Mitigating Legislative Risk in Retirement: The Critical Role of IRMAA and IRA Strategies

It’s Legislative Risk Awareness Month, and today I want to share one of the clearest examples of Legislative Risk many seniors face. And it’s an example that seems to be everywhere these days. 

I’m talking about IRMAA. 

IRMAA, of course, is the Income-Related Monthly Adjustment Amount (IRMAA), a fee Medicare beneficiaries at certain income thresholds pay for their Part B and Part D premiums.  

When the IRMAA adjustment rules were originally passed, they created IRMAA brackets and associated fees and introduced an annual process for adjusting these fees going forward. 

While we don’t know the exact amount IRMAA fees will rise each year going forward, the existence of those annual increases is already law.  Historically, these increases have ranged from around 4.73% to 8.02% annually.

Why is this a relevant topic for Legislative Risk Awareness Month?  

Medicare and Social Security expenses make up a majority of the mandatory spending in our nation’s annual budget.  In fact, the majority of all revenue generated by our country is made up of these two major expenditures. 

And the age demographics of our country will only compound this problem.   

IRMAA increases are inevitable. Clients can’t control them; only the government can. 

But, we can control the impact of our IRAs and 401ks on the IRMAA calculation each year.  If we can establish a baseline income throughout retirement from non-IRA assets, we can then look at the incremental impact on IRMAA from the addition of IRA distributions. 

It comes down to a few assumptions: 

• How long will you live?

• How many tiers of IRMAA do you move by the incremental IRA income?

• Are you married? 

You can then apply the new combined income to the tiered IRMAA tables for Parts B and D.  

When it comes to IRMAA fees, the “IRMAA Increments” are all equal.  If you jump from one bracket to the next higher bracket, the additional premium is equal for each tier.  The same goes for paying IRMAA as a single person or married. This means one jump in the bracket is equal to one more year of paying IRMAA, and it is also equal to paying IRMAA for a second person (spouse). 

So, you can define an IRMAA Increment as an equal, additional amount of IRMAA premium paid per year of paying IRMAA, plus additional tiers of IRMAA from higher income in a given year, per person (either 1 for a single or 2 for a spouse).

Suppose we can simplify this down to a very simple analysis of IRMAA Increments. In that case, we can quickly identify, based on realistic, reasonable assumptions, whether it makes sense to take IRA distributions over your lifetime compared to converting money over a few years to a tax-free instrument like a Roth IRA or Cash Value Life Insurance. 

Let’s explore deeper through an example.   

Here’s a 65-year-old couple with a $1M IRA. 

If they ask, “How will this IRA impact my IRMAA calculations?”  or better yet, “Can I limit the impact of my IRA on my IRMAA calculations?” Here's how we could help them answer it.

Let’s assume they have a baseline non-IRA income of $150,000, and the IRA distributions will be added to that.   

As for the $1M IRA, let’s consider two different scenarios.   

Scenario 1 assumes a strategy of keeping the IRA and using it for income.  With a blended growth rate of 5%, net of fees, you could take about $80,000 a year from the IRA and make it last to life expectancy (20 years). 

Or, the second scenario considers converting that IRA to a tax-free vehicle, like a Roth IRA.  I’ll go with a very aggressive 2-year conversion pattern.  That means $500,000 will be added to the baseline income for the next two years.  But it also means that income is off the books when it comes to IRMAA calculations in a shorter amount of time. 

Now we’ll just add up the additional IRMAA increments for each scenario. 

Scenario 1: 

Years – 20 

Tiers – 1 (Meaning the added $80k jumps the IRMAA calculation by one bracket tier) 

People – 2 (Assumes both live for 20 years) 

My quick 3rd-grade multiplication tables tell me this is 40 IRMAA Increments. 

Scenario 2: 

Years – 2 (Remember, we’re not looking at total IRMAA, only the years the IRA impacts IRMAA) 

Tiers – 4 (This is the big fear.  Large distributions from IRAs drive up income for IRMAA calculations) 

People – 2 

Another quick calculation tells me this scenario only carries 16 IRMAA Increments. 

In fourth grade, I learned greater than/less than.  40 is definitely greater than 16. 

Some very simple analysis tells me that converting to tax-free is well worth the up-front “cost” of conversion.   

Oh, and did someone mention that the cost of IRMAA is going up?  Every year?  That’s right.  Add on a 4-8% increase to that IRMAA Increment and suddenly conversion looks even better.  Because by executing a Roth Conversion now, they are paying their IRMAA Increments at their lowest values! 

Let’s look at the actual current value of an IRMAA Increment. The difference in tiers of the part B calculation is $104.80.  And the difference for part D is $20.50.  So that’s $125.30 per month, which equates to $1503.60. 

$1503.60 per Tier.  Per Year.  Per Person. 

And that’s at today’s prices.  The lowest percentage increase since IRMAA’s inception in 2007 was a growth of 4.73%.  So using that lowest fee increase going forward, the cost would grow to $2385.95 in 10 years, and $3789.26 in the final 20^th year of the example.   

And that’s assuming the smallest increase we’ve seen.  Those increases are not always that small.  

I understand that every client has their own unique set of circumstances.  And there are multiple factors that come into play when considering the possible conversion of tax-deferred money to tax-free money. 

But when it comes to IRMAA, the case is pretty cut and dry.  If your IRMAA Increments are higher by staying in the IRA, then a conversion must at least be considered.  And quickly. 

There is an incredibly high level of legislative risk around increases to IRMAA. After all, those increases have already been codified into law. 

Helping our clients minimize IRMAA as part of their conversion strategies can be an important part of helping protect our clients from legislative risk in retirement. (If you would like a deeper dive into IRMAA, watch our most recent study group here.)