Many people run into IRMAA for the first time right as they turn 65. And it often comes as a surprise because Medicare does not look at your current income when calculating your premiums. Instead, it looks back two years. That creates a real problem if the year being used included something unusual like a Roth conversion, a large capital gain, or your final high-income year before retirement.
IRMAA ends up feeling like a penalty for something that happened long ago. Here is how it actually works and what you can do when your income does not follow a smooth pattern year to year.
How IRMAA Is Calculated
IRMAA is an additional charge added to your Medicare Part B (and sometimes Part D) premiums once your income crosses certain thresholds. The calculation uses modified adjusted gross income, which includes Roth conversions, realized capital gains, and several income items that would not normally show up in your AGI.
The part that confuses most people is the two-year lookback. Medicare uses income from two years earlier simply because that is the most recent tax return the IRS has complete data for. It is not a rolling average. It is not a penalty for what happened two years ago. It is just the cleanest data set available at the time premiums must be assessed.
The problem, of course, is that two years ago may not look anything like your current financial situation. If that year included a Roth conversion or a one-time property sale, it can push you into a much higher IRMAA bracket even if your income has dropped significantly since then.
What Happens If the Lookback Year Was Unusual
This is one of the rare areas of Medicare where you actually have a chance to correct the record.
If the year being used for IRMAA included atypical income and your finances are very different now, you can file Form SSA-44 and request a reduction. Social Security allows IRMAA adjustments for certain life changing events such as:
- Retirement
- Loss of income from work
- Marriage or divorce
- Loss of pension
- Loss of income-producing property
Retirement is the one most people use. If you retired last year or the year before, and IRMAA is being based on a peak earnings year, you can often get it corrected. The key is to demonstrate that your current income is significantly lower than the income Medicare is using.
How Much Should You Worry About IRMAA?
This is where I tell people to step back and avoid letting IRMAA drive the entire planning process.
IRMAA can add a few hundred dollars a month to your premiums, and in the highest bracket it can approach six hundred dollars. That is not nothing, and it is understandable why people react strongly to it. But in the context of tax planning, Roth conversions, and long-term cash flow, IRMAA is rarely the largest number you are dealing with.
If a Roth conversion saves you tens or hundreds of thousands of dollars in future RMD-driven taxes, paying a few thousand dollars in temporary IRMAA should not derail that strategy. You never want the IRMAA tail to wag the dog.
The goal is not to eliminate IRMAA at all costs. The goal is to optimize lifetime taxes and retirement income. In many cases that means temporarily accepting a higher IRMAA bracket in exchange for much greater long-term savings.
A Practical Approach When Your Income Is Uneven
If your income has been lumpy due to conversions, asset sales, or variable withdrawals, here is the general framework I walk people through:
- Determine whether the prior-year income truly reflects your current financial reality. If not, consider filing Form SSA-44.
- Model the long-term tax impact of future Roth conversions or capital gains. Do not assume IRMAA should block those decisions.
- Look at how IRA withdrawals, RMDs, and investment income will stack up over the next decade. IRMAA is only one piece of the puzzle.
- Make sure you are not overreacting to a single year’s premium. The IRMAA brackets reset annually.
- Keep everything coordinated. Tax strategy, cash flow, Medicare timing, and portfolio withdrawals all have to be aligned for this to work smoothly.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on IRMAA, retirement taxes, and long-term withdrawal planning, listen to the full episode here.