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Tax-Efficient Withdrawal Order

IRMAA and Withdrawal Planning: Managing Medicare Costs in Retirement

Pomegra Learn

How Do You Plan Withdrawals to Minimize Medicare IRMAA Costs?

At age 65, your Medicare Part B and D premiums are no longer one-size-fits-all. The IRS looks back two years at your Modified Adjusted Gross Income (Modified AGI) and assesses income-related monthly adjustment amounts (IRMAA) if your income exceeds certain thresholds. For a single filer, the threshold is roughly $94,000; for married filing jointly, $188,000 (as of mid-2020s). Every dollar above that threshold can trigger an additional $77–$425 per month in Medicare premiums per person—potentially $5,000+ per year for a couple. Yet most retirees do not plan for this. By coordinating your withdrawal sequence, timing Roth conversions, and strategically managing traditional account distributions, you can legally stay below these thresholds and save tens of thousands over retirement.

Quick definition: IRMAA (Income-Related Monthly Adjustment Amount) is an additional Medicare premium charged to higher-income beneficiaries based on Modified AGI from two years prior, applied in tiers with surcharges ranging from ~$77 to $425+ per month.

Key takeaways​

  • IRMAA thresholds begin at ~$94,000 Modified AGI (single) and ~$188,000 (married); there is a new threshold every $2,000–$3,000 in income
  • Modified AGI includes taxable income, untaxed Social Security, nontaxable interest, and certain other income items—it is broader than standard AGI
  • IRMAA is assessed based on your Modified AGI from two years prior, not the current year, allowing strategic planning windows
  • Withdrawals from Roth IRAs and tax-free municipal bonds do not increase Modified AGI, making them powerful IRMAA-mitigation tools
  • Coordinating IRMAA planning with gap-year conversions (ages 62–65) can keep you below surcharges for life

Understanding Modified AGI for IRMAA​

Modified AGI for IRMAA purposes is NOT the same as AGI on your tax return. It includes:

  1. Your standard AGI (wages, interest, dividends, capital gains, retirement distributions, etc.)
  2. Plus: taxable Social Security benefits (even if not on your return)
  3. Plus: tax-exempt interest from municipal bonds
  4. Plus: excluded foreign earned income
  5. Plus: certain IRA deduction amounts

The key insight is that untaxed Social Security counts toward the IRMAA threshold, even though you may not owe income tax on it. A retiree with $50,000 AGI and $24,000 in untaxed Social Security has a Modified AGI of $74,000 for IRMAA purposes—closer to the $94,000 threshold than their AGI alone suggests.

IRMAA Tiers and Premium Impact​

As of 2025, here are approximate IRMAA thresholds and surcharges for Part B and D combined (single filers):

Modified AGITierMonthly Surcharge (Part B + D)Annual Cost
$0–$94,000Base~$187~$2,244
$94,001–$118,000Tier 1~$264~$3,168
$118,001–$142,000Tier 2~$380~$4,560
$142,001–$166,000Tier 3~$496~$5,952
$166,001–$190,000Tier 4~$612~$7,344
$190,001+Tier 5~$728+~$8,736+

For married couples, double these amounts (approximately).

A couple at $200,000 Modified AGI pays roughly $7,000–$10,000 per year in extra IRMAA costs compared to staying below $94,000. This is a permanent, recurring penalty for each year they remain above the threshold.

The Two-Year IRMAA Lookback​

IRMAA is assessed based on Modified AGI from two calendar years prior. This creates a strategic planning window:

  • At age 65 (2025), your IRMAA is based on your 2023 Modified AGI
  • At age 66 (2026), your IRMAA is based on your 2024 Modified AGI
  • Changes in 2025 do not affect IRMAA until 2027

This timing advantage is crucial. A retiree who retires at 62 (2023) and does large Roth conversions in 2023 and 2024 will see IRMAA surcharges starting in 2025 (based on the 2023 conversion) and 2026 (based on 2024). But if she is strategic, she can time conversions to avoid the lookback window or minimize impact.

The Critical Window: Ages 62–65​

For many retirees, the most valuable planning window is ages 62–65 (retirement through Medicare age). During these three years, you can do large Roth conversions and other income-generating moves knowing that:

  1. IRMAA does not attach until age 65
  2. The IRMAA determination is based on Modified AGI from two years prior (so conversions at 63 affect IRMAA at 65, based on 2023 income)
  3. After age 65, every dollar of additional income potentially increases IRMAA surcharges permanently

Strategic timing: A couple retires at 62. They have three years (2023, 2024, 2025) before Medicare age. In 2023 and 2024, they do Roth conversions up to (but not exceeding) the point where Modified AGI stays below the IRMAA threshold. By 2025, when they turn 65 and IRMAA kicks in, their baseline Modified AGI is low, and their IRMAA surcharge is minimal or absent. They have essentially "locked in" low IRMAA for life.

Withdrawal Sequencing to Minimize IRMAA​

Your withdrawal order dramatically impacts Modified AGI and thus IRMAA. Optimal sequencing:

  1. Roth IRA withdrawals – Do not increase Modified AGI
  2. Taxable brokerage account withdrawals (especially those with long-term capital gains taxed at preferential rates or returns of basis) – Minimal impact on Modified AGI
  3. Tax-exempt municipal bond interest – Does not increase Modified AGI
  4. Traditional IRA or 401(k) withdrawals – Increase Modified AGI dollar-for-dollar
  5. Social Security – Already counted in Combined Income and affects IRMAA indirectly

Example: A 70-year-old needs $50,000 for living expenses. She has:

  • $100,000 in a Roth IRA
  • $150,000 in a taxable brokerage account (cost basis $120,000, so $30,000 unrealized gain)
  • $300,000 in a traditional IRA

Withdrawal Option A (suboptimal): Take $50,000 from the traditional IRA. Modified AGI increases by $50,000, potentially pushing her into the next IRMAA tier.

Withdrawal Option B (optimal): Take $30,000 from the taxable account (cost basis portion, zero capital gain) and $20,000 from the Roth IRA. Modified AGI increases by zero, keeping her below IRMAA thresholds.

The same $50,000 withdrawal, sequenced correctly, costs thousands less in Medicare premiums.

Case Studies: IRMAA Planning Strategies​

Case 1: The couple with $600,000 in a traditional IRA​

A married couple, both 62, has:

  • $600,000 in a traditional IRA
  • $100,000 in Roth IRAs
  • $200,000 in a taxable brokerage account
  • No earned income
  • Plan to claim Social Security at 70 (not yet)

Their IRMAA threshold is $188,000. Without Social Security, their baseline Modified AGI is zero. But they withdraw $30,000/year to live on. If they take all $30,000 from the traditional IRA for three years (62, 63, 64), their Modified AGI at age 65 (based on the 2023 Modified AGI two years prior, i.e., age 63 income) is $30,000. This is safely below $188,000.

However, at age 70, when Social Security begins, their Combined Income jumps by $36,000/year (if Social Security is $3,000/month). Combined Income of $66,000 ($30,000 RMD + $36,000 SS) is still below IRMAA thresholds. They may never trigger IRMAA.

Alternative strategy: From age 62–65, they do Roth conversions of $40,000/year, paying ~$4,800/year in federal income tax (at 12% rate), for a total of $14,400 in conversion taxes. By age 65, they have converted $160,000 to Roth and their traditional IRA is $440,000. Their Modified AGI from conversion years (age 63 lookback) is higher (roughly $70,000, based on $40,000 conversion), but still below the $188,000 IRMAA threshold. They have locked in more tax-free assets, and future RMDs are smaller.

Case 2: The high-income retiree from private equity​

A 62-year-old exits a private equity firm with $2 million in a traditional 401(k) and $500,000 in investment property generating $100,000/year in rental income. His IRMAA threshold is $94,000. Even without retirement withdrawals, his Modified AGI is $100,000 (rental income), triggering Tier 1 IRMAA surcharges.

He has two options:

Option A: Accept the IRMAA surcharge (~$77/month = $924/year) and leave the 401(k) alone, planning RMDs at 73.

Option B (more strategic): At age 62, while his income is "only" $100,000 (one-time high due to exit), do a large Roth conversion of $400,000, paying roughly $88,000 in federal income tax. His Modified AGI jumps to $500,000 for that year, triggering the highest IRMAA tier ($400+/month = $4,800/year). But this is only for one year. In subsequent years, his Modified AGI is back to $100,000 (just rental income), and IRMAA reverts to Tier 1. He has paid $4,800 in IRMAA for one year to move $400,000 into Roth at favorable 22% conversion rates, and he avoids future RMDs on that amount.

The economics favor the conversion, despite the temporary IRMAA spike.

Coordination with Tax Brackets and Social Security​

IRMAA planning doesn't occur in isolation. It overlaps with tax-bracket planning and Social Security taxation:

  1. Bracket filling and IRMAA: Filling your 12% bracket with traditional withdrawals increases Modified AGI. If it also pushes you above IRMAA thresholds, the bracket-filling benefit may be offset by IRMAA surcharges. The optimal strategy balances both.

  2. Social Security timing and IRMAA: Delaying Social Security postpones Combined Income increases, which helps Social Security taxation thresholds but does not directly affect IRMAA. However, larger Social Security benefits later may increase Modified AGI indirectly (untaxed Social Security counts toward Modified AGI). The interaction is subtle but worth modeling.

  3. Charitable giving and IRMAA: QCDs reduce your Modified AGI directly, which helps IRMAA. A $20,000 QCD keeps Modified AGI $20,000 lower than a $20,000 traditional withdrawal, potentially saving $1,500+/year in IRMAA surcharges if it keeps you below a threshold.

Common mistakes​

  1. Ignoring the two-year lookback. A retiree at age 66 is surprised to receive notice of IRMAA surcharges. She forgets that her 2024 Modified AGI (from age 64) is the basis. She did a large distribution at age 64, forgot about it, and now pays surcharges. Always remember: decisions made today affect IRMAA two years from now.

  2. Forgetting to count untaxed Social Security in Modified AGI. A retiree calculates her Modified AGI at $85,000 and thinks she is safe from IRMAA. She forgets that her $20,000 in untaxed Social Security brings her true Modified AGI to $105,000, triggering Tier 1 surcharges. Always add untaxed Social Security benefits to AGI when checking IRMAA thresholds.

  3. Not accounting for future RMD increases. A retiree's Modified AGI is $170,000 at age 74, in Tier 3 IRMAA. She assumes it will stay there. But her RMD grows by roughly 5–6% per year; in five years at age 79, her RMD might be 50% larger, pushing her into Tier 4. She should have been planning conservatively from the start.

  4. Treating IRMAA as temporary. IRMAA is based on the two-year lookback, and once set, it is permanent until income changes. A retiree does one large conversion and assumes IRMAA will revert the next year. It does not. IRMAA stays elevated for two years (the year of the large income plus two years of lookback delay).

  5. Misunderstanding which accounts reduce Modified AGI. A retiree withdraws from a regular (non-Roth) 401(k) and a SEP-IRA, thinking they are "different" account types. Both increase Modified AGI equally. Only Roth accounts, taxable accounts, and certain bond interest (tax-exempt municipal bonds) reduce or avoid increasing Modified AGI.

FAQ​

Can I appeal my IRMAA determination if my income dropped due to job loss or other hardship?​

Yes. The Social Security Administration allows appeals of IRMAA determinations if you have a "life-changing event" (job loss, death of spouse, etc.). You must file a form SSA-44 (Request for Earnings Test Government Pension Offset Explanation) or submit a written appeal within 60 days of receiving the notice. The process is available but requires documentation and may take months.

How do I calculate my exact Modified AGI for IRMAA purposes?​

Use the IRS's IRMAA worksheet (published each year with Medicare notices). It starts with your AGI and adds untaxed Social Security, nontaxable interest, and certain other items. Many tax software programs calculate this automatically. If unsure, consult a tax professional or call Medicare directly.

Do Roth 401(k) rollovers into Roth IRAs affect IRMAA?​

Rollovers do not affect IRMAA directly because they do not create income. However, if you must withdraw from a traditional IRA during the rollover process, that withdrawal increases Modified AGI and may affect IRMAA. Keep rollovers clean to avoid unintended income.

Can I reduce IRMAA by splitting income with my spouse?​

For married couples, the IRMAA threshold is roughly double the single threshold ($188,000 vs. $94,000), so married couples already get a benefit. Filing separately is generally unfavorable and does not help IRMAA significantly. Stay married and file jointly if possible.

What if my income is below the IRMAA threshold but I have a large capital gain one year?​

Capital gains are part of your AGI for IRMAA purposes. A large capital gain pushes you above the threshold for that year, affecting IRMAA two years later. If you expect a large gain (selling a house, liquidating an investment), time it to minimize IRMAA impact. Alternatively, harvest losses to offset gains and keep Modified AGI lower.

Does disability income or workers' comp count toward IRMAA?​

Generally, no. Social Security Disability benefits do not count as income. Workers' compensation is not income for IRMAA. However, if these payments are in a taxable form (certain annuities, etc.), they may count. Review your specific situation with a tax professional.

Summary​

IRMAA is a stealth tax on retirement income for those over 65. By understanding the two-year lookback window, coordinating withdrawals across Roth, taxable, and traditional accounts, and timing conversions in your early 60s, you can legally stay below IRMAA thresholds and save tens of thousands in Medicare premiums. The key is strategic planning from retirement through age 65: maximize Roth conversions, use gap years to lock in low Modified AGI, and always sequence withdrawals to prioritize tax-free sources first. For high-income retirees, accepting temporary IRMAA spikes during conversion years may be worthwhile to move wealth into tax-free status permanently.

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