Beware large 401(k) withdrawals’ impact on Medicare prices

Many people retire and are not sure what to do with the money in their 401(k) from their former employer. Do not withdraw all the money out of your 401(k) just because you can. There is no tax PENALTY for withdrawing after age 59 ½, but if you are age 63 and take a large amount of money out and just sit it in your savings account, you might have made a big mistake as far as Medicare is concerned.

Why would Medicare care about your 401(k)? Most people don’t realize that the cost you pay for Medicare Parts B and D are based on your income (not assets). The rich pay more for Medicare. You may not be rich, but your 401(k) and regular IRA withdrawals become taxable income, and you may look rich to Medicare. If you take out too much tax-deferred money, it can cause your Medicare monthly premiums to go up. This is called IRMAA (income related monthly adjustment amount). I call it the “rich tax.”

What does Medicare consider to be “rich”?

Medicare will not look at your savings account or stock portfolio. This is not an asset test. The Medicare IRMAA is based on your modified adjusted gross income from two years prior. If you are turning 65 this year, look at your 2022 tax returns. If you earned over $103,000 as a single person or $206,000 as a couple, then you’ll pay the IRMAA surcharge for one year. You only have to be over the limit by $1 to trigger this surcharge.

There are currently five IRMAA brackets which I have listed on our website, TheMedicareFamily.com. It’s a moving target since the government adjusts these amounts annually. For people retiring in 2025, we don’t know what the exact dollar amounts are until November 2024. You could pay a little extra each month ($80) or you could pay almost $500 extra per month depending on which bracket you fall into.

Educate yourself on Medicare IRMAA if you are within two years of starting Medicare because there are other things that can trigger it that you may be able to avoid with some planning, such as selling a property. Those profits often cause IRMAA. If you can, plan to sell that property at age 62 instead of age 63. Capital gains from the sale at 62 won’t impact you since Medicare doesn’t begin till age 65. When you take withdrawals out of your 401(k) and IRA, stay below the expected IRMAA limits in the future.

Medicare IRMAA does not only impact you when you turn 65.

It can impact you every year that you are enrolled into Medicare. Age 65 is just the first age people find out about this extra cost. Every year that you are on Medicare, they will cross reference with the IRS to see your Modified Adjusted Gross income from two years prior, and if you are over the limit, they charge you more each month for one year.

This is not a permanent increase. If you sold a house and it caused you to pay more for Medicare, it’s only for one year.

Sylvia Gordon is known as Medicare Mama on social media. She and the Noblesville-based TheMedicareFamily.com have amassed nearly one million followers online where she teaches about Medicare, Social Security, and retirement.