When should I enroll in Medicare, and what is IRMAA?

• The enrollment window is seven months: three before, the month of, and three after your 65th birthday month
• If you are still covered by a qualifying employer group plan, a special enrollment period may apply when that coverage ends
• The Part B late enrollment penalty is permanent, not a one time charge
• IRMAA uses a two year lookback, so retirement year income affects premiums two years out
• A large Roth conversion or a one time capital gain can raise your Medicare premium two years later, which people routinely do not see coming

This is the part that surprises almost everyone.

Your Medicare premium for a given year is based on the modified adjusted gross income reported on your tax return from two years before. So your premium at 65 is set by what you reported at 63.

Now picture the typical energy retiree. He retires at 63, does a large Roth conversion that year because his wage income finally stopped and the brackets look cheap, and feels good about it. Two years later his Medicare premium arrives higher than he expected, and the decision that caused it is two years in the past and cannot be changed.

The planning implication is simple to state and easy to miss: the two years before you turn 65 are IRMAA relevant years. Any large one time income event in those years, a Roth conversion, a severance payment, an NUA distribution, a property sale, or exercising options, should be sized with Medicare premiums in the calculation and not just income tax.

IRMAA is tiered. Below the first threshold you pay the standard premium. Above it, surcharges apply to both Part B and Part D in steps, and they are based entirely on your tax return from two years earlier. We will walk through the current thresholds and where your projected income lands in them. Because the figures are adjusted each year, we confirm them against the official source rather than working from memory.

This matters and it is underused. If your income fell because of a qualifying life changing event, including stopping work, you can ask Social Security to use more recent income instead of the two year old return. Retirement is on the list of qualifying events.

So the retiree who gets an unexpectedly high premium notice in his first Medicare year, because it reflects his final working year, may be able to have it recalculated. A lot of people simply pay it.

A Roth conversion is not a life changing event. Income you chose to create does not qualify for relief, which is exactly why it has to be planned in advance.

Often you can delay Part B without penalty if you are covered by a qualifying employer group health plan through current employment, and then use a special enrollment period when that coverage ends. The details depend on the size of the employer and the nature of the coverage, and getting it wrong is expensive and permanent.

Two specific traps. COBRA and retiree coverage generally do not count as qualifying coverage for delaying Part B, even though they feel like employer coverage. And if you contribute to a health savings account, enrolling in Medicare ends your eligibility to contribute, with a lookback that can create a problem if you enroll mid year.

Confirm your own situation with Medicare or Social Security directly before you decide to delay anything.

If you are retiring in your late fifties, you will be on marketplace coverage for years before Medicare, which means you are managing against the ACA subsidy cliff first and IRMAA second. Those two constraints pull in the same direction, both reward keeping reported income lower, until 65, when the subsidy constraint disappears and only IRMAA remains.

That shift at 65 is why the conversion window often opens up right at the point most people stop thinking about tax planning.