It’s time for Medicare IRMAA tax planning in 2026

This is the time of year that I review my estimated income for the year to determine what actions are needed to minimize the impact on Medicare Part B and Part D income. Related Monthly Adjustment Amount (IRMAA).

I waited for the US Bureau of Labor Statistics to report the annual consumer price index for all urban consumers (CPI-U) for August. It was 2.5%. This data is taken into account to determine the inflation adjustment for IRMAA. Conformable 42 USC 1395r (which was updated on September 13, 2024), the previous threshold will be multiplied by 2.5% and rounded to the nearest $1,000. For 2025, the IRMAA increases to $106,000 ($103,000*2.5%) for single/married filing separately and $211,000 ($206,000*2.5%) for married filing jointly.

As discussed in my October 7, 2023 article Being 65 years old And Planning for RMD and against IRMAAyou always have to plan two years ahead. So I’m focusing on how my 2024 earnings will affect my 2026 Medicare premiums.

I do not anticipate disinflation in 2025, so I expect the single tier one threshold in 2026 to be no less than $106,000. I have to go into a state of educated guess now. Below is a table summarizing the estimated IRMAA for a single person given a range of 2025 CPI-U results.

Click to enlarge

Click to enlarge

I chose to plan as if the first tier of IRMAA for singles will be $108,000.

We’ve had a good year so far in terms of total taxable income. I faced the high probability of exceeding IRMAA for 2026 if I did not carefully manage my strategy to reduce risk and lock in fixed income returns (see Fixed Income, Politics and an Investor’s View, 29 July 2024).

Common guidance to harvest losses to offset gains is not always available to investors. However, there are strategies that can be used to mitigate, if not taxable income this year, then taxable income earned in future years.

One can get into the habit of reinvesting earnings and losing sight of portfolio allocation. I have three investment accounts: brokerage, Rollover IRA, and ROTH IRA. As time went on, my brokerage account balance, especially its fixed income component, grew significantly.

There are two outcomes to consider. First, does allocating total equity to fixed income differ from one’s objective? This is often discussed in financial articles. The second concern is whether allocations between accounts have become tax inefficient. Upon review, I found reasons to rebalance the investment types in my accounts.

Although I focus on income, my investments are not stock free. I own dividend-earning stocks like ATT (T), Verizon (VZ), and Orange (ORAN), in addition to stock mutual funds like Fidelity Select Consumer Staples (FDFAX) and Fidelity Select Utilities (FSUTX).

I’ve found it’s best to sell stocks in my Rollover IRA and buy them back into my brokerage account. At the same time, we used the proceeds from the sale to buy fixed income instruments. The result was no change in my overall portfolio allocation. It did result in my fees going down though.

Income earned in the Rollover IRA, whether interest, dividends, or capital gains, will be taxed on distribution at my highest marginal tax rate, which is 22% federal and 5.3% WI state. If the equity investment is transferred to my brokerage account, I will save 8.59% in taxes, assuming qualified dividends.

Because I follow a fixed income investment strategy, I have a steady stream of fixed income maturities that can fund the move to equities in my brokerage account.

Making this transition without the worry of market timing requires an investor to leave funds from matured or called cash or cash equivalent instruments such as a money market in the (taxable) brokerage account. On any given day, market orders can be placed by selling equity in a Rollover IRA or any other tax-deferred account and immediately buying the same equity in a brokerage account.

Even if the equity was sold at a loss, there is no immediate favorable or unfavorable tax consequence. Equity purchased in the taxable account has a market price basis. If, after a year or more, the price appreciates, that appreciation will be taxed as a capital gain against ordinary income.

The only potential negative tax consequence is if the equity is later sold at a loss. Only if the loss exceeds any capital gain offset will an ordinary income deduction (up to $3,000/year) be allowed. If sold at a loss in a tax-deferred account, the loss would ultimately have avoided the initial marginal rate of ordinary income tax that would have been paid in the year of contribution.

All these considerations do not address a situation where an investor’s income is simply so high that an IRMAA threshold is exceeded. An investor may not want to live with lower income and take the tax hit. Or, an investor can choose to lower their taxable income by following the strategy I outlined above and switch to low or no dividend paying stocks in their taxable account and fixed income and dividend paying stocks in -a tax-deferred or tax-free account. (ROTH IRA).

When I turn 73 and required minimum distributions (RMDs) begin, I will pay higher Medicare premiums. No strategy will save me from that fate. If an investor falls within an IRMAA threshold, rolling over fixed income to a ROTH IRA, which is not used to calculate modified adjusted gross income when distributed, can be advantageous. However, it will take calculations beyond the scope of this article to determine whether push and pull strategies result in a positive outcome.

In my scenario, the ROTH IRA is the container for my largest and safest investments. If an investor has a crystal ball and is able to spot the next NVIDIA, definitely use your ROTH IRA to invest in it. If you’re like me, who has had the occasional financial windfall as well as a devastating loss, I recommend a conservative approach. That’s because you’ve already paid taxes on your ROTH IRA deposits. If you lose capital, the result is that you paid taxes on what is now worthless.