For individuals who have spent decades building and protecting their wealth, navigating the complexities of retirement taxes can be a nuanced challenge. As you transition from accumulating assets to generating retirement income, you may encounter new rules that affect your cash flow. Two common areas of confusion are the Income-Related Monthly Adjustment Amount (IRMAA) and the taxation of Social Security benefits.
While both of these costs are influenced by your income, they operate under entirely different rules, formulas, and thresholds. A strategic decision in one area of your financial life — such as selling a business, exercising stock options, or rebalancing a portfolio — can inadvertently trigger unexpected costs in another.
Understanding the distinction between IRMAA and Social Security tax is essential for optimizing your portfolio and helping ensure your wealth transfers efficiently.
Understanding Social Security taxation
A common misconception among retirees is that Social Security benefits are entirely tax-free. However, depending on your income and filing status, up to 85% of your benefits may be subject to federal income tax. The IRS determines the taxable portion of your benefits using a specific formula based on your “combined income,” which is sometimes referred to as provisional income.
Combined income is calculated by adding your adjusted gross income (AGI), nontaxable interest (such as municipal bond interest), and half of your Social Security benefits. For married couples filing jointly, if your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your combined income exceeds $44,000, up to 85% of your benefits may be taxable.
It is important to note that this tax is applied to your benefits as ordinary income. The remaining 15% of your benefits can remain tax-free at the federal level. However, for those with established wealth and multiple streams of income, it is likely that the maximum 85% of benefits will be subject to taxation. Planning for this tax liability is a critical component of a comprehensive retirement strategy.
What Is IRMAA?
IRMAA, or the Income-Related Monthly Adjustment Amount, is not a tax. Rather, it is a surcharge added to your Medicare Part B and Part D premiums if your income exceeds certain thresholds. This surcharge is designed to require higher-income Medicare recipients to pay a larger share of the actual cost of their Medicare coverage.
Unlike Social Security taxation, which uses combined income, IRMAA is based on your Modified Adjusted Gross Income (MAGI). For Medicare purposes, MAGI is generally your AGI plus any tax-exempt interest income. This means that the tax-free municipal bonds you hold in your taxable accounts can still count toward your IRMAA calculation — a detail that often surprises investors.
Another critical difference is the timeline. Medicare uses a two-year lookback period to determine your IRMAA surcharge. For example, your IRMAA for 2025 is based on the MAGI reported on your 2023 tax return. This delayed effect can catch many retirees off guard, especially if they experience a one-time liquidity event.
The IRMAA brackets operate as a “cliff.” If your MAGI exceeds a threshold by even one dollar, you may be bumped into the next tier, resulting in a significant increase in your Medicare premiums for the entire year.1 For 2024 income, the first IRMAA threshold for married couples filing jointly begins at a MAGI of $218,000, with the highest tier applying to incomes of $750,000 or more.
How they intersect: The ripple effect of income
While IRMAA and Social Security taxes are calculated differently, they are both driven by your income. A single financial event can trigger a ripple effect across your financial plan, causing both a higher percentage of taxable Social Security benefits and an IRMAA surcharge.
Consider a hypothetical scenario:
- A married couple filing jointly has a base income consisting of Social Security, dividends, and modest IRA withdrawals. This base income keeps their Social Security benefits partially taxable and keeps them just below the first IRMAA bracket.
- If they decide to take a large distribution from a traditional IRA to fund a real estate purchase, or if they realize a significant capital gain from the sale of a highly appreciated asset, their AGI increases. This increase pushes their combined income higher, causing the maximum 85% of their Social Security benefits to become taxable. Simultaneously, the higher MAGI pushes them over the IRMAA cliff, resulting in thousands of dollars in additional Medicare premiums two years later.
Because IRMAA surcharges are typically deducted directly from your Social Security payments, the net effect is a smaller monthly check. This interconnectedness highlights the importance of coordinating your investment decisions with your tax planning.
Three strategies for managing IRMAA and Social Security taxes
Protecting and growing your wealth involves strategic decisions that look beyond single-year tax returns. Coordinating your investments with your tax and estate planning can help you manage these income-driven costs.
Here are three strategies that may help you optimize your portfolio.
1. Tax-aware withdrawal sequencing
The order in which you draw from your retirement accounts can significantly impact your taxable income. Traditional IRA and 401(k) distributions are generally taxed as ordinary income, which increases both your combined income for Social Security taxes and your MAGI for IRMAA.
Conversely, qualified distributions from a Roth IRA are tax-free and do not count toward your AGI or MAGI. By strategically balancing withdrawals between taxable, tax-deferred, and tax-free accounts, you may be able to smooth your income and avoid crossing IRMAA thresholds.
For clients with meaningful real estate holdings or business interests, timing the realization of capital gains alongside these withdrawals is a critical component of comprehensive planning.
2. Strategic Roth conversions
Converting funds from a traditional IRA to a Roth IRA can be a powerful tool for long-term tax efficiency, but it requires careful timing. The amount converted is added to your taxable income for the year, which can trigger both higher Social Security taxes and IRMAA surcharges.
To mitigate this risk, some investors choose to execute Roth conversions during early retirement years, before they claim Social Security or enroll in Medicare. By paying the taxes upfront during lower-income years, you can reduce future required minimum distributions (RMDs) and create a source of tax-free income that won’t affect your Medicare premiums later in life.
This strategy seeks to protect your assets from future tax rate increases while providing flexibility for your family’s future. It is important to weigh the upfront tax cost against the potential long-term benefits.
3. Qualified Charitable Distributions (QCDs)
For those who are charitably inclined and age 70 ½ or older, a Qualified Charitable Distribution (QCD) can be an effective way to manage income while fulfilling philanthropic goals.
A QCD allows you to transfer funds directly from your IRA to a qualified charity. These donations — up to $111,000 in 2026 — can satisfy your RMDs but are excluded from your taxable income. Because a QCD does not increase your AGI, it does not increase your combined income for Social Security taxation, nor does it add to your MAGI for IRMAA calculations.1
This strategy allows you to support your favorite causes efficiently, coordinating your charitable giving with your broader financial picture.
Planning for life-changing events
If you experience a sudden drop in income due to a life-changing event — such as retirement, divorce, the sale of a business, or the death of a spouse — you do not necessarily have to wait two years for your Medicare premiums to adjust. You can file an appeal with the Social Security Administration to request a reduction in your IRMAA surcharge based on your new, lower income.
This is particularly relevant for business owners approaching a liquidity event. The income spike from the sale can trigger IRMAA two years later, but if your ongoing income drops significantly post-sale, proactive communication with the Social Security Administration may help mitigate the surcharge.
Coordinating your financial picture
Managing the interplay between IRMAA and Social Security taxes requires a comprehensive approach. Decisions made today can have delayed effects on your cash flow and tax liabilities years down the road. It isn’t simply about avoiding a surcharge; it’s about making strategic decisions that align your finances with your life goals.
Mercer Advisors can help you navigate these complexities. Our advisors and specialists can work with you to coordinate your tax, estate, and investment strategies, to help optimize your portfolio and protect the wealth you have built.
If you want to find out more about how we can help you align your financial decisions with your long-term goals
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Social Security tax refers to the federal income tax applied to your Social Security benefits based on your combined income. IRMAA is an income-related surcharge added to your Medicare Part B and Part D premiums based on your MAGI from two years prior.
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You may be able to manage IRMAA by keeping your MAGI below the designated thresholds. Strategies include utilizing tax-free Roth IRA distributions, making Qualified Charitable Distributions (QCDs), and carefully timing capital gains.
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Yes, the amount converted from a traditional IRA to a Roth IRA is included in your taxable income for that year. This increase in MAGI can potentially push you into a higher IRMAA bracket and increase your Medicare premiums two years later.
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The Centers for Medicare & Medicaid Services (CMS) publishes the updated IRMAA brackets annually at cms.gov. You can also consult with your Mercer Advisors wealth advisor to understand how the current brackets apply to your specific financial situation.
