When retirement comes around, you want to enjoy the fruits of your labor, not fork over more than necessary to Medicare. However, certain financial moves, or lack thereof, can raise your Medicare premiums. These added costs often stem from seemingly innocent choices that, when left unchecked, can push your income into higher Medicare premium brackets. Here are the top financial pitfalls that could increase your Medicare premiums—and how to avoid them.
Ignoring the Power of Smart Financial Moves Early On
Planning for retirement doesn’t start the day you retire; it starts now. Making smart financial moves early can prevent some of the costly adjustments down the road. By strategically managing your income sources before retirement, you can establish a great financial foundation that makes a smoother transition into retirement.
A critical early decision is to contribute wisely to tax-advantaged accounts, such as Roth IRAs, which allow for tax-free withdrawals in retirement. Balancing these with traditional accounts can help you control your taxable income later on. Plus, early moves such as paying down debt and investing in tax-efficient accounts can prevent the need for large withdrawals from retirement accounts, which can inadvertently raise your Medicare premiums.
Not Paying Attention to IRMAA Brackets 2025
If you’ve been told that high income leads to high premiums in retirement, there’s a reason: IRMAA brackets 2025 determine additional costs for Medicare Part B and D premiums based on your Modified Adjusted Gross Income (MAGI). IRMAA, which stands for Income-Related Monthly Adjustment Amount, applies to those with higher incomes, meaning that a few thousand dollars in extra income can place you in a higher IRMAA bracket and significantly increase your Medicare premiums.
To avoid this costly pitfall, focus on managing your MAGI strategically. Roth conversions can help you reduce required minimum distributions (RMDs) from traditional retirement accounts later, potentially keeping you in a lower IRMAA bracket. Timing withdrawals and staggering income streams can also prevent spikes in income that push you into a higher bracket. Awareness of IRMAA brackets, staying on top of income planning, and periodically reviewing your MAGI are essential to prevent Medicare premium hikes.
Forgetting About Required Minimum Distributions
Once you hit age 73, required minimum distributions (RMDs) become a reality for traditional IRAs and 401(k) accounts. Many retirees overlook the impact of these mandatory withdrawals, only to realize that the extra income raises their Medicare premiums. RMDs can be substantial, and if you haven’t prepared, these distributions can push you into a higher tax bracket, increasing your tax burden and your Medicare premiums.
There are ways to manage RMDs strategically, like spreading withdrawals over a longer period or combining them with charitable donations to reduce taxable income. Qualified charitable distributions (QCDs), for instance, allow you to donate from your IRA directly to a charity, meeting your RMD requirement while avoiding added taxable income.
Overlooking the Impact of Capital Gains
Capital gains from investments may seem harmless, but they can significantly affect your MAGI and lead to higher Medicare premiums if you’re not careful. Whether from selling a primary residence, liquidating stocks, or cashing out investments, capital gains add to your income in the year they’re realized. If these gains are substantial, they can easily push you into a higher income bracket, giving you higher premiums.
To avoid this pitfall, being strategic with capital gains is essential. For example, consider spreading gains across multiple years, especially if you’re close to an IRMAA bracket threshold. Alternatively, if you’re retired and relying on investment income, consider tax-loss harvesting, which involves selling investments at a loss to offset gains. With careful planning, you can manage capital gains efficiently, preventing unnecessary Medicare premium increases and keeping more money in your pocket.
Mistiming Social Security Benefits
Choosing when to take Social Security benefits is one of the most impactful decisions in retirement, and timing matters when it comes to Medicare premiums. Taking Social Security too early can lead to lower benefits, while waiting longer can mean higher monthly payments, potentially increasing your taxable income. Social Security benefits become taxable if your combined income reaches a certain threshold, which can raise your Medicare premiums.
Retirees can maximize Social Security benefits by coordinating timing with other income sources. For instance, waiting until full retirement age or even later (up to age 70) can result in a higher monthly benefit and allow you to draw down other income sources at lower tax rates. If your goal is to maximize Social Security while managing taxable income, consider working with a financial planner to create a strategy that aligns with your income needs and minimizes tax impact.
