Do 401k Withdrawals Count as Income for Medicare?
Gain clarity on how 401k withdrawals are factored into Medicare income and their effect on your premium costs.
Many individuals approaching or in retirement often wonder how their financial decisions, particularly regarding retirement savings, might influence their healthcare costs. A common concern revolves around whether withdrawals from a 401(k) retirement account will increase Medicare premiums. Understanding this relationship is important because Medicare premiums can be adjusted based on reported income levels. This adjustment mechanism means that managing your retirement income streams can directly affect the amount you pay for Medicare coverage.
Income Related Monthly Adjustment Amounts
Medicare beneficiaries with higher incomes may pay an additional amount on top of their standard Medicare Part B and Part D premiums. This is known as the Income Related Monthly Adjustment Amount (IRMAA). IRMAA ensures those with greater financial resources contribute more to their Medicare costs.
The Social Security Administration (SSA) determines if you owe an IRMAA by reviewing your federal tax return from two years prior. For instance, your 2025 Medicare premiums, including any potential IRMAA, are based on your 2023 tax return. This two-year lookback period means financial planning should consider income earned well in advance.
IRMAA applies to Medicare Part B and Part D. The surcharge is calculated on a sliding scale, with different income brackets triggering varying additional premium amounts. For 2025, individuals with a modified adjusted gross income (MAGI) above $106,000 and married couples filing jointly with a MAGI above $212,000 will pay an IRMAA. These income thresholds are subject to annual adjustments. If the SSA determines you must pay an IRMAA, you will receive an official notice detailing the new premium amount.
Calculating Modified Adjusted Gross Income for Medicare
Your Modified Adjusted Gross Income (MAGI) primarily determines Medicare premiums, including any IRMAA. MAGI is a specific calculation used by Medicare, starting with your Adjusted Gross Income (AGI) reported on your IRS Form 1040.
To calculate MAGI, you add certain tax-exempt income to your AGI. The most common addition is tax-exempt interest income, such as from municipal bonds. This interest is included in the MAGI calculation for Medicare premium determinations.
Other income sources contributing to MAGI include wages, self-employment income, capital gains, dividends, and taxable interest. Taxable Social Security benefits also contribute to MAGI. For most individuals, their MAGI is either identical to or very similar to their AGI. This definition dictates the income level used to assess your Medicare premiums.
How 401(k) Withdrawals Affect Medicare Income
Taxable withdrawals from a traditional 401(k) account directly count as income for Medicare’s MAGI calculation. When you take distributions from a traditional 401(k), these amounts are typically taxed as ordinary income and are included in your Adjusted Gross Income (AGI). Since AGI forms the starting point for Medicare’s MAGI, these withdrawals can increase your overall income for Medicare premium assessment. A significant increase in taxable income due to 401(k) withdrawals could push your MAGI above the IRMAA thresholds, leading to higher Medicare Part B and Part D premiums.
In contrast, qualified withdrawals from a Roth 401(k) account generally do not count towards Medicare’s MAGI. This is because contributions to a Roth 401(k) are made with after-tax dollars, and qualified distributions in retirement are tax-free. Since these withdrawals are not included in your AGI, they do not impact your MAGI for Medicare premium calculations. Therefore, a strategy involving Roth accounts can provide a source of retirement income that does not affect your Medicare premium costs.
It is important to note that the impact of 401(k) withdrawals on Medicare premiums is based on the MAGI from two years prior. This means that a large taxable withdrawal made this year would affect your Medicare premiums two years from now. While a one-time large withdrawal can temporarily increase premiums, if income levels return to normal in subsequent years, Medicare premiums would also typically adjust back down after the two-year lookback period.