More Than Half of Working Boomers Plan to Retire at 70 or Later, and Extra Income Can Raise Medicare Costs Later

Continuing to work beyond 65 can help strengthen retirement savings, but higher earnings can also raise Medicare premiums later on, and even one IRA withdrawal may move someone into a more expensive bracket than expected.

More than half of working baby boomers expect to retire at 70 or older, if they retire at all, according to a Transamerica Center for Retirement Studies report released recently. For older Americans looking to build up their finances, staying employed can protect savings. But a larger paycheck can also increase Medicare premiums, with the extra charge showing up two years later.

To illustrate the point, consider Carol, a hypothetical 66-year-old who takes a job paying $125,000 a year and also plans to withdraw $15,000 from her traditional IRA to replace her roof. Combined, those choices could push her into a higher Medicare income bracket two years later, potentially adding $1,736 to her annual premiums based on current thresholds.

Your Income Now Can Set Your Premiums Two Years Later

The Social Security Administration calculates the surcharge, known as IRMAA, from the most recent federal tax return provided by the IRS. That is usually the return from two years earlier, which means income earned now can determine premiums later.

The agency uses modified adjusted gross income, or MAGI, which includes adjusted gross income plus tax-exempt interest. Wages count, as do withdrawals from a traditional IRA or 401(k). Interest from municipal bonds also counts, even though it is often thought of as tax-free.

IRMAA can apply twice. The SSA adds one surcharge to Part B and another to Part D, and each one applies only if you have that coverage. The monthly surcharges for single filers are shown below:

A $15,000 IRA Withdrawal Pushes Carol Into a Higher Tier

Carol’s MAGI would total $140,000. Because the later-year brackets are not yet available, the current table is being used as a stand-in. The brackets also rise with inflation: the first single-filer threshold moved from $106,000 to $109,000. So the actual future limits would likely be a little higher.

Using the current thresholds, Carol’s $140,000 income places her $3,000 above the $137,000 cutoff for the next IRMAA bracket. That would mean combined Part B and Part D surcharges of $240.40 a month, or $2,884.80 a year, in addition to her standard premiums.

Without the IRA withdrawal, her $125,000 salary would put her in the first bracket, with combined surcharges of $95.70 a month, or $1,148.40 a year. The difference is $1,736.40 annually, although the actual effect on future premiums would depend on the thresholds and surcharge amounts that are ultimately set. Because Carol is 66, she has not yet reached required minimum distribution age, so the withdrawal is optional and can be adjusted.

She could avoid the higher bracket by reducing the IRA withdrawal by $3,000 or moving part of it into a different tax year. That would keep her income at or below the lower cutoff. The exact savings would depend on where the Medicare thresholds land later, but spreading withdrawals across years could help limit premium costs.

Retirement May Offer a Path to Lower Medicare Surcharges

If Carol retires later, her premiums would still be based on the earlier tax return unless she qualifies for a new determination. Form SSA-44 allows a request for reconsideration based on more recent tax information or other updated facts. Qualifying events include stopping work, reducing hours, marriage, divorce, a spouse’s death, loss of income-producing property, loss of employer pension income, or receipt of an employer settlement payment.

Social Security also allows people to report expected income declines tied to qualifying life changes, including retirement or reduced hours. Carol would need to provide documentation supporting the change and her estimated income. Her voluntary IRA withdrawal would not qualify on its own, even if it pushed her into a higher premium bracket.

Three Steps to Take Before Year-End

1. Estimate your MAGI now. Add wages, IRA withdrawals, capital gains, and tax-exempt bond interest. If you are close to a bracket line, use the final months of the year to shift withdrawals and sales you can control.
2. Coordinate Social Security with your paycheck. At 66, Carol is still below full retirement age. If she claims benefits while earning $125,000, the earnings test could reduce some payments. Benefits received could also raise taxable income and affect later Medicare premiums.
3. Check whether you qualify for IRMAA relief when you retire. If you stop working or cut back your hours and expect income to fall, ask Social Security whether a new premium determination is possible. Form SSA-44 lets you submit documentation and actual or estimated income figures. If you are still covered by a current employer and have not enrolled in Part B, it may also be worth checking whether delaying enrollment makes sense.