MAGI and Medicare: Simple Ways to Reduce Premiums

As retirement approaches, certain financial terms suddenly become important — and MAGI (Modified Adjusted Gross Income) is one of them. MAGI plays a major role in how much you pay for Medicare. With the right planning, you may be able to reduce your premiums and keep more of your income working for you.

What Is MAGI and Why It Matters

Your Medicare premiums are based on your MAGI. Medicare uses the number from your tax return two years ago to determine whether you pay the standard premium or an added surcharge called IRMAA.

MAGI includes:

• Taxable income
• Tax-exempt interest (yes, this counts)
• Certain deductions

The idea is simple: higher income means higher Medicare premiums. Lower income may mean lower premiums.

How Different Income Sources Affect Your Premiums

Not all income is treated the same. Some increases your MAGI and some doesn't. Understanding the difference can help you plan withdrawals and taxes more efficiently.

Here’s how key income sources affect MAGI:

• Investment income: Dividends, interest, and capital gains all count toward MAGI. Realizing gains — even by accident — can push you into a higher Medicare tier.
• Traditional retirement accounts: Withdrawals from a Traditional IRA or 401(k) are taxable. This increases MAGI and may trigger higher Medicare premiums.
• Social Security benefits: A portion of Social Security is taxable and may increase MAGI depending on your total income.

Some income sources do not increase MAGI, including:

• Roth IRA withdrawals
• Roth 401(k) withdrawals
• Qualified HSA withdrawals

If you switch from Traditional IRA withdrawals to Roth withdrawals later in retirement, your income — and potentially your Medicare costs — may drop.

What Is IRMAA?

IRMAA is an additional charge added to Medicare premiums if your MAGI is above certain limits. Medicare looks at your tax return from two years prior to decide whether you will pay IRMAA.

The higher your MAGI, the higher your Medicare Part B and Part D premiums.

Ways to Reduce MAGI and Lower Medicare Premiums

With planning, you may be able to lower your income level — and therefore lower Medicare costs. Here are strategies retirees often use:

• Time your income: You may delay or accelerate withdrawals, sales, or gains depending on your tax year. For example, waiting until the next calendar year to sell an investment may keep you under an IRMAA threshold.
• Choose investments carefully: Roth accounts and tax-efficient investments may help you limit taxable income. Pulling from Roth accounts when close to an IRMAA threshold can help avoid crossing into the next bracket.
• Use charitable giving smartly: Qualified Charitable Distributions (QCDs) from IRAs allow donations without increasing taxable income. You don’t get a deduction, but the income never counts — which can prevent Medicare surcharges.

These strategies require planning based on your goals, assets, and tax situation. Working with a financial planner or tax professional can help make sure the numbers work in your favor.

Roth Strategies in Retirement

Traditional retirement accounts can grow tax-deferred, but withdrawals increase MAGI. Roth accounts grow tax-free and can provide income without raising Medicare costs.

One option is a Roth conversion. This means transferring money from a Traditional IRA or 401(k) into a Roth IRA and paying the taxes now. Converting earlier in retirement — before Medicare enrollment or before required minimum distributions begin — may help keep income lower later in retirement.

Timing is key. A conversion done in the wrong year could cause higher Medicare premiums. A planned conversion strategy can potentially reduce long-term taxes and future IRMAA costs.

Appealing IRMAA When Life Changes

Every November, Medicare sends notices showing next year’s premiums and any IRMAA charges. If your income dropped because of a major life event — such as retirement, divorce, marriage, or the loss of a spouse — you may be able to appeal.

To appeal, you file Form SSA-44 and explain why your income is now lower than the tax return used in the calculation. Many retirees successfully reduce premiums through this process when circumstances change.

Required Minimum Distributions (RMDs)

At age 73, you must begin withdrawing from Traditional IRAs and 401(k)s. These withdrawals count as taxable income and increase your MAGI.

For some retirees, this creates an unexpected income spike and pushes them into a higher Medicare bracket. Strategies like QCDs, partial Roth conversions before age 73, and coordinated withdrawal planning can help manage this.

Final Thoughts

Medicare costs can feel confusing, but you have more control than you may think. By planning ahead, understanding which income sources affect MAGI, and making thoughtful withdrawal and investment decisions, you can potentially lower your Medicare premiums and make your income more predictable.

If you're approaching Medicare age — or already enrolled — reviewing your income strategy may help you avoid unnecessary costs and protect your retirement savings.

By James Blue, Fee-Only Advisor | Blue Advisors

James Blue is the founder of Blue Advisors, a fee-only financial planning and investment management firm based in Columbus, Ohio.

This content is provided for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. The views expressed are those of the author as of the date published and are subject to change without notice. Blue Advisors is a fee-only registered investment advisory firm. Advisory services are offered only pursuant to a written advisory agreement and to clients in the State of Ohio, the Commonwealth of Pennsylvania, and other jurisdictions where Blue Advisors is properly registered or exempt from registration. Past performance is not indicative of future results. Readers should consult with their financial advisor, tax professional, or attorney before making financial decisions.