9 Types of Income That Typically Don’t Increase Your Medicare Premiums

For retirees living on a fixed budget, it helps to understand Medicare’s Income-Related Monthly Adjustment Amount, or IRMAA. This surcharge can be added to Medicare premiums when income crosses certain limits, and the extra cost can weigh heavily on retirement finances.

IRMAA is tied to your modified adjusted gross income, or MAGI, but not every dollar you receive is counted the same way. By using income sources that are tax-advantaged or tax-free, retirees may be able to keep MAGI lower and avoid higher Part B and Part D premiums. The following nine income types can help preserve more of your nest egg.

How IRMAA works

IRMAA is an added fee on Medicare Part B and Part D premiums when MAGI exceeds set thresholds from an earlier tax year. In other words, the premiums you pay are based on income reported two years earlier.

If your MAGI is above the applicable limit, you pay the standard premium plus the surcharge. The result is higher monthly Medicare costs for higher-income beneficiaries on certain plans.

MAGI includes adjusted gross income plus tax-exempt interest, which means some income that is not taxed can still affect IRMAA unless it is handled carefully.

IRMAA income thresholds

For the current bracket structure, single filers whose income is above $109,000 pay higher Medicare Part B and Part D premiums, while the limit for joint filers is $218,000. Premiums vary by income tier, with Part B surcharges ranging from $81.20 to $487 and Part D surcharges ranging from $14.50 to $91.

Even a small amount over a threshold can add hundreds of dollars a year to Medicare costs, so it is worth knowing where your income falls.

Not all income is treated the same for IRMAA purposes. Here are nine sources that generally do not raise your Medicare bill.

1. Roth IRA distributions

Qualified Roth IRA withdrawals are generally excluded from MAGI for IRMAA purposes when the account has met the five-year rule and the owner is over age 59½. Because these withdrawals are tax-free, they do not usually count toward higher Medicare premiums.

For example, taking $10,000 from a Roth IRA should not increase MAGI. Many retirees use Roth withdrawals to cover expenses without triggering IRMAA.

2. Health savings account withdrawals

Withdrawals from a health savings account used for qualified medical expenses are tax-free and are not included in MAGI. For instance, taking out $7,500 to pay long-term care premiums would not affect IRMAA brackets, as long as the expenses are eligible and properly documented.

3. Life insurance proceeds

Lump-sum death benefits paid from a life insurance policy are generally not included in MAGI because they are tax-free. A $100,000 payout, for example, would not affect MAGI even if it is used for estate planning.

This can provide a useful source of cash without increasing Medicare costs. Still, any interest earned on the proceeds is usually taxable and may count toward MAGI, while growth inside a permanent policy is typically tax-deferred but can create taxable income in some cases.

4. Reverse mortgage payments

Money received from a reverse mortgage is treated as loan advances rather than income, so it does not raise MAGI. That makes it a potential non-taxed source of liquidity.

Keep in mind that the loan becomes due when the home is sold or the borrower moves out.

5. Qualified charitable distributions

Direct charitable transfers from an IRA can bypass taxable income and MAGI when they qualify as qualified charitable distributions, or QCDs. These transfers go straight from the IRA to an eligible charity, so they do not count as income.

QCDs can support a charitable cause while also helping manage income and satisfy required minimum distributions for people who are old enough to take them. They can be especially useful in years when MAGI is close to an IRMAA threshold.

6. Gifts received

Cash gifts from family members or friends generally do not increase taxable income or Medicare IRMAA income. That remains true even if the gift amount is above the annual exclusion, because the gift tax rules apply to the giver, not the recipient.

For example, if an adult child gives you $25,000 to help with retirement expenses, you generally would not owe federal income tax on it, and it would not increase your MAGI for Medicare premium purposes. Any taxable interest or investment earnings generated from that money later could count, however.

7. Workers’ compensation

Disability payments from workers’ compensation are excluded from MAGI when they are paid under a workers’ compensation act. So, if a retiree receives $15,000 from a work-related injury fund, that amount should not affect Medicare premiums.

This can provide financial support without adding to taxable income, though the payments must be properly classified to remain tax-exempt.

8. Veterans’ benefits

Disability pensions and other qualifying Department of Veterans Affairs benefits are generally non-taxable and are not counted in MAGI. An annual disability pension of $20,000, for instance, would not count toward IRMAA.

For eligible veterans, this can be an important tax-free income source, but paperwork should clearly identify the benefits to avoid classification errors.

9. Inheritance outside tax-deferred accounts

Cash, property, or other assets inherited outside tax-deferred accounts generally do not count toward MAGI. IRS guidance states that gifts, bequests, and inheritances, including money and real estate, are not considered taxable income when received.

For example, inheriting $50,000 in a savings account should not push up reported income for that year and may help you stay below IRMAA limits. Any income those assets later produce, such as rent or dividends, would generally be taxable when received.