This year I withdrew $60,000 from my retirement plan, which increased my Medicare premiums. Is it permanent?

I am 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 have to pay a lot of federal/state taxes. Also, my monthly Medicare premium will increase. Will the Medicare premium increase permanently or only in the year of withdrawal? Is it too late to develop a tax reduction strategy? I don’t need the money right now. What should my withdrawal strategy be?

– Joyce

Sorry about the tax surprise, Joyce. While they’re never fun, there’s still time to take certain actions to reduce your tax burden. This won’t necessarily help you with your Medicare premiums, but any potential premium increase isn’t permanent.

Let’s break it down so you can see if there’s a way to adjust your withdrawal strategy to potentially lower both your taxes and your 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 get Medicare Part A without paying a monthly premium. However, there are premiums for Parts B and D. 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, the IRMAA begins with income above $103,000 for filers and $206,000 for couples. IRMAA can increase Medicare Part B premiums by up to $594 a month in 2024, depending on your income.

However, your IRMAA premium each year is based on your earnings from the previous two years. 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, this will be determined based on the IRMAA brackets for 2024, which will be adjusted for inflation and will be announced in late 2025 or early 2026. It may sound strange, but exceeding the income limits of the 2024 IRMAA does not necessarily mean you will never pay IRMAA. If your income barely exceeds the IRMAA threshold this year, inflation can increase the limit in 2026 and you won’t be affected by the surcharge.

(But if you need additional help planning your IRMAA or managing your retirement income, consider working with a financial advisor.)

Different measures of income

SmartAsset and Yahoo Finance LLC may earn commissions or income through links in the content below.

I also think it’s important to note that there are different measures of income when determining what you pay in taxes and whether you have to 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.

The story continues

You can see how it all works by looking at a Form 1040 – the personal income tax return. Lines 1a through 15 of Form 1040 help you figure your taxable income by starting with your total income, which includes wages, dividends, capital gains, and other income. From there, subtract “adjustments to income” (from Schedule 1, line 26), including contributions to retirement accounts and interest on student loans. The resulting figure is your adjusted gross income (AGI).

Then subtract the standard deduction or itemized deductions, along with any qualified business income deductions, 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 will guide you in calculating your actual tax liability. (A financial advisor with tax experience can be a valuable resource when planning taxes and looking for efficiencies.)

What about “modified” AGI (MAGI)?

But IRMAA is based on your MAGI, and you’ll notice that there’s no line labeled “MAGI” on Form 1040. In fact, there’s no universal formula for calculating it. Instead, there are more than a dozen ways to calculate MAGI depending on why 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-free interest, your MAGI is the same as your AGI.

Because IRMAA is linked to MAGI, tax deductions (recorded after line 11) will not affect whether you are subject to higher Medicare premiums. You need to look above line 11 for ways to lower your AGI and, in turn, your IRMAA. However, there are many things reported below line 11 that can lower your tax bill.

Please discuss 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 a financial advisor with tax experience.)

Distributions underway

It’s interesting that you withdrew $60,000, even though you say you don’t need it. As of now, I would suggest that you deal with your distribution plan keeping in mind your 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 feeling charitable, QCDs allow you to distribute them without including them in your income. Just note that QCDs can only be made from IRA. To incorporate them into your withdrawal strategy, you’ll first need to invest the funds in an IRA.

(If you need help creating a tax-efficient withdrawal strategy, use this free tool to connect you with a fiduciary financial advisor.)

bottom line

Your withdrawal this year will not trigger IRMAA next year because there is a two-year delay. You can lower your tax bill by reducing your income or by making use of available deductions and credits. To reduce or eliminate the IRMAA, you must keep your MAGI below the IRMAA threshold amounts.

Tips for planning your retirement income

• You may want to consider converting portions of tax-deferred accounts to Roth IRAs during your early retirement years before required minimum distributions (RMDs) begin at age 73 (75 for those age 1960 or later). This strategy can reduce future RMDs and reduce taxable income later in retirement.

• Although planning for retirement income can be complicated, a financial advisor can help you create a plan based on your assets and income needs. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three verified financial advisors serving your area, and you can make a free introductory call with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Keep an emergency fund on hand in case you have unexpected expenses. An emergency fund should be liquid, in an account that is not at risk of major fluctuations such as the stock market. The trade-off 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.

• Are you a financial advisor who wants to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

Brandon Renfro, CFP®, is a financial planning columnist for SmartAsset and answers readers’ questions about tax and personal finance topics. Have a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not an employee of SmartAsset and does not participate in SmartAsset AMP. You have been compensated for this article. Some questions submitted by readers are edited for clarity or brevity.

Photo credit: ©iStock.com/LPETTET, ©iStock.com/Moyo Studio

The Ask an Advisor post: I withdrew $60,000 from my retirement plan this year, which increased my Medicare premiums. Is it permanent? appeared first on SmartReads by SmartAsset.