The Retirement Tax Trap: Managing IRMAA and Withdrawal Sequencing Before It’s Too Late

As they're nearing retirement and finalizing their withdrawal, spending, and healthcare plans, many seniors aren't aware that there's a trap waiting on the other side of the finish line.

IRMAA, the Income-Related Monthly Adjustment Amount, is a surcharge that can drive up Medicare Part B and D premiums for high-earning seniors.

The catch? IRMAA is based on your modified adjusted gross income (MAGI) from two years prior. That means the Medicare premiums you pay at age 65 are determined by the income you earned at age 63.

 If you’re approaching retirement, it’s important to think ahead about what your retirement income will look like and how it could affect your Medicare premiums down the road. Proactive tax and withdrawal planning in the years leading up to retirement, and throughout retirement, can help reduce future IRMAA surcharges and keep your healthcare costs in check.

IRMAA and the ABCDs

First, let's do a quick review of the Medicare ABCDs.

• Medicare Part A covers hospital visits.

• Medicare Part B covers doctor's visits.

• Medicare Part C (Medicare Advantage) is an optional plan that bundles the other parts of Medicare, often with additional coverage that traditional Medicare doesn't provide.

• Medicare Part D covers prescription drugs.

IRMAA can affect the premiums for Parts B and D that the government and insurers establish every fall for the following year.

To determine if your premiums are subject to IRMAA, the Centers for Medicare & Medicaid Services (CMS) looks back on your modified adjusted gross income (MAGI) from two years prior. So, for new Medicare enrollees retiring at 65, your first year of Medicare premiums is based on your MAGI when you were 63 years old. If you earn above the annual income limits ($106,000 for individuals and $212,000 for married couples filing jointly in 2025), your premiums could rise by hundreds or even thousands of dollars per year, depending on which IRMAA income tier you fall into.

The IRMAA surcharge is reevaluated each year as new tax information becomes available. So, while a higher-income year could temporarily push you into an IRMAA tier, a later decrease in income can reduce, or even eliminate, the surcharge in future years. This annual reassessment creates opportunities for retirees to plan income distributions and withdrawals strategically, helping manage Medicare costs over time.

We're still waiting for the final Medicare premiums and IRMAA limits for 2026. However, based on the annual report released by the Medicare Trustees last June, it's estimated that Part B and Part D premiums are both going to rise next year. Those increases alone could absorb the 2.8% cost-of-living adjustment (COLA) coming to Social Security recipients. Add an IRMAA surcharge, and many seniors who aren't planning ahead could struggle to maintain their preferred lifestyle while paying for the healthcare they need.

Smart Moves in Your Final Two Working Years

Because of the two-year lookback provision, pre-retirees should work with their advisors to control their retirement income before they retire. Some moves you might consider include:

• Manage Your Final Paychecks: If you have control over your compensation, consider deferring a large bonus or accelerating income to lower your earnings in a key lookback year.

• Maximize Tax-Advantaged Contributions: Contribute as much as you can to every account that lowers your MAGI, including your 401(k) and Health Savings Accounts (HSA).

• Model Your Future: A comprehensive financial plan never guesses; it makes projections. Keen Wealth helps clients model their projected income throughout their retirement. We can use this data to plan ahead for potential IRMAA scenarios while also analyzing tax liability and optimal withdrawal sequencing.

Speaking of withdrawals ...

Withdrawal Sequencing 101

Once you are retired, you're going to shift from making contributions to your accounts to living off of them.

The order in which you tap into your accounts is critical to managing your annual taxable income, as well as your vulnerability to IRMAA.

But, at the same time, you should have the resources you need to live your best life and start crossing some items off your bucket list.

A common withdrawal sequence that hits that sweet spot might look like:

• Early Retirement: Withdraw from your taxable brokerage accounts. You'll only pay capital gains tax on the growth, not the entire withdrawal, which usually won't trigger a spike in MAGI.

• The Conversion Window: In the gap years between retirement and required minimum distributions (73 to 75, depending on your birth year), your taxable income could be at its lowest. This can be the ideal moment to convert funds from your traditional 401(k) or IRA into a tax-exempt Roth IRA. You’ll pay tax on the conversion while you're in a lower tax bracket, but that money will grow tax-free in the Roth account and will not count toward future IRMAA calculations when you do make withdrawals, and unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions.

• Middle Retirement: The strategies above can help you "thin out" some of your accounts before you have to start taking RMDs, which can reduce the size of those RMDs and your tax liability. Ideally, you've also delayed taking Social Security benefits until this stage, if not later, to maximize your benefits and reduce your taxable income.

• Late Retirement: Use your tax-free Roth IRA funds last so that they can grow as much as possible. Withdrawals from these accounts are also not included in your MAGI calculation.

Avoiding the IRMAA Cliff

IRMAA isn't just a trap; it's a cliff. Unlike income tax brackets, which are marginal, if you earn just $1 over the IRMAA tiers, your Medicare premiums are probably going up.

Get ahead of anything that could drive up your income in a given year, including:

• RMDs: A large RMD from a lifetime of 401(k) savings can single-handedly trigger IRMAA.

• Social Security: In a high-earning year, up to 85% of your Social Security benefit can be included in your MAGI.

• One-Time Events: Selling a second house, taking a large capital gain from a stock, or even a poorly timed Roth conversion can increase your MAGI.

You can anticipate and plan for many of these IRMAA triggers, like Social Security and RMDs. Others, like a windfall or an unexpected increase in your withdrawal needs to cover an emergency, will require some in-the-moment adjustments.

However, all of them are usually manageable if you are working with an advisor and following a comprehensive financial plan.

If you can see retirement on the horizon, then now is the time to meet with Keen Wealth and start preparing for every piece of the transition into your golden years.

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About Bill

Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

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