When people retire, they often wonder what to do with the money in their 401(k) from their former employer. Be careful about withdrawing all the money at once just because you can. While there’s no tax penalty for withdrawing after age 59 ½, taking a large amount at once can impact your Medicare costs if you’re over 63.
Why does this happen? Medicare premiums for Parts B and D are based on your income, not your assets. If you withdraw too much from your 401(k) or IRA, this taxable income might make you appear “rich” to Medicare, even if you’re not. When this happens, you could face a higher monthly Medicare premium due to IRMAA (Income-Related Monthly Adjustment Amount), which is an extra charge for higher incomes.
Medicare considers you “rich” based on your income from two years earlier, not your current assets. For example, if you turn 65 this year, Medicare will look at your 2022 income. Earning over $103,000 as an individual or $206,000 as a couple triggers the IRMAA surcharge, even if you exceed it by just $1. This surcharge can add $80 to nearly $500 to your monthly Medicare bill, depending on your income bracket.
IRMAA rates change annually, so it’s important to be aware of future limits, especially within two years of enrolling in Medicare. Some financial moves, like selling property, can increase your income temporarily and lead to higher premiums. For example, selling a property at age 62 instead of 63 can help, as Medicare doesn’t start until age 65, so capital gains at 62 won’t affect your premiums.
IRMAA can affect you every year on Medicare, not just at age 65. Each year, Medicare checks your Modified Adjusted Gross Income from two years prior. If you’re over the limit, you’ll pay the higher premium for one year. However, this increase isn’t permanent—if one year’s income bumps you into a higher bracket, you only pay the extra amount for that year.
There are many ways to plan your income for max benefits. If you need help with your current retirement plan or need help staying retired contact me.