Do You Know the Connection Between Income and Medicare Costs?

While enjoying what you’ve worked hard to build should be a priority, you should also keep in mind that withdrawing the money you’ve saved in traditional 401(k)s and IRAs can impact your Medicare costs throughout your retirement. Read on to see what having a high income could cost you in Medicare premiums and what strategies could potentially help you keep more money in your pocket and less going to Medicare premiums which are deducted from your Social Security check.

Understanding Medicare

First make sure you understand Medicare, how it’s broken up, and what plan you will likely choose. Medicare is sectioned into different parts, each serving a unique role in delivering health care coverage. These parts include Part A, Part B, Part D, and additional coverage options like Medicare Advantage (Part C) and Medigap.

• Part A (Hospital Insurance): Covers inpatient hospital stays, skilled nursing facility care, hospice care, and limited home health care. This is normally free for most people who have qualified for Medicare coverage.
• Part B (Medical Insurance): Covers doctor visits, outpatient care, home health care, and preventive services like screenings and wellness visits, along with durable medical equipment (e.g., wheelchairs). Part B coverage is the premium that will be deducted from your Social Security check if you don’t choose Medigap or Part C.
• Part D (Prescription Drug Coverage): Helps cover the cost of prescription medications, including certain vaccines. You can get Part D as a standalone plan along with Part B or as part of a Medicare Advantage Plan.
• Medicare Supplemental Insurance (Medigap): Extra coverage from private insurers to help pay for out-of-pocket costs in Original Medicare, such as copayments and coinsurance. Plans are standardized by letter (e.g., Plan G, Plan K).
• Part C (Medicare Advantage Plans): Private, Medicare-approved plans that may bundle Part A, Part B, and often Part D (prescription drug) coverages. Usually limited to providers within the plan’s network. May have different out-of-pocket costs and additional benefits not available in Original Medicare, like vision and hearing coverage.

Comparing Your Choice of Original Medicare with Medicare Advantage

Understanding Modified Adjusted Gross Income (MAGI)

There is one thing that will have a huge impact on your Medicare costs— your modified adjusted gross income (MAGI). Your MAGI is your adjusted gross income (AGI) minus allowable tax deductions and credits. Once you retire, you may be surprised to find that a combination of income from pensions, investment earnings, traditional (non-Roth) IRA withdrawals, and traditional 401(k) withdrawals may land you with a higher MAGI than you realized. While you may no longer be earning a traditional income from working a job, your MAGI will still reflect all of your taxable income.

RMD Impacts

A required minimum distribution (RMD) is the amount you are required to withdraw annually from specific retirement accounts, such as traditional (non-Roth) 401(k)s and traditional Individual Retirement Accounts (IRAs). Starting at age 73, you must take your first RMD by April 1 of the following year, and each subsequent RMD must be taken by December 31 each year after. These mandatory withdrawals are added to your taxable income, minus any allowable deductions or credits.

Higher Medicare Premiums for High Earners

How does retirement income connect to Medicare premium costs? If you have a high income, you may be subject to an income-related monthly adjustment amount (IRMAA) that is added to your Medicare Part B and Part D premiums. These surcharges are calculated annually by the Social Security Administration (SSA). If the SSA determines you must pay an IRMAA, you’ll receive a notice explaining the new premium amount and the reason for it.

Medicare premiums and income thresholds for IRMAA change each year. Income limits are based on your modified adjusted gross income (MAGI) from your tax return two years prior (see “Two-Year Lookback” below). This means your premium costs can vary depending on your reported income and the current year’s SSA guidelines.

Other Impacts

Various income sources contribute to your MAGI, including withdrawals from retirement accounts, capital gains, home sale profits, and interest income such as Treasury bill yields. All of these can impact your Medicare premium amounts

Two-Year Lookback

When enrolling in Medicare, your MAGI from your tax return filed two years prior determines your premiums. This “two-year lookback” means that unexpected large distributions or gains from two years ago can increase your Medicare premiums today. Because this rule applies throughout retirement, your premiums can fluctuate annually based on your income from two years prior. It’s important to plan ahead so you aren’t caught off guard by increased costs.

Potential Strategies

Since Medicare premiums are influenced by your MAGI—the higher your income, the higher your premiums may be—it’s wise to work with a retirement planner well before enrolling in Medicare or retiring. A financial advisor can help create a tailored retirement income strategy, including which accounts to draw from and whether converting some taxable accounts to Roth accounts might help reduce future taxable income and premiums. Effective planning helps you keep more money in your pocket throughout retirement.

Planning for Medicare can seem like an overwhelming process. From knowing which retirement accounts to leverage to help keep your MAGI as low as possible, to accounting for that two-year lookback, it can be a lot. That’s why the best place to start in your plan is talking to someone knowledgeable about retirement planning.