Many people assume Medicare costs the same for everyone. Yet some retirees may pay higher Medicare Part B and Part D premiums based on their income.
Timing is an important part of this calculation. Medicare generally does not use your current income when calculating certain premium adjustments. Instead, it typically relies on information reported on your federal tax return from two years earlier.
As a result, a Roth conversion, major realized investment gain, large retirement account withdrawal, or a property sale could affect your Medicare costs well after the transaction takes place. Understanding this connection can help you anticipate potential expenses and evaluate how decisions that affect your income today could influence your Medicare premiums in the future.
What Is IRMAA?
IRMAA stands for Income-Related Monthly Adjustment Amount. It is an additional charge that some higher-income Medicare beneficiaries pay on top of their Medicare Part B premium and Medicare Part D plan premium.
The Social Security Administration generally calculates IRMAA using income information provided by the IRS. Whether IRMAA applies and how much you pay depend on your income and tax filing status.
What Income Does Medicare Use to Calculate IRMAA?
Medicare generally uses your Modified Adjusted Gross Income (MAGI) when determining whether IRMAA applies. MAGI includes your adjusted gross income plus any tax-exempt interest income reported on your federal tax return.
Medicare typically bases IRMAA on your MAGI from two years earlier. For example, Medicare premiums for 2026 generally use income reported on your 2024 federal tax return.
This two-year lookback can be especially important for someone who recently retired. Medicare premiums may still be based on income from their final working years, even if their current income is much lower.
Which Financial Decisions Can Increase Medicare Premiums?
Your income may change from year to year during retirement. Some increases come from ongoing income sources, while others result from one-time financial decisions that temporarily raise your MAGI.
Common examples include:
- Investment gains. Capital gains and other taxable investment income can increase your reported income. Common examples include selling appreciated investments, reducing a concentrated stock position, rebalancing a taxable portfolio, or receiving a large capital gain distribution.
- IRA and retirement plan withdrawals. Withdrawals from traditional IRAs and employer-sponsored retirement plans can increase your taxable income. Larger distributions, including required minimum distributions (RMDs), may increase MAGI and potentially move you into a higher IRMAA bracket.
- Roth IRA conversions. The taxable portion of a Roth conversion is generally included in your income for the year of the conversion. Depending on the amount converted, the additional income could affect future Medicare premiums.
- Real estate sales. Taxable gains from the sale of real estate can increase your reported income and potentially affect future Medicare premiums. This may include the sale of a rental property, vacation home, investment property, or, in some cases, a primary residence.
IRMAA is not limited to retirees with consistently high incomes. A single transaction may increase income enough to affect Medicare premiums. If income later returns to a lower level, the resulting premium increase may be temporary.
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Should You Avoid Decisions That Could Trigger IRMAA?
Not necessarily. Keeping income below an IRMAA threshold may help reduce Medicare premiums, but it should not be the only consideration. A decision that increases your income for one year may still make sense based on your other financial goals and needs.
Before moving forward, consider how a decision could affect your taxes, investments, cash flow, retirement income, and Medicare costs. Looking at these factors together can help you decide whether the decision still makes sense, even if it leads to higher Medicare premiums.
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Planning for Medicare Premiums in Retirement
Higher Medicare premiums can sometimes come as a surprise, especially when they are tied to income reported two years earlier. Keeping this timing in mind can help you plan for potential premium increases before completing a transaction that could raise your income.
If you’re approaching Medicare eligibility or have questions about your retirement income strategy, we’re here to help. You can schedule a complimentary introductory meeting with our team in Glastonbury or Wilton, Connecticut, to discuss your retirement income decisions and how they may affect your Medicare costs.
Have a quick question instead? Send us a note.
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Michael Nicoletti is a CERTIFIED FINANCIAL PLANNER® professional and works with clients throughout Connecticut and nationwide, offering financial planning and wealth management services. Based in Glastonbury and Wilton, CT, Michael helps families and individuals plan for their financial, insurance, investment, and retirement goals. Schedule a complimentary introductory meeting with Michael.
This material is being provided for informational purposes only. It is not a complete description or a recommendation. The information has been obtained from sources considered reliable, but we do not guarantee that it is accurate or complete. It is not a statement of all available data necessary for making an investment decision.
RMDs are generally subject to federal income tax and may also be subject to state taxes. Contributions to a traditional IRA may be tax-deductible depending on income, tax-filing status, and other factors. Withdrawals of pre-tax contributions and/or earnings from traditional IRAs and 401(k) plans are subject to ordinary income tax and, if taken before age 59½, may be subject to a 10% federal tax penalty. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. A 401(k) plan is a long-term retirement savings vehicle. Tax laws may change at any time and could substantially affect an individual’s situation.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.