Retirement Income Increases Impact on Medicare Premium

Some parts of the premium structure are affected by income. Vitalii Vodolazskyi/ShutterStock

You’ve worked hard to save for retirement. And whether it’s in a 401(k) plan, individual retirement account (IRA), or annuity, at one point, you’re going to withdraw funds. But that influx of money could cause a problem with your Medicare premium.

For most people, Medicare premiums are stable. But if you are in a certain tax bracket, you may have to pay premium increases. When does this happen? And is there anything you can do to prevent the increase?

4 Parts to Medicare Premium Structure

There are four parts to Medicare, and each has a premium. Some parts of the premium structure are affected by income, but others are not.

For example, household income typically does not affect parts A and C premiums. Part A covers hospital treatment, doctor visits, and inpatient care.

This doesn’t have a monthly premium. In rare cases, based on work history, not income, it may have a premium.

Part C is a public/private partnership. Although these plans have premiums, they are based on your chosen plan, not your income.

With Medicare Parts B and D, your premium is based on the specific plan you are enrolled in, and it is adjusted based on your household income.

Part B covers outpatient treatment, personal doctors’ care, and medical devices.

The premium in 2025 is $185 per month. This is adjusted based on your income.

Medicare D covers prescription medicines. Its premium depends on your chosen plan but can also be adjusted for income.

Income-Related Monthly Adjustment Amount

As of the 2003 legislation, the federal government reduced the subsidy for high-income individuals. This resulted in these individuals paying higher premiums for parts B and D. These higher premiums are known as the income-related monthly adjustment amount (IRMAA). They are also known as surcharges or means testing.

Required Minimum Distributions Influence Medicare Premiums

A federally required minimum distribution (RMD) is the minimum amount you must withdraw annually from qualified retirement plans.

The age you are required to start withdrawing increased from 72 to 73 in 2023. By 2033, it will be 75. RMDs are required from traditional funds such as an IRA, 401(k), thrift savings plan, and other traditional retirement plans.

Roth IRAs are not subject to RMDs.

As you start withdrawing money from these accounts, the spike in income will directly influence the premiums you pay for Medicare Part B and Part D.

Medicare is based on your modified adjusted gross income (MAGI). Distributions from most retirement accounts are counted as taxable income.

You should be mindful of how these distributions impact your Medicare premiums.

Minimizing RMD Trap With Medicare

If you think RMDs could raise your retirement income, have a plan. Sit down with an accountant and assess your risk. If you are at risk for a premium increase, there are some strategies you can use to mitigate the impact.

You and your accountant will need to engage in thoughtful tax planning to minimize the overall taxable income.

Analyze Your Affected Accounts

Look at the type of accounts you need. Roth IRAs don’t affect Medicare premiums. In fact, they’re not required to have RMDs during your lifetime. That’s because you contributed to them after tax.

But you’ll need to look at your RMD-eligible accounts and calculate how much money you will be required to take as a distribution.

To calculate your RMD, when you first start taking the required amount, you take your account balance as of the end of the year, divided by your life expectancy factor, and there’s your RMD.

Don’t Put Off Withdrawal

When you reach 73, you must start taking RMDs. Although you can delay withdrawing funds the following year, you'll be required to take two distributions.

Taking two distributions could trigger a Medicare surcharge.

Make a Charitable Distribution

If it looks like the RMD is going to push you into a higher income bracket, consider using a qualified charitable distribution (QCD).

A QCD allows you to transfer up to $100,000 annually to a qualified charity. Keep in mind it must be direct. It can’t come to you and then you pass it on to the charity. That won’t count as a QCD and will defeat the purpose.

Using a QCD satisfies your RMD without increasing your taxable income.

Take Your Distributions Early

Although you may be subject to some penalties, taking an early distribution might be a strategic move under the right circumstances.

Taking distributions after you are 59 1/2 can help manage your MAGI in later years.

You’ll need to carefully consider the potential for taxes and penalties. Only do this once you have consulted with a financial adviser.

Consider an Annuity

A qualified longevity annuity can provide payments that align with your financial needs while minimizing RMDs. You'll lower the risk of pushing your income into a higher bracket, which could affect your Medicare premiums.

Medicare Premium Affected by Income

A spike in your income could affect your Medicare Part B and Part D premiums. This can specifically happen if an RMD puts you in a higher income bracket. The premium increase is the result of the IRMAA.

Meet with a financial adviser before receiving RMDs to develop a strategy that minimizes the impact on your Medicare premium.

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