Will My Medicare Premiums Increase Based on My Retirement Income?
By Seth Deal, CPA/PFS
Meet Captain Sarah Martinez, a 30-year veteran firefighter in Washington State. At 57, she's eligible for LEOFF Plan 2 retirement with a solid pension and $650,000 in her deferred compensation account. As a LEOFF Plan 2 member, Sarah didn't pay into Social Security during her career. She recently learned that her Medicare premiums could increase dramatically based on her retirement income.
For Department of Retirement Systems (DRS) members, understanding how retirement income affects Medicare premiums is crucial for accurate retirement planning. Your pension, Social Security, and investment withdrawals all factor into a calculation that could significantly impact your healthcare costs.
Core Principles
Understanding Medicare premium calculations starts with these fundamental principles:
1. Income-Related Monthly Adjustment Amount (IRMAA) Rules¹ Medicare Part B and Part D premiums increase based on your Modified Adjusted Gross Income (MAGI) from two years prior. Higher income means higher premiums.
2. The Two-Year Lookback Period² Medicare uses your tax return from two years ago to determine current premiums. Your 2025 premiums are based on your 2023 income.
3. Federal Income Focus³ IRMAA calculations are based solely on federal Modified Adjusted Gross Income (MAGI), making it easier to project and plan for these premium increases.
4. All Income Sources Count⁴ Your DRS pension, Social Security, investment gains, rental income, and required minimum distributions all contribute to the MAGI calculation.
5. Planning Opportunities Exist⁵ Strategic income timing and Roth conversions during lower-income years can help manage future Medicare costs.
Understanding Sarah's Medicare Premium Challenge
Calculating Sarah's Projected MAGI
Let's examine Sarah and Tom's expected combined income sources when Sarah becomes Medicare-eligible at 65:
- Sarah's LEOFF Plan 2 pension: $6,083 monthly ($73,000 annually)
- Tom's Social Security: $2,800 monthly ($33,600 annually)
- Investment income from joint accounts: $8,000 annually
Their total projected combined MAGI: $114,600 annually. This keeps them comfortably in the standard Medicare premium bracket, with each paying $185 monthly.
However, this scenario creates a major problem down the road. By not touching their retirement accounts, Sarah's $650,000 deferred compensation balance and Tom's $450,000 401(k) will continue growing. Let’s assume they grow at approximately 7% annually.
The IRMAA Time Bomb: When RMDs Begin
At $114,600 combined MAGI, Sarah and Tom each pay the standard $185 monthly premium. This seems manageable, but they're building toward a significant problem.
By age 73, when required minimum distributions begin, their retirement accounts will have grown substantially:
- Sarah's deferred compensation: $650,000 → approximately $1.3 million (7% annual growth)
- Tom's 401(k): $450,000 → approximately $900,000 (7% annual growth)
- Combined RMD at age 73: approximately $85,000 annually (Total Investment balance divided by 25.6)
Their new MAGI at age 73:
- Pension and Social Security: $106,600
- Combined RMDs: $84,000
- Investment income: $12,000
- Total: $202,600
While still technically under the first MFJ IRMAA threshold of $206,000, they're dangerously close (the IRMAA thresholds do adjust annually which may provide a little more breathing room in the future).
When Sarah's Premiums Will Peak
The Growing Problem: When IRMAA Becomes Unavoidable
Sarah and Tom's Medicare premiums face escalating costs as their untouched retirement accounts continue growing:
Ages 65-72: Comfortable with standard Medicare premiums while living on pension and Social Security
Age 73: RMDs begin at approximately $84,000 combined, pushing their total MAGI to $202,600 - dangerously close to IRMAA thresholds
Ages 75-80: RMDs continue growing, easily exceeding $100,000 annually and triggering the first IRMAA bracket ($1,786 additional annual cost for both premiums – see below)
Ages 80+: Large retirement account balances generate RMDs exceeding $140,000, potentially pushing their combined income above $258,000 and into the second IRMAA bracket, costing them an additional $371.80 monthly ($4,462 annually) for both Medicare premiums
The 2025 Medicare Part B IRMAA brackets for married couples filing jointly:
- $206,000 or less: Standard premium ($185 monthly each)
- $206,001-$258,000: $259.40 monthly each (additional $74.40 each)
- $258,001-$322,000: $370.90 monthly each (additional $185.90 each)
By their 80s, Sarah and Tom could be paying over $8,900 annually just for Medicare Part B premiums - more than double the standard amount.
Sarah's Income Smoothing Strategy
Here's how Sarah can manage her income to minimize Medicare premiums:
Ages 57-64 (Pre-Medicare Planning Phase)
- Evaluate Roth Conversions annually from traditional deferred comp to Roth
- Live primarily on LEOFF pension ($57,600) plus withdrawals
- Build tax-free Roth balance while in lower tax brackets
Ages 65-72 (Early Medicare Phase)
- Evaluate Roth conversions annually
- Strategic timing of investment sales to offset gains with losses
- Coordinate with Tom's Social Security and retirement income timing
Ages 73+ (RMD Management Phase)
- Benefit from smaller RMDs due to previous Roth conversions
- Use Qualified Charitable Distributions to reduce taxable RMDs
- Coordinate with Tom's income to stay below joint filing thresholds
Ongoing Monitoring and Adjustments
Sarah monitors their long-term strategy focusing on:
- RMD projections and their impact on IRMAA thresholds
- Roth conversion opportunities during low-income years
- Updated IRMAA brackets and Medicare premium changes for married couples
- The growing gap between their strategy and the "do nothing" approach
- Tax law changes that might affect their conversion strategy
The Dramatic Difference: Sarah and Tom's Tale of Two Strategies
The "Do Nothing" Approach - Combined Financial Picture at Age 75:
- Sarah's LEOFF pension: $73,000
- Tom's Social Security: $33,600
- Combined RMDs from $2.2M in retirement accounts: $88,000
- Investment income: $12,000 (Capital Gains + Interest)
- Total Combined MAGI: $206,600
- Each spouse's Medicare Part B premium: $259.40 monthly
- Total household Medicare cost: $6,226 annually
The Strategic Planning Approach - Combined Financial Picture at Age 75:
- Sarah's LEOFF pension: $73,000 (unchanged)
- Tom's Social Security: $33,600 (unchanged)
- Combined RMDs from $900K in remaining traditional accounts: $36,000
- Investment income: $12,000
- Total Combined MAGI: $154,600
- Each spouse's Medicare Part B premium: $185 monthly
- Total household Medicare cost: $4,440 annually
Annual Medicare Premium Savings: $1,786
But the story gets even more dramatic at age 80:
"Do Nothing" at Age 80:
- Combined MAGI approaches $270,000 with larger RMDs
- Medicare Part B premiums: $370.90 each ($8,902 annually for both)
Strategic Planning at Age 80:
- Combined MAGI stays around $170,000
- Medicare Part B premiums: $185 each ($4,440 annually for both)
Annual Medicare Premium Savings at Age 80: $4,462
Lifetime Medicare Premium Savings: Over $50,000
The strategic approach transforms their retirement in multiple ways beyond Medicare savings:
Additional Benefits of Sarah and Tom's Proactive Strategy:
- Substantial tax-free Roth assets by age 75
- Dramatically lower RMDs that don't force unwanted income
- Protection against future tax rate increases
- Flexibility to manage income for other means-tested benefits
- Legacy planning advantages with tax-free assets for heirs
- Peace of mind knowing healthcare costs won't spiral out of control
The key insight: The window for action closes quickly. Once Sarah reaches Medicare age, the opportunity to prevent massive IRMAA increases through Roth conversions becomes much more limited.
Remember, Medicare premium planning requires coordination with your overall retirement income strategy. Like Sarah, you need a comprehensive approach that considers your LEOFF/PERS benefits, Social Security timing, and investment withdrawals.
If you’re concerned about your current financial plan and would like to explore the possibility of professional help, consider reaching out.
I specialize in helping Washington Public employees who are nearing retirement or are retired, reduce taxes, maximize pensions, and retire stress-free.
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-Seth Deal
Sources and Resources