IRMAA: The Medicare Tax That Can Cost You Thousands

IRMAA Article Discussion is in this Video... Topic #2

I read a lot of financial articles every week. In fact, part of my job as an advisor is to understand what type of content is being put out there, what's going on in the marketplace, and what the media is talking about so that I'm able to be a guide and maybe a calming voice if necessary when clients and prospects come into the office and they have questions about things they're seeing or reading.

There are people out there still creating a lot of great content and putting out really nice thought leadership when it comes to retirement and investing. But in my view, a lot of the stuff that's put out there today is actually generated by artificial intelligence, and AI is putting out just massive dumps of content. For a lot of people, it's overwhelming.

In this week's video, I'm going to share with you three different articles that I read, give you a CFP® professional's take on them, and one of them I had to throw in here because when I read it, it just made me want to throw my phone across the room. Not literally, but hopefully I can unpack what I mean, and you'll understand where I'm coming from.

Hey, welcome back to the channel. My name is Michael Baker, and for nearly two decades I've been helping people build and protect their wealth and put together retirement income plans. I'm excited to share some of my thoughts on recent media articles that I read.

Article #1 : The 401(k) vs. IRA Debate

This first article was published in MarketWatch by Alicia Munnell. I think this is more of an opinion piece because it's definitely shaped by her perspective on this issue. The title of the article was "More Money in IRAs and 401(k)s and Why That Leaves Workers More Vulnerable."

I fundamentally disagree with this article. It pushed my buttons, and even going back and looking at it again because I had saved it for commentary, I can feel myself getting worked up. But don't worry, I'll keep it in perspective.

The article starts out outlining the issue that Americans have over $7 trillion in 401(k) plans and that these plans are governed by ERISA and that ERISA framework or regulatory framework holds 401(k) plan providers to a fiduciary standard of care, and that by default, that is just superior to IRAs. Because if you were to move your money into an IRA, you might have to work with somebody who isn't held to a fiduciary standard of care.

Now listen, I am all about the fiduciary world. I've been a Certified Financial Planner and held to a fiduciary standard since 2013, and I think that is the ultimate standard of care that everyone should be seeking to find in a financial professional. But this idea that you need big government or big regulations to actually do that for you? I'm completely against that.

There are many marketplace solutions that work and open up the opportunities for competition and markets to build in efficiencies. Now, is the system for finance broken? There would be some people that absolutely argue that. But what I believe is I believe in consumer choice. I believe in educating people, informing people, and helping people make good decisions that work well for them.

I don't believe you just blanketly apply a regulatory framework that says everybody has to do this—like everybody has to eat oranges for the rest of their life because apples are never good for you. That's the kind of framework that I just completely am against altogether because I believe it puts too much of government into our personal lives.

Tim Maurer has a great quote when it comes to money. He says, "Personal finance is more personal than finance," and I believe that to be true. I believe that opens up the idea for choice.

The Creditor Protection Argument

Going back to the article, one of the things that was pointed out is creditor protection for 401(k)s. Yes, there is creditor protection for 401(k)s, but guess what? There's creditor protection for IRAs too. Many states will offer creditor protection just like for 401(k)s—they will offer that for IRAs. It's limited, so you need to research that in your state.

But the idea that you can't move your money out of a 401(k) because of creditor protection? Well, that's one thing to consider if you're in a situation where you need to really be looking at protecting your assets from creditors. That goes in your decision matrix. But if you're not in that situation, maybe you want more flexibility that's not available inside of your 401(k).

Maybe you want better fund options. Maybe you want access to an advisor that actually knows you personally, can work with you directly, and build a plan or a portfolio that works for you specifically.

I've been doing this for a long time, and most of the people that come into our office to talk with us about their 401(k) are armed with a 1-800 number and an online portal. So if that's the standard of care that we want people to have when it comes to their finances, I fundamentally reject that.

I think everybody deserves access to competent financial professionals that are held to a fiduciary standard of care who can help guide them as individuals. We are not all the same. We don't have the same priorities, we don't have the same values, and I think our plans and our investments and how we do money should reflect those things that are most important to us.

I don't think we need a government regulation saying this is how we have to do money. So when I read this article from a very prominent retirement research professional and academic like Alicia Munnell, who wrote the article—and I love her work, that's the thing. I love a lot of her research. We've used her research in educating clients—but I just fundamentally reject this opinion.

My Take on the 401(k) vs. IRA Question

If you read that article, understand that regulations do have a place, but they are not the panacea. They are not the all-encompassing solution to issues that exist within the financial professional world or within the financial services world.

I love choice. I love markets. I want markets to work. I want people to have options, and I want professionals to educate more, lead with education, and let people make informed decisions. I think that's the way.

So if you're considering moving money out of a 401(k):

1. The fiduciary standard of care is not exclusive to 401(k)s. Remember that there are thousands of great advisors out there who hold themselves to a fiduciary standard of care and work with IRAs, so you don't need to have your money in a 401(k) to work with a fiduciary or someone held to that standard of care.

2. IRAs open up a ton of flexibility with the investment universe. A lot of 401(k) plans limit you to the fund menu. And let's be honest, not all 401(k) plans are created equal. I still see in 2026 some 401(k) plans that have high-expense funds, limited fund selection, and overall not necessarily the great mix for people who are trying to build a comprehensive retirement plan for themselves.

3. Have confidence and trust in yourself. I think you are the expert on you, and I think you are equipped and able to find someone that you believe in, that you trust, that can help you make the best decisions for yourself. I don't want the government doing that for you. I want you to have that choice. I want you to have that freedom.

Article #2: IRMAA - The Hidden Medicare Tax

Here's a question for you: Do you know what IRMAA is? If you don't know, that's okay because a lot of people don't. In fact, there was a recent article published that said most people in retirement who are going to be subject to IRMAA don't even know what it is, and they're surprised when it affects them.

IRMAA stands for Income-Related Monthly Adjustment Amount. This is basically a surcharge that is added to your Medicare Part B and Part D premiums based on your income. So the more income you have in retirement, the higher your Medicare premiums are going to be.

Now, this isn't necessarily a bad thing because it's a progressive system where people who have higher incomes are going to pay more for their Medicare. But the issue is that a lot of people don't know about it, and they're not planning for it.

How IRMAA Works

IRMAA works on a two-year look-back. So for example, if we're in 2026, they're going to look at your 2024 income to determine what your IRMAA surcharges are going to be in 2026. This is important because you need to be thinking about your income planning strategies well in advance.

The other thing about IRMAA that catches a lot of people off guard is that it doesn't phase in or phase out gradually. Once you cross a threshold by even $1, you pay the full surcharge for that bracket. So you could have $1 more in income and see a significant jump in your Medicare premiums.

When IRMAA Becomes Critical

If you're in your early retirement years and you're not yet on Medicare, you need to start thinking about IRMAA now. Especially if you're doing things like Roth conversions, turning on Social Security, or you may be selling some assets where you're going to realize pretty large capital gains, or you're going to have consulting income or maybe selling a business.

You need to be aware of how IRMAA works.

The Widow's Penalty

Also, the thing that really catches a lot of people off guard is what happens when we lose a spouse. When we lose a spouse, we have tax bracket compression, and that also means IRMAA bracket compression. You might be receiving similar income that you had when you were married, but now when you're solo—you've lost your spouse and you're a single filer—you don't necessarily have a big income drop-off. You could automatically start seeing yourself bumping up against those IRMAA brackets.

Why This Matters for the Future

IRMAA is something that we have to deal with. Now, here's the piece I want everyone to hear because this is where I believe we're going with this: It's no secret that Social Security and Medicare are in financial trouble. Without action, both of these programs are going to face severe headwinds in the years ahead. What Congress will do is still a mystery, even though there are a lot of proposals and solutions being put out there.

But Medicare is the one that I'm most concerned about—not Social Security, but Medicare. I believe that because we have IRMAA on the books, which is basically an automatic surcharge where it charges people more premiums based on their income, this could be something that could easily be adjusted back down, where people that used to not have to pay IRMAA now have to start paying IRMAA tax or IRMAA surcharges on their Medicare.

So I want you to become very aware of this, especially if you have a pretty strong income in retirement or you expect there to be inheritance money or selling some assets while you're in retirement and receiving Medicare. IRMAA is something you need to know about, and if you aren't educated on it, you need to start today.

Article #3: The Retirement Spending Paradox

This last article was near and dear to my heart. If you're still with me, you rock, because I know this stuff can be a little bit dry, but this stuff is important. This is the kind of content that I consume from day to day, week to week, because I want to see what clients are reading about.

This last article is from Kiplinger's: "The Average Retirement Withdrawal Rate by Age." This article points out something that I really struggle with.

Let's frame it up so that hopefully you can understand where I'm coming from. Basically in this article, they talk about withdrawal rates by age, and there was a study that was done. What they're finding correlates with another study that Michael Finke and David Blanchett did about retirement spending and retirement income.

The Problem: Retirees Aren't Spending

What we're finding is really troubling: A lot of people, when they've prepared and saved for retirement, do all this really hard work to get to retirement, and then they spend less money. I think what Finke and Blanchett kind of pointed out is that there's a little bit of a psychological thing that happens when we retire.

Think about this: When you've been working, you grow accustomed to having structure, having a routine, and an organizing principle of your life, which is work. But also you get accustomed to having a paycheck. That paycheck gets deposited in your account either monthly or biweekly, maybe weekly, but you get accustomed to this cadence of receiving a steady paycheck.

Well, when you retire, you don't necessarily have that paycheck.

The Solution: Create Your Retirement Paycheck

Let's talk about actionable advice. One of the things that you can do when you're planning for retirement and you are looking at the years ahead:

Step 1: Identify Your Lifestyle

The first thing I think you should do is identify your lifestyle and the lifestyle that you want to defend and protect in retirement. This lifestyle—and I'm not talking about your essential living expenses because nobody wants to go into retirement and nobody fantasizes about retirement with a no-fun budget—I'm talking about what's the lifestyle you want to have in retirement.

Does it involve certain restaurants that you want to go to? Does it involve certain trips that you want to take? Does it involve a certain number of vacations every year? What lifestyle, when you are sitting and thinking about retirement or discussing retirement with your spouse, what does that lifestyle look like? How do we price that? What is that going to cost us?

That's the lifestyle we want to defend and protect.

Step 2: Build Your Income Floor

Then let's get to work on building what we call an income floor. How do we build or structure retirement income streams so that we can fund that lifestyle and protect that lifestyle in retirement? Hopefully you have more than enough assets to be able to do this.

This is how you would know whether or not you're funded enough for retirement, or you need to do a little bit of work. But then after that, the other assets can be supplemental assets, or they can be set aside to grow and build wealth over time.

There are lots of things to think about, but this is the number one thing I think a lot of people miss, and a lot of people aren't educated on this because they're still trying to apply somebody else's playbook to their situation.

Step 3: Get Your License to Spend

In my experience, once people realize that their lifestyle is going to be protected, that gives them what Finke and Blanchett call the "license to spend." They don't mind spending their money each month because they're going to receive another paycheck next month. They're not going to be worried about markets because that may affect their paycheck next month or next year.

Now, they might be worried about markets because we're people and we worry, and markets can give us all a little anxiety, but it won't be about the paycheck.

So the first thing we need to think about is: What does our lifestyle need to look like? How do we defend and protect that lifestyle? Then can we structure assets around that and create an income floor so that we've protected our lifestyle in retirement? Then we have our license to spend.

If we want to do a remodel, if we want to do a special trip with all of our family, if we need to finance or buy a new car, these big purchases which are going to happen—or most likely we're going to want to do some things in retirement—we can do that without worrying about our paychecks being affected.

My Advice: Stop Checking Quarterly

Get rid of plans where you have to check in quarterly and see how you're doing and whether or not you're going to be able to receive the income you want next year. I think that way of planning is, in my opinion, not optimal for happiness. It might be optimal for terminal wealth when you pass away, but I don't know a lot of people that are entering their retirement years wanting to die with the most money.

Let's build a plan that helps you create the retirement that you want, the paychecks and the lifestyle that you want to protect and have throughout the duration of your retirement.

The Bottom Line

Remember, the risk isn't necessarily outliving your money. It's outliving your ability to spend and enjoy it while you still can.

If you've made it this far, thank you for watching. If you like this video, give me a like—that really helps out with the algorithm and helps us reach more people. But as always, thank you for watching, and we'll see you next time.

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