If you're 63 or older, every tax decision you make has a Medicare price tag attached to it. Whether anybody told you or not, Irma can start hitting you before you're even on Medicare. And if you're retired or had another life-changing event in the last two years and you're paying Irma based off your old salary, look up. That one form could put hundreds or even thousands of dollars back in your pocket this year alone. People pay Irma for a year or two that they never actually had to pay simply because nobody told them this form exists. All right, welcome in everybody. This is the Well Advised Wealth Podcast. I'm your host, Justin Chastain, certified financial planner, and every week I help successful business owners and families create wealth that lasts. So I want you to ultimately picture this. You retire, you've done everything right, you've saved, you've invested, you've even paid your taxes, which is probably most than few have done. But then a few months into your first year on Medicare, you open a letter from Social Security, and they're telling you that your Medicare premium is going to be two, three, possibly even four times what your neighbor pays. Same Medicare, same doctors, same coverage, just ultimately a larger bill. Well, that letter has a name and it's called Bull Well, that this is a family show. It's called Irma. It's income-related monthly adjusted amount. And I'm going to be honest with you, it catches more successful retirees off guard than almost anything that I typically see in my practice. So today we're going to talk about the good, the bad, and the ugly of Irma, what it is, and how it works, but most importantly, where it can quietly cost you thousands of dollars a year and exactly what you can do about it. And here's the deal timing matters. So the decisions that you make before December 31st of this year decide what you're going to pay in your Medicare two years from now. So let's get into it. Before we get into the good, the bad, and the ugly, there's really two terms that I want you to know and understand at a very high level. The first one is Magi. No, not MAGA. This is not that kind of a show. But Magi is short for modified adjusted gross income. For Irma purposes, Medicare's definition is simple. We'll get into that a little bit. It's something more than just simple. But you're just going to take your tax adjusted gross income. That's the number near the bottom of your first page of your actual tax return. Add back any tax exempt interest like a municipality bond. That's it. That's the number. Now again, as I said, that sounds simple, but what does that include? Will that include your pension, your required minimum distributions, Roth conversions, your capital gains, your dividends, the taxable part of your Social Security? Even that Muni bond interest you thought was just tax free. All of it counts. But what doesn't count? Qualified withdrawals from a Roth IRA, money you pull from a regular savings or a brokerage account that's just principal, and the tax-free part of a home sale that falls under the capital gain exclusion. And hold on to that because we're going to come back to it. And that list ultimately is where the planning lives in the magi. Term number two. There is a two-year look back. This is where most people get confused. Medicare doesn't just use this year's income premium, it's using your tax return from two years earlier. So in your 2026 premiums, that was set by your 2024 tax return if you're enrolling in Medicare. Also, if you're looking to 2028 premiums, that set's going to be returned for this year for the 2026 filings that you're doing. So the year that we're in currently right now. So here's why this is so important. It means the income you create this year shows up on a Medicare bill two years from now, long after you have forgotten about it. It also means that Irma can start hitting you before you're even on Medicare. If you're going on Medicare at 65, your income at 63 is the income that sets your bill. So if you're 63 or older, every tax decision you make has a Medicare price tag attached to it, whether anybody told you or not. Keep this in mind. Got those? Well, if not, this episode is still moving forward and you'll be fine. But let's get into it. So let's talk about the good. Number one, Irma is completely predictable, and you get two years of warning. It's kind of like a hurricane almost. A little bit. Irma even sounds like a hurricane that hit the coast somewhere and did awful damage. But most things that hurt your retirement income come out of nowhere. It could be the market drops, it could be a health issue that shows up, inflationary spikes. Irma's totally different. The rules are published, the income brackets are published, and because of that two-year look back period, you can see it coming from a long way off. Here's what the 2026 brackets look like. So if you're single and your 2024 modified adjusted gross income was $109,000 or less, or $218,000 or less if you're married filing jointly, you pay the standard Part B premium of $202.90, and that would be monthly. So there's no ERMA surcharge. Once you go over their line, there are five surcharged tiers for IRMA. And at the first tier, your Part B premium jumps from $209.90 to $284.10 a month. At the top tier, which starts at $500,000 modified adjusted gross income if you're single or $750,000 if you're married, you're going to pay $689.90 a month. That's more than three times the standard premium. And then there's a separate surcharge on your Part D coverage ranging anywhere from $14.50 to $91 a month, on top of what your drug plan costs. So those thresholds get adjust adjusted for inflation each and every year. The official 2027 numbers, they're coming out soon, but they won't come out until November. But here's the good news. Because they're generally inflated or indexed for inflation, the current brackets make a conservative planning line. If you keep your income under this year's thresholds, of course, you're very likely under next year's, too. That's something that you can actually build a plan around. Number two under the good. If your income has dropped, you can appeal it. Now this one surprises most people. Social Security has a form, and again, don't they all? They have a form for everything. But it's called an SSA-44. Now that lets you ask them to use a more recent year's income instead of the two-year-old number, if you've had what they've called a life-changing event. Now, there's eight of these. I don't expect you to remember all of them, but I do want you to know that generally speaking, if you've had something that could potentially be a life-changing event, this form is definitely worth filing. So it could be marriage, you have found love again, or maybe you're just like Johnny Carson. You love marriage so much you had to do it five or six different times. And look, there's no judgment. This is like a Planet Fitness podcast. It could be a divorce or an annulment, right? Maybe you went to Vegas, viva la Vegas, right? It could be the death of a spouse, work stoppage, work reduction, loss of income producing property, loss of pension income, and an employer settlement payment. The most common one that I see is going to be retirement. So it's going to be something income related. And think about it. You turn 65, you go on Medicare, Social Security looks back at your tax return when you were 63. Well, what was happened probably at 63? You were still working and drawing a full salary. So they bill you like you're still earning that full salary, even though you've already retired and your income has fallen off a cliff. That's exactly what the SSA-44 form is for. You file it, you show them that your work stoppage, you give them a lower estimated income, and in many cases that surcharge goes away. People pay Irma for a year or two that they never actually had to pay simply because nobody told them this form exists. Number three under the good. You have more control over your magi or your modified adjusted gross income than you think. IRMA's based on income, and in retirement, you get to decide a lot about where your income comes from and when. It's a lever that most people are never pulling or have never pulled. A few of the big ones. Roth conversions done before 63, meaning before the look back periods kick in, never touch a Medicare bill. So money sitting in a Roth IRA comes out without showing on your modified adjusted gross income at all. So the more of your retirement income that comes from Roth dollars, the more room you have under the thresholds. Now, once you're 70 and a half, the qualified charitable distributions where you can give to charity directly from your IRA, keep that money off your return entirely and can count towards your required minimum distributions. Also, capital gains can often be spread across tax years instead of piling into one. Now, none of these are loopholes, they're just decisions about timing. And the earlier you start making them with intention and purpose, the more you get to use them. Now, we can't talk about all the good without any of the bad. Here is the bad. Number one, it's a cliff, not a ramp. This is the thing that most people don't expect, but normal tax brackets are marginal. So when you cross into a higher bracket, only the dollars above that line get taxed at the higher rate. Irma doesn't work that way. It's a cliff. Once you go over that IRMA threshold of one, and even if it's by a dollar, you pay the full surcharge for that tier for the entire year. Sounds pretty good, right? The government has this figured out. So let me put a number on it. Say you're a married couple, both on Medicare with a modified adjusted gross income of $218,000. That pays no surcharge. But that same couple has modified adjusted gross income of $218,000 and one dollar. That lands them in the first tier. That's an extra eighty-one dollars and twenty cent a month for part B plus $14.50 for part D per person. So that comes to about $1,148 a year for each, or roughly $2,297 for the couple for one extra dollar. So just think about it. The reality of it is you could ultimately be paying that much more per year for a surcharge. And my fault philosophy is if this is the go-go years of your retirement, why not use that for a trip or travel or a tank of gas? But here's the fix. Don't plan to the line. Plan to a cushion under that line. If you're doing Roth conversions, taking a capital gain or deciding on how much to pull from your IRA this year, know where the next threshold sits and leave your margin of several thousand dollars below it. Investment income like dividends and year-in mutual fund distributions has a way of showing up bigger than you expected. Also, if you work with a CPA, have them run your projected Magi or modified adjusted gross income in November, not April, while there's still time to adjust. That is one thing that I do with my clients. Most of my year-in meetings, yes, we talk about wealth management strategies, we're talking about returns, we're talking about a lot of the investment piece, but the biggest pieces are what do we need to do and how do we need to apply this for tax purposes? So we're doing a lot of tax planning well before April of next year. Number two under the bat. Married couples pay it twice. Now you probably are like Justin, there's a pun in there somewhere. Probably, but I'm gonna lay off of it. We need to get this rolling. You want to get to my segment where I'm gonna give you some tips on how to handle this. But here's something a lot of couples miss. The bracket is based upon your combined income on a joint return, but the bill is not split. Each spouse enrolled in Medicare pays their own full surcharge. So everything I just told you gets doubled. A married couple with $300,000 of modified adjusted gross income lands in that second tier. Each of them pays $405.80 a month for part B instead of the $202.90 plus a $37.50 surcharge on Part D. That's about $2,885 a year in extra premiums per person or around $5,770 for the household. Every year their income stays the same. Now, if you're thinking, well, we'll just file separately. There might be bigger issues for that, and that could be a life-changing event. But be careful. For a married couple who live together for at any point during the year, filing separately is one of the worst moves you can make for Irma. And this is why. Your income above $109,000 skips to the first three tiers and goes straight to the second highest surcharge. The fixed tier is really just awareness. When a married couple is deciding how big a Roth conversion to do or when to sell a big position, they need to price Irma for both people, not just one. That doubled the cost. That changes the math and sometimes enough to change the decision. Number three under the bad. Tax-free does not mean Irma free. This one gets a lot of retirees who did everything right. Municipal bonds are popular, especially with high income investors, because the interest is often free from federal income tax. There is a potential for having the state income tax tax-free as long as you buy it in the state that you reside, but you would always want to double check that. It's not your taxable income that Irma's looking at, but remember our first term for Irma. Magi also adds back tax exempt interest right back. So that tax-free bond can still punch you over that Medicare threshold. And guess what? The same goes for part D. That drug surcharge applies whether you've had a standalone drug plan or Medicare Advantage drug plan, and it gets paid to Medicare, not your insurance company. So picking a cheaper plan does not make this amount smaller. Here's the fix. Look at your whole income picture, not just your taxable. If you're sitting right on the threshold and a big chunk of your income is in muni interest, it's worth a conversation about how that fits alongside Roth money and other sources that truly stay out of modified adjusted gross income. The goal isn't to avoid municipality bonds or munis, it's to know that they count, especially when you're in your Irma or what we call that red zone income retirement planning phase. Let's get on to the ugly. Number one, under the ugly, one big year can cost you a whole lot of premiums. Here's where Irma gets down and dirty. A single one-time income event like a home sale, the sell of a business, a big bonus, one oversized Roth conversion shows up on one tax return. And that one return decides a full year of Medicare premiums two years later. It doesn't care that the income was a one-time thing. So let's walk through an example. A married couple, both on Medicare, sells the house they've lived in for 30 years, and this is relevant. There could be downsizing. They have a $700,000 gain. The home sell exclusion shelters $500,000 of that for a married couple, and that's great. But the other $200,000 becomes a taxable capital gain. Add it to their normal $150,000 of income in their modified adjusted gross income for the year. That's $350,000. That lands them in that third tier of Irma. Each of them pays an extra $324.60 a month for B and $60.40 for part D. That's $4,620 a year per person or $9,240 for the couple, all because of one sale. And here's the really ugly part. Selling your house is not on that list of eight life-changing events. Neither is selling investments or doing a big Roth conversion. So when the higher bill shows up, there's usually no appeal to file. But here's the fix. The fix is to plan the big year before it happens, not after. If you're selling a business, ask whether an installment sell that spreads the gain out over several years makes sense. If you're selling a big stock position, see if you can split the sell across December and January so it lands on two tax returns instead of just one. If you know that a big income year is coming, keep everything else conversions, extra IRA withdrawals, capital gains, as low as you can in that same year. And if the big year is unavoidable, at least see it coming. Budget for higher income premiums so it doesn't feel like a penalty out of nowhere. Because it is going to feel like a penalty. We just don't want to feel like it's a penalty out of nowhere. Now I've shared this multiple times before, but as most of you know, I got into this career because I lost a mother early in life. And having to plan for the family and doing finances around that was not the easiest. But here is something that slipped up on me, even being a financial planner and saying, wow, this is something that you've really got to keep your eye on. What about a widow's penalty? And this is one of the hardest ones to talk about. And it's the one that I see hurt families the most. When one spouse dies, the survivor usually loses one of the two Social Security checks because you're going to draw on the largest Social Security opportunity. You're not going to be able to keep both Social Security checks. And you maybe lose some other income as well. But a lot of the other income, like a pension or a required minimum distribution, the investment income, keeps coming in at close to the same level. Meanwhile, after a year of the death of the survivor usually files as single. And the single Irma thresholds are roughly half the married ones. So picture a couple with $190,000 of modified adjust gross income and one spouse passes away. A couple of years later, that survivor's income is still around $165 a year, but now they're filing single. That lands them in the second tier. That means their Part B premium alone doubles, and with Part D surcharge, they're paying about $2,885 a year more for Medicare. You got less income, same coverage, bigger bill. And also this is at the worst possible time. The death of a spouse is one of the eight life-changing events, so the survivor can file that SSA-44 in transition. But if their single income stays above the threshold, that surcharge is going to be there year after year. So what's the fix? Well, while both spouses are still here, you have to do this. For a lot of married couples, doing Roth conversions in the years while you're still filing jointly, while you have those wider brackets, is one of the best gives you can give the surviving spouse. It shrinks the IRA that would have been forced to big required minimum distributions onto a single filer later. That's why I tell couples to plan for the survivor, not just the couple. And number three under the ugly, the conversion that saved taxes but forgot about Medicare. This one little tidbit is counterintuitive, so stay with me. Roth conversions are one of the best tools in retirement planning. I talk about them a good bit on this show. We even talked about a backdoor Roth, but my next show coming up is going to be around Roth conversions, not just backdoor Roth conversions. But I see a lot of people doing big conversions at 64 or 66 to save on taxes over the long run, but then they get blindsided two years later when they have a Medicare bill that nobody put into the math. So let's just say you're a couple and you have $180,000 of income and you convert $150,000 in one year, and we're talking about pre-qualified or pre-tax qualified from a traditional $401 into a Roth opportunity. That would put your modified adjusted gross income at around $330 in the second tier. That one conversion is adding about $5,770 in Medicare premiums for that couple two years later. Now here's the honest part because I'm not going to tell you to never convert. Sometimes paying that IRMA is the right answer. That surcharge is going to only be for one year. The Roth money grows tax-free for the rest of your life and your heir's life. If the long run tax savings are large enough, paying a one-year Medicare surcharge to get there can absolutely be worth it. So the fix is to this. You need to put IRMA in the math on purpose because any conversion after 63 and you're on Medicare, you figure out where the thresholds are and what crossing each one would actually cost. Sometimes the answer is to converse right up just under the threshold. Sometimes it is just a blow through one or two tiers because the tax savings will be worth it. Both can be smart, but the only bad version is the one where you just did not know. So let's rock right into our weekly wealth minute. If you're 63 or older, there's one thing you do before December 31st. You need to get an estimate against the IRMA brackets. If you're just under a threshold, protect that cushion. Hold off on the extra IRA withdrawal, spread out that capital gain, or size your Roth conversion to fit. If you're just over, see what it would take to get back under. And if you're retired or had another life-changing event in the last two years and you're paying IRMA based off your old salary, look up form SSA-44. That one form could put hundreds or even thousands of dollars back in your pocket this year alone. Money is the tool. Keeping more of it working for you is how you build wealth. And that's your weekly wealth minute. So let's wrap this up like a pair of counterfeit Michael Jordans sold at the jockey lot or a flea market. As we've talked about, there's good and the bad and the ugly of Irma. So let's wrap this up like a counterfeit pair of Jordans you just bought at the flea market. I've talked about the good, the bad, and the ugly of Irma, but remember, Medicare doesn't care how much you have, it cares how much shows up on one line of your tax return two years ago. So plan that line on purpose and with intention. I know nobody got into retirement dreaming about Medicare surcharges. You dreamed about golf, grandkids, finally reading the manual for that grill you bought in 2014. But if one letter from Social Security is going to ruin your year, I would rather it be the one telling you that your appeal was approved. And if you're looking at your own numbers and wondering where you land, and maybe your own financial planner has not even talked to you about Irma and what this does to your planning, reach out to me. I'm glad to help. And this is exactly the kind of conversations I have with clients every week, and I'd be glad to have one with you. I'm Justin Chastang. Thanks for listening to the Well Advised Wealth Podcast. Until next time, build wealth and live well.
SPEAKER_00Parallel Financial LLC is a member firm of the Fiduciary Alliance, LLC, which is a registered investment advisor. More information about Parallel Financial can be found in Form ADV Part 2, which is available upon request. This website is for informational purposes only and should not be construed as an investment advice or a recommendation to buy or sell any security or other investment, or to undertake any investment strategy. Opinions expressed herein are solely those of parallel financial LLC, unless otherwise specifically cited. Material presented is believed to be from reliable sources, and no representations are made by our firm as to another party's informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.