEAKER_01 8:03

Yeah. So when you pour the water methodically over several years, you reduce your future required minimum distributions, you build a massive tax-free base, and you never trigger a higher surcharge.

SPEAKER_00 8:13

You get the benefit without spilling the water. I love that.

SPEAKER_01 8:16

It's highly effective.

SPEAKER_00 8:17

The second proactive lever is incredibly powerful for folks who are already charitably inclined. These are qualified charitable distributions or QCDs.

SPEAKER_01 8:26

Aaron Powell This is one of my favorites.

SPEAKER_00 8:28

Yeah. If you are 70 and a half or older, the 2026 rules allow you to donate up to $105,000 directly from your IRA to a qualifying charity. Right. And the absolute magic of this mechanism is that it satisfies your required minimum distribution, but the money literally never shows up on your tax return as part of your NGI.

SPEAKER_01 8:48

Aaron Powell The mechanics of a QCD make it one of the most effective tools in the entire tax code.

SPEAKER_00 8:52

Aaron Powell Because it just skips your 1040 completely.

SPEAKER_01 8:55

Exactly. Because the money moves directly from the IRA custodian to the charity, it bypasses your tax return entirely. Let's break down the math for uh a hypothetical couple.

SPEAKER_00 9:04

Okay, let's hear it.

SPEAKER_01 9:05

Aaron Powell Imagine they have a projected MGI of $250,000. That puts them solidly into an IRMAA penalty bracket. But let's say they normally give about $40,000 a year to their church or, you know, local charities out of their checking account.

SPEAKER_00 9:19

Okay, so they're already giving the money away. But if they change the plumbing and use a QCD to send that $40,000 directly from their IRA instead, their NGI suddenly drops down from $250,000 to $210,000.

SPEAKER_01 9:32

And by dropping to $210,000, they fall below that $212,001 threshold for tier one.

SPEAKER_00 9:37

Oh wow.

SPEAKER_01 9:38

The combined tax savings and the erased Medicare premium surcharge often far exceed whatever benefit they would have received from just taking a standard charitable tax deduction.

SPEAKER_00 9:49

That is just brilliant maneuvering. You're doing good for the charity and saving yourself a fortune in stealth taxes.

SPEAKER_01 9:54

It's a win-win.

SPEAKER_00 9:55

So the third proactive lever focuses on your taxable investment accounts. This is strategic tax loss harvesting. This is the discipline of selling investment positions at a loss to intentionally offset your realized gains.

SPEAKER_01 10:08

Yes.

SPEAKER_00 10:09

But for high net worth investors, this cannot be a panic scramble on December 30th. It has to be a year-round discipline, right?

SPEAKER_01 10:15

Year-round visibility is required because of how mutual funds operate. You see, mutual funds often issue capital gains distributions at the end of the year.

SPEAKER_00 10:22

Even if you didn't sell anything.

SPEAKER_01 10:23

Right. Even if you have those distributions set to automatically reinvest, meaning you never actually touch the cash, the IRS still counts them towards your NGI.

SPEAKER_00 10:33

Which could easily push you over an IRMAA cliff.

SPEAKER_01 10:36

Exactly. So a disciplined investment manager is constantly monitoring your realized income throughout the year, harvesting losses to offset those invisible gains, and ensuring your total income stays anchored below the next IRMAA tier boundary.

SPEAKER_00 10:51

Okay, those are fantastic ways to proactively manage your lovers. But let's talk about real life.

SPEAKER_01 10:57

Sure.

SPEAKER_00 10:57

What happens if the damage is already done? Let's say you retired last year, your income plummeted because you stopped working, but your current Medicare bill is astronomical because the government is looking at your tax return from two years ago when you were at your absolute peak earning.

SPEAKER_01 11:13

Ah, a classic trap.

SPEAKER_00 11:15

Are you just stuck paying for a speed you aren't driving anymore?

SPEAKER_01 11:17

You aren't stuck, provided you know how to press the erase button. The erase button. Yeah. There is a specific corrective strategy called the SSA 44 appeal.

SPEAKER_00 11:25

Okay, I have to ask on behalf of anyone listening who might be in this exact situation, why would anyone not file this appeal if their income dropped? Is the government hiding the paperwork?

SPEAKER_01 11:36

No, it's not hidden. It's just a massive awareness gap. I mean, most retirees simply do not know the form exists. They assume the government's bill is final.

SPEAKER_00 11:46

Because it looks so official.

SPEAKER_01 11:47

Right. But the Social Security Administration has a very specific list of life-changing events. If your income dropped due to retirement or divorce, the death of a spouse, or even the loss of income-producing property, you are fully entitled to file an SSA 44.

SPEAKER_00 12:03

You are legally demanding they use your current reality instead of the two-year look back.

SPEAKER_01 12:08

Precisely. You submit the form with an estimate of your current, much lower income, and if it's approved, they wipe away the surcharge immediately. You don't have to wait two years for the system to naturally catch up.

SPEAKER_00 12:18

That is wild. It's just a publicly available form that can instantly erase thousands of dollars in penalties.

SPEAKER_01 12:23

It really is that simple if you just know to ask for it.

SPEAKER_00 12:26

So we've covered the proactive levers and the corrective erase button. Now we move into building structural motes around your wealth.

SPEAKER_01 12:34

The moat building.

SPEAKER_00 12:35

Yeah. This involves shifting the types of assets you hold, specifically focusing on municipal bonds.

SPEAKER_01 12:41

Municipal bonds play a unique role here. Generally speaking, the interest income generated by municipal bonds is excluded from federal taxable income.

SPEAKER_00 12:51

Okay.

SPEAKER_01 12:51

And according to the strategies outlined by Davies Wealth Management, this tax-exempt nature makes it a highly effective tool for managing the MGI calculation for IRMAA purposes.

SPEAKER_00 13:03

So it's essentially invisible income to the Medicare toll booth attendant.

SPEAKER_01 13:08

That's the goal. If you're in a high tax bracket, say the 32% bracket or above, and you require cash flow from your taxable portfolio to fund your lifestyle, generating that income through standard corporate bonds or dividend stocks is just going to inflate your MEI.

SPEAKER_00 13:22

It fills up that glass of water too fast.

SPEAKER_01 13:23

Exactly. So by shifting a strategic allocation to high-quality municipal bonds, you can generate the required cash flow while shielding that income from the IRMAA calculation.

SPEAKER_00 13:33

That brings us to the final two strategies, which I'd call the heavyweight plays.

SPEAKER_01 13:37

These are the big ones.

SPEAKER_00 13:38

Yeah. These require serious multi-year foresight and structural planning. Strategy six is all about timing large events. If you're planning to sell a vacation home or liquidate a highly concentrated stock position or sell a business, you know, timing is literally everything.

SPEAKER_01 13:55

Timing is everything.

SPEAKER_00 13:56

You want to execute that massive income spike before the two-year Medicare enrollment window even opens.

SPEAKER_01 14:02

Right. The mechanics of the calendar are your biggest asset or your biggest liability here.

SPEAKER_00 14:06

Because of when Medicare starts.

SPEAKER_01 14:08

Yes. Medicare eligibility begins at age 65. Because of the two-year look back, the tax year that dictates your initial Medicare premiums is the year you turn 63.

SPEAKER_00 14:19

Oh wow. Age 63 is the magic number.

SPEAKER_01 14:22

It is. If you are currently 62 and you have flexibility on when to sell a highly appreciated asset, getting that transaction completed and recognized before your 63rd birthday is crucial.

SPEAKER_00 14:33

Yeah, it makes total sense.

SPEAKER_01 14:34

That foresight alone can prevent your initial Medicare premiums from skyrocketing right out of the gate.

SPEAKER_00 14:39

You essentially clear the income spike through the system before the toll booth cameras even turn on. Exactly. Okay, so the final strategy outlined is private placement life insurance or PPLI. Now the documentation notes this is a highly specialized tool for clients with $5 million or more in investable assets.

SPEAKER_01 14:59

That's very specialized.

SPEAKER_00 15:00

The investment growth accumulates tax-deferred or even tax-free inside an institutional insurance wrapper, meaning none of that growth ever flows into your Angi. But okay, I have to challenge this a bit.

SPEAKER_01 15:13

Freaking on.

SPEAKER_00 15:14

PPLI sounds like an exclusive VIP club for the ultra-wealthy. What is the actual takeaway here for the listener who is sitting on a nice, healthy $2 million nest egg, but doesn't quite meet that $5 million threshold?

SPEAKER_01 15:26

It's a fair pushback. It really is. What's fascinating here is that the specific financial instrument, the PPLI wrapper, is definitely niche, but the underlying principle governing it is entirely universal.

SPEAKER_00 15:39

Which is what?

SPEAKER_01 15:39

The takeaway for the listener with the $2 million nest egg is the critical need for forward-looking coordination.

SPEAKER_00 15:44

Uh-huh.

SPEAKER_01 15:44

You might not utilize institutional life insurance, but you still face the exact same mechanics when you sell a property or execute a Roth conversion. You still need your CPA, your financial planner, and your estate attorney operating from the exact same playbook.

SPEAKER_00 15:59

So the tool changes, but the strategy remains.

SPEAKER_01 16:02

Exactly. The vehicle you use changes based on your net worth, but the absolute necessity for coordination does not.

SPEAKER_00 16:09

Coordination. That is the perfect logical bridge to our final section here. Why do these highly effective strategies fail so often in the real world?

SPEAKER_01 16:18

It happens all the time.

SPEAKER_00 16:19

According to the breakdown, the biggest mistakes people make are missing the SSA 44 appeal window, vastly underestimating those brutal Part D prescription costs, and the ultimate wealth killer operating in costly silos.

SPEAKER_01 16:31

The silo problem is the natural enemy of IRMA planning. Just think about a typical high net worth advisory setup. You have a CPA whose primary job is looking backward to file your taxes by April 15th. You have an investment manager whose sole focus is generating market returns on your portfolio. And you have an estate attorney who is looking decades into the future at what happens after you pass away. Right. And because they don't communicate, a massive blind spot opens up right in the middle. Who is looking at your projected MGI three years from now?

SPEAKER_00 17:08

Nobody.

SPEAKER_01 17:09

Nobody. The investment manager triggers a massive capital gain. The CPA dutifully reports it on your taxes the next year, and two years after that, you get hit with a massive IRMAA surcharge.

SPEAKER_00 17:20

Because nobody warned you.

SPEAKER_01 17:21

The penalty falls right through the cracks because no single professional owns the full multi-year income picture.

SPEAKER_00 17:27

So what does this all mean for the listener? How does the approach championed by Davies Wealth Management actually fix the silo problem?

SPEAKER_01 17:36

The solution lies in the fundamental difference between a transactional broker and a fee-based fiduciary.

SPEAKER_00 17:42

Okay, tell me more about that.

SPEAKER_01 17:43

A true fiduciary approach requires building multi-year income projections. It means mapping out exactly where your income sits on the IRMAA tiers, not just this year, but for the next decade.

SPEAKER_00 17:54

Like plotting the course.

SPEAKER_01 17:56

Yes. It involves optimizing those Roth conversions down to the dollar, integrating QCDs proactively, and managing asset location. Proactive planning versus reactive scrambling is quite literally the difference between losing or saving $50,000 to $150,000 over the course of a retirement.

SPEAKER_00 18:14

$50,000 to $150,000. That is real tangible wealth.

SPEAKER_01 18:18

It's massive.

SPEAKER_00 18:19

That is money that could be spent on your family, on travel, on your actual life instead of being quietly siphoned off by a hidden tax just because your advisors weren't talking to each other. Exactly. The first step you can take today is to figure out where you stand. Calculate your own projected MAGI against these upcoming Medicare tiers. Don't wait for the delayed penalty letter to show up in your mailbox.

SPEAKER_01 18:40

Having clarity on your income map is truly the most valuable thing you can do for your future self.

SPEAKER_00 18:46

And we want to point you toward two incredible resources to help you get that exact clarity. Davies Wealth Management offers a comprehensive free Medicare IRMAA planning guide specifically designed for high-income retirees.

SPEAKER_01 18:59

It's an excellent resource.

SPEAKER_00 19:01

Yeah. And you can also book a complimentary fiduciary audit with Thomas Davies and his team to see exactly where your portfolio's exposure lies. It's a tremendous opportunity to get a second set of eyes on your multi-year strategy.

SPEAKER_01 19:13

It's an essential step in ensuring you keep the wealth you've built.

SPEAKER_00 19:17

And as we wrap up today's deep dive, we want to leave you with one final, slightly broader concept to chew on. We've just spent a significant amount of time exploring how the government successfully utilizes stealth means testing to claw back benefits from higher earners via IRMAA in that two-year look back mechanism.

SPEAKER_01 19:34

Right, stealth means testing.

SPEAKER_00 19:36

The architecture is already in place and it's functioning perfectly for them. So as national budgets continue to tighten in the coming decades, you have to wonder what other traditional retirement benefits might face similar hidden surcharges or two-year look back traps in the future.

SPEAKER_01 19:51

It is a sobering thought, but a highly realistic one. I mean, if they can build a functional two-year time machine for healthcare premiums, the infrastructure exists to apply that exact same time machine to other programs.

SPEAKER_00 20:04

The precedent has absolutely been set. So don't let yourself get caught at that bizarre toll booth paying a massive premium today for a financial speed you didn't even realize was being tracked two years ago.

SPEAKER_01 20:15

Keep an eye on your speed.

SPEAKER_00 20:16

Take active control of your income levers, demand coordination from your professional team, and keep that glass of water from spilling over. Thanks for joining us on this deep dive. We'll catch you on the next one.