Understanding IRMAA: The Two-Year Lookback
The Income-Related Monthly Adjustment Amount (IRMAA) is a surcharge applied to Medicare Part B and Part D premiums for higher-income beneficiaries. The Social Security Administration (SSA) determines if you owe an IRMAA by evaluating your Modified Adjusted Gross Income (MAGI) from your tax return two years prior. For instance, the IRMAA for 2025 is based on your tax filings from 2023. This two-year lookback is a critical factor when considering how an inheritance might affect your premiums down the line. A significant increase in income in one year could lead to higher Medicare costs two years later, a delay that often catches people by surprise.
Inheritance Principal vs. Taxable Income
The key distinction when assessing the impact of an inheritance is whether the asset generates taxable income for you. The Internal Revenue Service (IRS) generally does not consider the inheritance of cash, investments, or property as taxable income to the beneficiary. This means that simply receiving a cash windfall will not directly trigger an IRMAA surcharge. However, the situation changes when the inherited asset itself is a source of taxable income or is sold for a gain.
How Different Inherited Assets Can Impact Your MAGI
- Cash Inheritance: Receiving a cash inheritance does not count as income for IRMAA purposes, as it is not considered taxable income.
- Inherited Retirement Accounts: This is where things get complex. Inheriting a traditional IRA, 401(k), or other tax-deferred retirement plan requires you to take taxable withdrawals. For most non-spouse beneficiaries, the entire account must be distributed within 10 years. Each withdrawal is considered taxable income and is added to your MAGI, which can easily push you into a higher IRMAA bracket. In contrast, withdrawals from an inherited Roth IRA are tax-free and will not affect your IRMAA, although the account still must be emptied within the 10-year period.
- Inherited Real Estate or Investments: Inheriting real estate or a brokerage account is generally not a taxable event upon receipt. However, if you later sell that inherited property or investment, any capital gain realized could increase your MAGI. This is calculated based on the difference between the sales price and the asset's value on the date of death (known as the stepped-up basis). Additionally, any ongoing income from these assets, such as rent from a property or dividends from stocks, would be taxable and contribute to your MAGI.
Strategies to Manage Inherited Assets and Avoid IRMAA
For those inheriting taxable assets, especially retirement accounts, proactive planning is essential to minimize the potential IRMAA impact. The 10-year rule for inherited IRAs offers some flexibility in managing taxable distributions. It may be beneficial to consult a financial advisor to determine a withdrawal strategy that spreads out the taxable income over several years, potentially keeping you below the IRMAA thresholds.
Comparison of Inheritance Types and Their IRMAA Effect
| Inherited Asset Type | Is the Principal Taxable? | Is Income/Distribution Taxable? | Potential IRMAA Impact? |
|---|---|---|---|
| Cash | No | N/A | No |
| Traditional IRA/401(k) | No | Yes (upon withdrawal) | Yes (withdrawals increase MAGI) |
| Roth IRA | No | No | No (withdrawals are tax-free) |
| Real Estate | No | Yes (capital gains on sale, rental income) | Yes (taxable income increases MAGI) |
| Brokerage Account | No | Yes (capital gains on sale, dividends) | Yes (taxable income increases MAGI) |
Additional Considerations and Exceptions
It is also important to differentiate between Medicare and Medicaid. Medicaid is a needs-based program, and an inheritance can directly affect eligibility by increasing your countable assets. For Medicare, the impact is primarily on your premiums through the IRMAA calculation, not your eligibility for benefits. High-income beneficiaries who have experienced a significant life-changing event, such as a work stoppage or a death in the family, may also be able to request an appeal to reduce or eliminate the IRMAA surcharge. The Social Security Administration provides specific forms and guidelines for such requests.
Conclusion
Ultimately, a straightforward cash inheritance does not count as income for IRMAA. However, the situation is far more nuanced with inherited assets like retirement accounts or real estate that generate taxable income. The key is understanding that IRMAA is tied to your taxable income as reported to the IRS, and certain inherited assets and the way you manage them can significantly increase that figure. Consulting a qualified financial planner or tax advisor is highly recommended to navigate these complexities and avoid an unexpected increase in your Medicare premiums.
For more detailed information on IRMAA and its income thresholds, you can visit the official Social Security Administration website.
