I’m 71 years old and my current Thrift Savings Plan (TSP) balance is $315,000 after withdrawing $60,000 this year. This is putting me in a higher tax bracket and I must pay a large amount of federal/state taxes. In addition, my monthly Medicare premium will increase. Will the Medicare premium increase permanently or only the year of withdrawal? Is it too late to develop a strategy to reduce taxes? I don’t need the money right now. What should my withdrawal strategy be?
– Joyce
I’m sorry to hear about the tax surprise, Joyce. While those are never fun, there is still time to take certain actions to reduce your tax burden. That’s not necessarily going to help you with your Medicare premiums, but any potential increase in premium is not permanent.
Let’s break this down so you can see if there’s a way to adjust your withdrawal strategy to potentially reduce both your taxes and Medicare premiums. (And if you need additional guidance related to your retirement income plan, tax strategy or investment portfolio, consider speaking with a financial advisor.)
What Is IRMAA?
Most people receive Medicare Part A without paying a monthly premium. There are premiums for Parts B and D, though. If your income exceeds certain limits you may have to pay an additional surcharge known as an income-related monthly adjustment amount (IRMAA).
For 2024, IRMAA starts at incomes above $103,000 for single filers and $206,000 for couples. IRMAA can increase your Medicare Part B premiums to as much as $594 per month in 2024, depending on your income.
However, your IRMAA premium each year is based on your income from two years prior. So your IRMAA (if any) for 2024 is based on your income from 2022. As a result, the government will use your 2024 income to calculate your IRMAA adjustment in 2026.
Additionally, that will be determined based on the IRMAA brackets for 2024, which will be adjusted for inflation and announced in the last few months of 2025 or early 2026. It may seem odd, but exceeding the 2024 IRMAA income limits doesn’t necessarily mean you’ll ever pay IRMAA. If your income is just barely over the IRMAA threshold this year, inflation may push the limit higher by 2026 and leave you unaffected by the surcharge.
(But if you need additional help planning for IRMAA or managing your retirement income, consider working with a financial advisor.)
Different Measures of Income
I also think it’s important to point out that there are different measures of income when it comes to determining what you pay in taxes and whether you must pay more for Medicare. Your taxable income largely determines what you owe in taxes, while your modified adjusted gross income (MAGI) determines what you pay for Medicare.
You can see how this all works by looking at a Form 1040 – the Individual Income Tax Return. Lines 1a through 15 on Form 1040 help you calculate your taxable income by starting with your total income, which includes wages, dividends, capital gains and other earnings. From there, you subtract “adjustments to income” (from Schedule 1, line 26), including contributions to retirement accounts and student loan interest. The resulting figure is your adjusted gross income (AGI).
Next, you subtract either the standard deduction or itemized deductions, along with any qualified business income deduction, to determine your taxable income. This final amount is what is used to calculate the taxes you owe for the year.
So, to put it in the simplest terms:
From there, the next section of Form 1040 is labeled “Taxes and Credits” and lines 16-24 walk you through calculating your actual tax liability. (A financial advisor with tax expertise can be a valuable resource as you plan for taxes and look for efficiencies.)
What About “Modified” AGI (MAGI)?
But IRMAA is based on your MAGI, and you’ll notice there is no line labeled “MAGI” on Form 1040. In fact, there is no universal formula for calculating it. Instead, there are over a dozen ways to calculate MAGI depending on the reason you need it, and each purpose has its own prescribed calculation.
For IRMAA purposes, MAGI is your combined AGI and tax exempt interest. If you have no tax-exempt interest, your MAGI is the same as your AGI.
Since IRMAA is tied to MAGI, tax deductions (recorded after line 11) will not impact whether you’re subject to higher Medicare premiums. You need to look above line 11 to find ways of reducing your AGI, and in turn, your IRMAA. However, there’s plenty of stuff that is recorded below line 11 that can reduce your tax bill.
Look at these items with your tax professional to see which options are viable for you. Not all of them will apply or make sense for you to do. I suggest calling them sooner rather than later as some of these options have a calendar year deadline, not a tax filing deadline. (And if you’re interested in getting financial advice, consider working with financial advisor with tax expertise.)
Distributions Going Forward
It’s interesting that you withdrew $60,000 although you say you don’t need the money. Going forward I’d suggest mapping out your distribution plan in consideration of income needs, taxes, and IRMAA to be the most efficient.
Don’t forget to factor in required minimum distributions (RMDs) once you turn 73. If you’re charitably inclined, QCDs allow you to distribute those without including them in your income at all. Just keep in mind that QCDs can only be made from IRAs. To incorporate them into your withdrawal strategy, you would first have to roll the funds into an IRA.
(If you need help creating a tax-efficient withdrawal strategy, use this free tool to connect with a fiduciary financial advisor.)
Bottom Line
Your withdrawal this year won’t trigger IRMAA next year because there’s a two-year delay. You can reduce your tax bill by either reducing your income or making use of available deductions and credits. To reduce or eliminate IRMAA, you need to keep your MAGI under IRMAA threshold amounts.
Tips for Retirement Income Planning
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You may want to consider converting portions of tax-deferred accounts to Roth IRAs in your early retirement years before required minimum distributions (RMDs) begin at age 73 (75 for people more in 1960 or later). This strategy can lower future RMDs and reduce taxable income later in retirement.
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While retirement income planning can be complicated, a financial advisor can help you build a plan based on your assets and income needs. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not an employee of SmartAsset and is not a participant in SmartAsset AMP. He has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
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