The Mysterious Risk of IRMAA. The Cost May Be Higher Than You Think

In November 2023, Dan McGrath — co-founder of the IRMAA Certified Planner program and best-selling author of What You Don't Know About Retirement Will Hurt You — published an analysis at LTC News titled "The Mysterious Risk of IRMAA. The Cost May Be Higher Than You Think." His thesis was blunt: the risk of IRMAA (Income-Related Monthly Adjustment Amounts) looms like a shadow over retirement planning, often bringing unexpected costs that surpass initial estimates.

Why does that matter? Because in retirement, when it comes to health coverage at age 65 or older, there is essentially one option: Medicare. And as McGrath pointed out, Medicare is excellent coverage for those who use the system prudently — but it is not free, and it quietly reduces your Social Security benefit, too.

Federal regulations tie the two programs together. To receive Social Security benefits, you must enroll in Medicare when you are eligible and no longer have employer health coverage, and your Social Security benefit automatically pays most of your Medicare premiums. Failing to enroll in Medicare while collecting Social Security — without other proper coverage — can result in forfeiture of Social Security benefits.

On top of that baseline cost, there is a lesser-known surcharge that depends on how much income you generate in retirement. That surcharge is IRMAA — and it is the "mysterious risk" the article set out to expose. This page walks through McGrath's argument and what it means for retirees and the advisors who serve them.

IRMAA is short for Medicare's Income-Related Monthly Adjustment Amount. According to the Code of Federal Regulations, it is an amount you pay for your Medicare Part B and Part D coverage when your modified adjusted gross income (MAGI) is above certain thresholds. Ultimately, the more income you have in retirement, the higher your Medicare Part B and Part D premiums will be — and that cost typically comes directly from your Social Security benefit.

At the time of the article, the Social Security Administration applied IRMAA to anyone enrolled in Medicare with a MAGI over $103,000 for individuals and $206,000 for couples — the thresholds that took effect for 2024. (These thresholds adjust each year; see the current IRMAA brackets for today's figures.)

One detail that surprises nearly everyone: the SSA determines your IRMAA using your tax return from two years prior. Income you earned two years ago sets the premium you pay today — a mechanism explained in depth in our guide to how IRMAA is calculated.

Will You Really Reach IRMAA?

Reaching IRMAA comes down to how much income you generate in retirement. McGrath's article cited projections from the Trustees of Medicare showing that the odds of reaching IRMAA were set to grow substantially: in 2023, over 15% — about 6.8 million — of eligible Medicare beneficiaries reached IRMAA, and by 2032 that share was projected to grow to over 25%, with more than 13 million retirees impacted.

In other words, IRMAA was never designed to stay a "wealthy retiree" problem. Because the thresholds and the income landscape both shift over time, a growing share of ordinary savers — especially diligent 401(k) contributors — are projected to cross into surcharge territory.

McGrath offered a memorable rule of thumb: ask yourself whether the IRS can see your income. If the IRS recognizes it, it probably counts toward IRMAA. The SSA defines IRMAA income as your Modified Adjusted Gross Income — your adjusted gross income plus tax-exempt interest, or everything on lines 2a and 11 of the 2022 IRS Form 1040.

MAGI that counts toward IRMAA includes:

• Salaries and wages, and earned tips
• Taxable Social Security benefits
• Interest earnings and dividend income
• Capital gains and income from stock options
• Pension distributions
• Rental revenue and royalties
• Alimony received, gambling proceeds, and debt forgiveness
• Withdrawals from tax-deferred investments — yes, your Traditional 401(k) and Traditional IRA

That last bullet is the sting in the tail. The more you save for retirement using a tax-deferred strategy, the higher your future Medicare premiums may be. As McGrath put it, IRMAA is largely driven by Traditional 401(k)/IRA withdrawals plus the taxable portion of Social Security benefits.

The Short List That Doesn't Count

What does NOT count toward IRMAA is, unfortunately, a much shorter list:

• Distributions from Roth accounts, Health Savings Accounts, and 401(h) plans
• Portions of income from non-qualified annuities
• Loans from primary residences and life insurance policies

McGrath's twin rules of thumb: if you have a decent amount saved in a Traditional 401(k), you are likely to reach IRMAA at some point in retirement. If all of your retirement savings sit in Roth accounts and life insurance, you may never reach it. For concrete tactics, see our guide on how to reduce MAGI.

For those who reached IRMAA at the time of the article, the surcharge could total between $1,990 and $12,012 a year for a couple, depending on the bracket. Uncomfortable, but perhaps manageable — which is why many advisors historically dismissed IRMAA as a rounding error.

The real issue, McGrath argued, is trajectory. Citing the Trustees of Medicare, he noted that Medicare costs — including IRMAA — were inflating by over 7.25% annually through 2032. If those projections held and inflation remained consistent, the cost of IRMAA for a couple would rise to between roughly $3,400 and $20,000 annually by 2032.

Compounding at that rate transforms IRMAA from an annoyance into a six-figure lifetime expense for many households. That is the "cost may be higher than you think" at the heart of the article's title — the sticker price today dramatically understates the cumulative burden over a 25- or 30-year retirement.

IRMAA's Other Impact: Your Social Security Check

Beyond the direct cost, IRMAA comes out of your Social Security benefit. McGrath cited the Social Security Board of Trustees' projection that the annual cost-of-living adjustment (COLA) would be no higher than 2.40% through at least 2032, while Medicare premiums and IRMAA inflate by more than 7.25% — roughly three times faster.

When the deduction grows three times faster than the benefit, the arithmetic only ends one way: over time, the net Social Security check a high-income retiree actually receives shrinks. This interaction between the two programs is covered in more detail in our article on Social Security and IRMAA.

McGrath's prescription follows directly from the definition: IRMAA is all about the income the IRS sees on your Form 1040. The goal, then, is to build retirement income from sources the IRS does not count — Roth IRAs and Roth 401(k)s, non-qualified annuities, and life insurance cash value.

He made a particular case for life insurance — not the sexiest financial instrument, as he conceded, but one that can do three jobs at once:

• Family protection in the event of an untimely death
• Tax-free income through cash value that does not count toward IRMAA or the taxation of Social Security benefits
• Long-term care funding if riders or hybrid designs are used to cover future care expenses

Timing matters enormously here. Because IRMAA uses a two-year lookback, repositioning assets — for example, through Roth conversions — is far cleaner before Medicare enrollment than after. Converting later can itself trigger IRMAA in the conversion years, so the strategy needs to be modeled, not guessed at.

And if a surcharge does land after a life-changing event such as retirement, divorce, or the death of a spouse, it is not necessarily final: beneficiaries can request a redetermination using Form SSA-44. Our IRMAA appeal guide walks through the process.

Fitting for a piece published at LTC News, McGrath closed with a connection many planners miss: the collision between long-term care costs and IRMAA. If you do not have long-term care insurance, you will probably sell off assets — perhaps from an IRA or 401(k) — to pay for the expensive care many of us will eventually need.

That creates a double hit. Not only are you spending your own money on care, but liquidating assets generates taxable income. Selling appreciated stock produces capital gains; drawing down a Traditional IRA produces ordinary income. Either way, that income lands in your AGI — which can push you into a higher IRMAA bracket and raise your Medicare premiums at the exact moment your health expenses are spiking.

By contrast, proceeds from a qualified long-term care insurance policy — traditional or hybrid — come to the policyholder tax-free and are not considered income for IRMAA purposes. In McGrath's framing, LTC insurance isn't just care funding; it's an IRMAA firewall for the highest-spending years of retirement.

The original article closed by encouraging readers to contact a professional trained on IRMAA — and that advice has aged well. IRMAA sits at the intersection of tax planning, Medicare rules, Social Security, and investment strategy, which is precisely where a competent advisor earns their fee.

For advisors, McGrath's analysis suggests a concrete workflow:

• Project MAGI year by year through retirement, not just at the point of enrollment — the two-year lookback means today's decisions surface in premiums two years later.
• Quantify the lifetime cost of IRMAA under current projections, so clients see the compounding risk, not just this year's surcharge.
• Test mitigation strategies — Roth conversion schedules, withdrawal sequencing, asset location, and gain harvesting — against the bracket thresholds.
• Watch for appeal opportunities when clients retire or experience other qualifying life events.

This is the analysis RetirementAdvisorPro was built to automate: modeling a client's future MAGI against IRMAA brackets, showing the multi-decade cost of inaction, and comparing mitigation strategies side by side in a client-ready format. If you'd like to see it applied to a real case, schedule a demo.