The Hidden Tax: IRMAA

Most retirees think their Medicare premiums are fixed. They're not. There's a surcharge called IRMAA, the Income-Related Monthly Adjustment Amount, that increases what you pay for Medicare Part B and Part D once your income crosses certain thresholds. For some retirees it adds thousands of dollars a year to healthcare costs.

The two-year trap

Here's the part that catches people: your premiums are based on your income from two years ago. Have a high-income year at 63, maybe from selling a business, taking a large withdrawal, or converting to a Roth IRA, and the bill arrives in your Medicare premiums at 65.

I've had clients call and ask, "Why did my Medicare premium just jump?" The answer was a financial decision made years earlier that nobody flagged at the time. And unlike a tax bracket, IRMAA works like a cliff: one dollar over a threshold raises premiums for the entire year.

The good news: it's manageable

• Spreading income over multiple years instead of bunching it
• Sizing Roth conversions to stop below the thresholds, which is a core part of our tax planning work
• Managing capital gains around the same lines
• Timing withdrawals so a one-time need doesn't become a two-year surcharge

This isn't about avoiding taxes entirely. It's about avoiding unnecessary penalties layered on top of them. IRMAA isn't technically a tax, but it behaves like one, and it responds to planning like one.