Key Takeaways
- An IRMAA surcharge can raise Medicare Part B and Part D costs for beneficiaries whose income exceeds specified thresholds.
- Large withdrawals, investment gains, Roth conversions, and RMDs can increase taxable income and affect future Medicare premiums.
- Professionally guided retirement income planning can help coordinate taxes, investments, Medicare, Social Security, and retirement withdrawals for overall gains.
When planning your retirement income, it’s important to look beyond your anticipated day-to-day spending; also consider how taxes, emergencies, and unplanned expenses can affect how far your income stretches.
Among the unplanned costs that impact retirement budgets are Medicare premiums. These premiums are based on income, and for many retirees, this comes as a surprise — often after the fact. Based on their earnings and withdrawals, they end up with an IRMAA surcharge.
IRMAA stands for Income-Related Monthly Adjustment Amount, and the surcharge is an additional deduction for Part B and Part D Medicare coverage. Since Medicare uses income from past years to determine these costs, a financial decision you make today affects your premiums down the road.
With that in mind, let’s go over how you can manage your income, stay within an IRMAA bracket, and avoid raising your Medicare premiums unnecessarily.
What Is an IRMAA Surcharge?
An IRMAA surcharge is an extra charge applied when a beneficiary’s income from two years prior goes beyond certain limits.
The Social Security Administration typically relies on your federal tax return when deciding whether you’re subject to an additional Medicare charge, and the income figure they use for this is called modified adjusted gross income (MAGI). It’s the sum of your gross income and tax-exempt interest.
For example, your 2026 Medicare premiums will be calculated based on the income reported on your 2024 return. This two-year lookback can create an unexpected situation where your financial decisions today increase Medicare costs in a future year.
High-income retirees move through the brackets year after year, with higher income generally resulting in higher Medicare premiums.
Which Retirement Income Affects Medicare Costs?
By retirement income, we’re referring to all your income gains, including:
- Pensions
- Traditional IRA and 401(k) withdrawals
- Required Minimum Distributions (RMDs)
- Roth conversions
- Capital gains from investments
- Other taxable earnings.
Although each income source helps support your retirement, together they can raise your MAGI, move you into a higher IRMAA bracket, and trigger an IRMAA surcharge. It’s another reason why retirement income planning involves more than just minimizing your immediate tax obligations.
Roth Conversions and IRMAA
Converting a traditional retirement account to a Roth IRA can be beneficial over the long term because you may be able to limit taxable withdrawals later and have more flexibility in managing retirement income. However, the catch is that the converted amount is usually taxable for that year. A large Roth conversion, therefore, could raise your MAGI enough to trigger an IRMAA surcharge.
This is not to say that retirees should avoid Roth conversions. Instead, it’s a call for retirees and their financial planners to consider the potential Medicare impact against the conversion’s broader tax and retirement-planning benefits.
How Required Minimum Distributions (RMDs) Affect IRMAA
After RMDs begin, required withdrawals could increase your income enough to raise your Medicare premiums.
Planning for RMDs before they begin may help you keep future taxable income under better control. Strategies like Roth conversions, carefully timed withdrawals, and qualified charitable distributions can all be useful tools, depending on your retirement goals and financial needs.
Why This Matters More After Widowhood
IRMAA can become particularly important after the death of a spouse. A couple’s joint income may have been low enough to avoid an IRMAA surcharge because they filed jointly. However, when a spouse dies, the surviving partner may face a different situation because single filers face lower income thresholds.
Particularly in situations where income has not fallen by half, applicable IRMAA brackets can change the situation significantly. The surviving spouse ends up having to pay higher taxes and higher Medicare premiums. That’s why Medicare expenses deserve a place in the overall retirement and widowhood planning, rather than being handled separately.
How Can You Plan Around IRMAA?
IRMAA is not just something to react to. It can be planned for. Depending on your circumstances, this may include:
- Spreading taxable income across multiple years
- Managing capital gains intentionally
- Coordinating Roth conversions
- Reducing future RMD exposure
The goal isn't to avoid every possible IRMAA surcharge entirely; it’s to understand the financial implications of your options before making decisions around your retirement income.
Make Medicare Part of Your Retirement Income Plan
Tax-efficient retirement income planning is about more than keeping taxes low. It’s also about understanding how your income decisions can affect the total cost of retirement, including Medicare premiums.
For high-income retirees, a move that reduces taxes today could have unintended Medicare consequences later. Similarly, accepting an IRMAA surcharge today can help you save more on taxes over time.
Fero Financial can help you navigate retirement income, taxes, Medicare, and other financial decisions with targeted guidance so you can make informed choices. We’re a family-led financial planning firm that brings together all aspects of your financial life into a coordinated plan.
With nearly 40 years of financial planning experience, we’re a deeply knowledgeable and experienced team, one of the best in the industry. Call Fero Financial today.
FAQs
Can I avoid an IRMAA surcharge by keeping my income below a threshold?
Potentially. As long as your MAGI is at or below the applicable IRMAA threshold, you won’t have to pay additional Medicare premiums. However, deliberately limiting your income to avoid IRMAA may not always work in your best interest.
What happens if my income has dropped since the tax year Social Security used?
If your income has dropped significantly because of a qualifying life-changing event, you may be able to request a fresh recalibration by the Social Security Administration. The process is detailed, and you may be asked to provide supporting documentation.
Are Medicare premiums and Medicaid premiums the same?
No, these are two different programs with separate eligibility requirements and cost structures. An IRMAA surcharge only applies to Medicare premiums. While some retirees may be eligible for both, they should avoid treating them as interchangeable when planning their healthcare expenses.
How can retirement income planning help manage my IRMAA?
With Fero Financial’s Retirement Income Planning, we help you devise a strategy that considers all key financial factors. For example, we may help you coordinate withdrawals, decide on the size and timing of Roth conversions, manage investment gains, and consider qualified charitable distributions where appropriate. We’ll help you make calculated financial moves whose positive impact is well anticipated, for your long-term benefit.
