Avoiding the Medicare IRMAA Surcharge: Tax Planning Tips for Public Retirees

What IRMAA Is and Why Public Retirees Should Care

The Income-Related Monthly Adjustment Amount (IRMAA) is Medicare's way of charging higher-income retirees more for their healthcare coverage. IRMAA is a surcharge you pay on top of your Medicare Part B and Part D premiums if you make a yearly income above the annual thresholds.

For public employees with pensions, Social Security, and retirement account withdrawals, IRMAA can be a costly surprise that significantly increases healthcare expenses in retirement. The surcharges can add thousands of dollars annually to your Medicare costs, making strategic tax planning essential for maintaining your retirement budget.

Why Public Employees Are at Higher Risk:

• Multiple income sources: Pensions + Social Security + retirement account withdrawals
• Required minimum distributions (RMDs) from 403(b), 457(b), and traditional IRAs starting at age 73 or 75
• Pension income timing that may be difficult to control
• Limited awareness of IRMAA rules during retirement planning

Understanding IRMAA and planning to avoid it can save thousands of dollars annually in Medicare premiums, preserving more of your hard-earned retirement income for the lifestyle you've planned.

How IRMAA Is Calculated: The Two-Year Lookback Rule

2025 IRMAA Income Thresholds

For 2025, Medicare beneficiaries with income over $106,000 (for single tax filers), $212,000 for joint filers, and $106,000 (for married people who file separately) will pay the surcharge. These thresholds increased from $103,000 (individual) and $206,000 (joint) in 2024.

Complete 2025 IRMAA Brackets (Official CMS Data)

Single Tax Filers:

• $106,000 or less: No IRMAA surcharge
• $106,001 - $133,000: $74.00/month surcharge (Part B), $13.70/month (Part D)
• $133,001 - $167,000: $185.00/month surcharge (Part B), $35.30/month (Part D)
• $167,001 - $200,000: $295.90/month surcharge (Part B), $57.00/month (Part D)
• $200,001 - $500,000: $406.90/month surcharge (Part B), $78.60/month (Part D)
• Over $500,000: $443.90/month surcharge (Part B), $85.80/month (Part D)

Married Filing Jointly:

• $212,000 or less: No IRMAA surcharge
• $212,001 - $266,000: $74.00/month surcharge per person
• $266,001 - $334,000: $185.00/month surcharge per person
• $334,001 - $400,000: $295.90/month surcharge per person
• $400,001 - $750,000: $406.90/month surcharge per person
• Over $750,000: $443.90/month surcharge per person

Married Filing Separately (Living with Spouse):

• $106,000 or less: No IRMAA surcharge
• $106,001 - $394,000: $406.90/month surcharge (Part B), $78.60/month (Part D)
• Over $394,000: $443.90/month surcharge (Part B), $85.80/month (Part D)

The Two-Year Lookback Rule

Critical Timing Concept: IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years prior to your current Medicare year.

• For 2025 Medicare premiums: Based on your 2023 tax return
• For 2026 Medicare premiums: Based on your 2024 tax return
• For 2027 Medicare premiums: Based on your 2025 tax return

This means you need to plan your income management before age 65 to avoid IRMAA surcharges when you first become eligible for Medicare.

Income Sources That Trigger IRMAA for Public Employees

Modified Adjusted Gross Income (MAGI) Includes:

Pension Income:

• Teacher Retirement System (TRS) benefits
• Employees Retirement System (ERS) benefits
• Municipal retirement system payments
• Optional Retirement Program (ORP) distributions

Social Security Benefits:

• Up to 85% of benefits may be included in MAGI calculation
• Depends on your other income sources
• Can push you over IRMAA thresholds unexpectedly

Retirement Account Withdrawals:

• 403(b) and 457(b) distributions
• Traditional IRA withdrawals
• Required minimum distributions (RMDs) starting at age 73
• Rollover amounts (if not properly executed)

Investment Income:

• Dividend income from taxable accounts
• Capital gains from asset sales
• Interest income from bonds and CDs
• Rental income from investment properties

Other Income Sources:

• Part-time employment income
• Consulting or contractor payments
• Business income
• Roth IRA conversions

Income Sources That DON'T Count Toward IRMAA:

Tax-Free Sources:

• Roth IRA distributions (after 5-year holding period)
• Qualified charitable distributions (QCDs) from traditional IRAs
• Municipal bond interest
• Life insurance proceeds
• HSA distributions for qualified medical expenses

Tax Planning Strategies to Avoid IRMAA

Strategy 1: Roth Conversions Before Age 65

The Concept: Convert traditional retirement account funds to Roth IRAs during lower-income years before Medicare eligibility.

Optimal Timing for Public Employees:

• Ages 60-63: After early retirement but before Medicare
• Lower-income years: When pension hasn't started or is reduced
• Before Social Security: When you have more control over total income

Example for Texas Teacher:

• Age 60: Retire with TRS pension ($35,000/year)
• Ages 60-64: Convert $50,000/year from 403(b) to Roth IRA
• Age 65+: Live on pension + Roth distributions (tax-free)
• Result: MAGI stays below IRMAA thresholds

Roth Conversion Benefits:

• No RMDs: Roth IRAs don't have required minimum distributions
• Tax-free growth: Future withdrawals don't increase MAGI
• Estate planning: Better for heirs than traditional accounts

Strategy 2: Strategic Capital Gains Management

Harvest Losses Before Medicare:

• Ages 62-64: Realize capital losses to offset future gains
• Tax-loss harvesting: Offset gains with losses in the same year
• Avoid wash sale rules: Don't repurchase identical securities within 30 days

Time Asset Sales Strategically:

• Sell appreciated assets during lower-income years
• Spread large sales over multiple years to stay below IRMAA thresholds
• Consider installment sales to spread income recognition

Strategy 3: Qualified Charitable Distributions (QCDs)

QCDs from traditional IRAs can reduce your MAGI and help you avoid IRMAA by reducing your current and future RMDs.

QCD Rules and Benefits:

• Age requirement: Must be 70½ or older
• Annual limit: Up to $100,000 per person annually
• Direct transfer: Funds must go directly from IRA custodian to qualified charity
• RMD satisfaction: QCDs count toward your RMD requirement after age 73

IRMAA Avoidance Strategy: Instead of taking a $20,000 RMD and donating $20,000 to charity separately:

• Traditional approach: $20,000 added to MAGI, $20,000 charitable deduction
• QCD approach: $0 added to MAGI, no deduction needed
• Result: Lower MAGI and potential IRMAA avoidance

Strategy 4: Health Savings Account (HSA) Maximization

Triple Tax Advantage:

• Deductible contributions: Reduce current year MAGI
• Tax-free growth: No taxes on investment gains
• Tax-free withdrawals: For qualified medical expenses

IRMAA Avoidance Benefits:

• Age 65+: Can withdraw for any purpose (taxed as ordinary income)
• Medical expenses: Always tax-free, don't increase MAGI
• Long-term care: Significant expenses covered tax-free

Special Considerations for Public Employees

Pension Income Timing Challenges

Limited Control Over Pension Payments: Most public employee pensions provide fixed monthly payments that you can't easily adjust to manage IRMAA. However, you can:

• Coordinate with other income sources: Time Social Security claiming and retirement account withdrawals
• Plan around pension increases: Factor in cost-of-living adjustments (COLAs)
• Consider pension options: Some systems offer lump-sum options that affect timing

Optional Retirement Program (ORP) Flexibility

Texas ORP Participants Have More Control:

• Withdrawal timing: Can control when and how much to withdraw
• Roth conversions: More flexibility for conversion strategies
• Asset allocation: Can adjust for tax-efficient growth

ORP IRMAA Strategy:

• Delay withdrawals: Use other income sources first
• Small, consistent withdrawals: Stay below IRMAA thresholds
• Roth conversions: Convert during lower-income years

Federal Employee Considerations

FERS Pension Coordination:

• Immediate annuity: Limited control over timing
• TSP withdrawals: Can time these strategically
• Social Security: Factor in federal employment impact on benefits

CSRS Retirees:

• No Social Security: May have lower overall income risk
• TSP management: Primary tool for IRMAA planning
• Health benefits: FEHB may reduce Medicare supplemental needs

Case Study: Sarah Avoids IRMAA Through Strategic Planning

Background

Sarah, Texas Teacher:

• Age 65 in 2025 (Medicare enrollment year)
• TRS pension: $42,000 annually
• Social Security: $28,000 annually
• 403(b) balance: $450,000
• Traditional IRA: $180,000
• Married filing jointly

Without IRMAA Planning

Projected 2025 Income:

• TRS pension: $42,000
• Social Security: $28,000 (85% taxable = $23,800)
• RMDs starting at 73: $25,000+ annually
• Total MAGI at age 73: $90,800

Future Risk: As RMDs increase, likely to exceed $212,000 joint threshold with spouse's income.

With Strategic IRMAA Avoidance

Ages 60-64 (Pre-Medicare Roth Conversion Strategy):

• Annual income: $70,000 (TRS pension + spousal income)
• Roth conversions: $35,000 annually from traditional accounts
• Total income: $105,000 (well below joint IRMAA threshold)

Age 65+ (Medicare Years):

• TRS pension: $42,000
• Social Security: $28,000
• Roth withdrawals: Tax-free, don't count toward MAGI
• QCDs at age 70½: $10,000 annually to charity (reduces RMDs)

Results:

• MAGI stays below $212,000 joint threshold
• Avoids IRMAA surcharges: Saves $1,776+ annually for both spouses (Part B only)
• Tax-free retirement income: From Roth accounts
• Charitable giving: Accomplished tax-efficiently through QCDs

Advanced IRMAA Avoidance Strategies

Asset Location Strategy

Tax-Efficient Account Placement:

• Tax-deferred accounts: Hold bonds and dividend-paying stocks
• Taxable accounts: Hold tax-efficient index funds and growth stocks
• Roth accounts: Hold highest-growth potential investments

Multi-Year Income Smoothing

Avoid Income Spikes: Instead of large, irregular income events:

• Spread asset sales over multiple years
• Time Roth conversions during consistently lower-income periods
• Plan major financial decisions around the two-year lookback rule

Geographic Arbitrage for Tax Planning

State Tax Considerations:

• Texas advantage: No state income tax on retirement income
• Other states: May have different tax treatment affecting federal MAGI
• Timing relocations: Consider tax implications of moving during conversion years

Life Event Exceptions to IRMAA

When You Can Appeal IRMAA

Medicare allows appeals for certain life-changing events that reduce your income:

• Death of spouse
• Divorce or annulment
• Work reduction or stoppage
• Loss of pension income
• Employer settlement payments ending

How to Appeal:

• Complete Form SSA-44
• Provide documentation of income change
• Submit within 12 months of the life-changing event

Implementation Timeline: Your IRMAA Avoidance Plan

10 Years Before Medicare (Age 55)

• Calculate projected retirement income from all sources
• Model IRMAA exposure under different scenarios
• Begin Roth conversion planning
• Maximize HSA contributions

5 Years Before Medicare (Age 60)

• Implement Roth conversion strategy
• Optimize asset location in taxable vs. tax-deferred accounts
• Plan charitable giving strategy
• Review and adjust annually

2 Years Before Medicare (Age 63)

• Finalize income projections for Medicare eligibility year
• Complete major Roth conversions
• Plan asset sales timing
• Prepare QCD strategy for age 70½

Medicare Enrollment Year (Age 65)

• Monitor MAGI carefully
• Adjust withdrawal strategies
• Implement QCD planning if age 70½+
• Plan for future RMD impacts

Common IRMAA Planning Mistakes to Avoid

Timing Errors

• Converting too much in one year: Creates unnecessary tax spike
• Ignoring the two-year lookback: Planning too late
• Not coordinating with spouse: Joint filers need combined strategy

Income Calculation Mistakes

• Forgetting about Social Security taxation: Up to 85% can be taxable
• Overlooking investment income: Dividends and capital gains add up
• Improper Roth conversion timing: Converting after Medicare eligibility

Strategic Oversights

• Not considering RMD trajectory: Future increases in required distributions
• Ignoring state tax implications: Some states tax retirement income
• Failing to plan for both spouses: Each needs individual IRMAA management

Conclusion: Start Planning Before Medicare Enrollment

IRMAA represents one of the largest controllable expenses in retirement for higher-income public employees. The best way to avoid IRMAA is to keep your MAGI down through careful tax planning. With proper planning, you can avoid thousands of dollars in annual Medicare surcharges while maintaining your desired retirement lifestyle.

Key Takeaways:

1. Start planning early: IRMAA is based on income from two years prior
2. Use Roth conversions strategically: During lower-income years before Medicare
3. Coordinate all income sources: Pensions, Social Security, and retirement accounts
4. Consider QCDs: Powerful tool for charitable giving and IRMAA avoidance
5. Monitor annually: Adjust strategies as income and rules change

Your Next Steps:

1. Calculate your projected MAGI for Medicare eligibility years
2. Model different income scenarios to identify IRMAA risk
3. Develop a multi-year tax strategy incorporating Roth conversions
4. Consult with professionals familiar with public employee benefits
5. Review and adjust annually as income and rules evolve

Don't let IRMAA surcharges unnecessarily drain your retirement income. With proper planning and strategic implementation, you can enjoy full Medicare benefits without the costly surcharges, preserving more of your hard-earned retirement dollars for the life you've planned.

The time to start planning is now—before you need Medicare and while you still have maximum control over your retirement income timing. Reach out to me on the contact page below to work on your customized tax planning strategies.

Disclaimer: This article provides general information about IRMAA and tax planning strategies based on 2025 Medicare rules from the Centers for Medicare & Medicaid Services (CMS). Medicare rules and tax laws can change, and individual situations vary significantly. Always consult with qualified tax and financial professionals who understand public employee benefits before implementing strategies discussed in this article.