Retirement
Most people think of Medicare premiums as a fixed cost. For higher-income retirees, they aren't. Part B and Part D premiums include an income-related adjustment, commonly called IRMAA.
The adjustment is based on your modified adjusted gross income from a prior tax year — generally two years earlier. That lag is what catches people off guard: a decision made this year can raise premiums two years from now, often after the reason for the higher income has passed.
Because the adjustment applies in tiers, crossing a threshold by a modest amount can increase premiums for the full year. This makes income awareness valuable in years with unusual income events.
Both sides of the decision, laid out plainly.
Premiums for a given year are generally based on the tax return from two years prior. Planning therefore has to look forward, not backward.
The adjustment applies in steps. Being slightly over a threshold generally produces the same increase as being well over it, which makes proximity to a threshold worth knowing.
The calculation uses a modified version of adjusted gross income, which can include items such as tax-exempt interest. Many one-time events are included.
If income dropped due to specific qualifying events — retirement, the death of a spouse, divorce, and others — you may be able to request that a more recent year be used instead.
An adjustment tied to a one-time income event typically applies for one year and then falls away once income normalizes.
For married couples filing jointly, the income figure generally affects each spouse's premium, effectively doubling the impact.
Key takeaway
Medicare premiums are a downstream consequence of income decisions made two years earlier. Before any large, discretionary taxable event in retirement, it's worth asking what it does to premiums later.
Taxes & Charitable Giving
Moving money from a pre-tax retirement account to a Roth IRA generally creates taxable income today in exchange for the potential for tax-free qualified withdrawals later. Whether it makes sense depends on your tax circumstances, time horizon, and broader financial plan.
Read the GuideRetirement
Claiming earlier generally means receiving income sooner with a smaller monthly benefit, while delaying can increase the monthly benefit. Health, longevity, marital status, taxes, and other income can all influence the decision.
Read the GuideInvestments & Accounts
Leaving money in the existing plan, moving it to a new employer plan, rolling it to an IRA, or taking a distribution can each have different advantages, costs, tax consequences, and trade-offs.
Read the GuideNext step
Every situation has details a general guide can't cover. A short conversation is usually the fastest way to sort out what applies to you.
This material is provided for general informational and educational purposes only and should not be construed as individualized investment, tax, accounting, or legal advice. Individual circumstances vary, and strategies discussed may not be appropriate for every investor. Wealthspan Investment Management, LLC does not provide legal or tax advice. Clients should consult their attorney, tax professional, and financial advisor regarding their individual circumstances. Investing involves risk, including possible loss of principal.