Key Points
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Withdrawing money from a 401(k) can increase your taxable income.
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This can affect your Medicare premiums after age 63.
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IRMAA can cause you to pay much higher premiums.
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Many people keep their retirement savings in a 401(k) or a similar tax-advantaged account. Once you retire, it is time to start drawing from those savings. However, before you make a large withdrawal, you should be aware of the implications.
And if you are 63 or over, it’s especially important to know that your withdrawals could have a surprising impact on your monthly bills a few years down the line. Here’s why.
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A 401(k) withdrawal after 63 could cause higher monthly costs
Taking a large withdrawal from your 401(k) after age 63 could come back to haunt you at 65 for a very simple, yet surprising, reason: It could raise your Medicare premiums.
See, most retirees become eligible for Medicare at 65 and have premiums automatically withdrawn from their Social Security checks.
There is a standard premium for Medicare Part B, which is what most people pay. But there’s also a surcharge for seniors with high household incomes. It’s called the Medicare Income-Related Monthly Adjustment Amount (IRMAA).
IRMAA can significantly increase Medicare premiums, costing you anywhere from $81.20 to $487.00 extra per month, depending on your tax filing status and how much your Modified Adjusted Gross Income (MAGI) is.
Since your 401(k) distributions count as income, the money from those distributions could potentially push you above the threshold where IRMAA kicks in, and Medicare costs you more each month because of it.
Why is age 63 important?
It may seem confusing that age 63 matters when determining whether you’re subject to the IRMAA surcharge, since Medicare eligibility starts at 65, not at age 63.
However, 63 is an important age because Medicare looks back two years when setting premiums.
This means the modified adjusted gross income that you report at age 63 will be the MAGI used to assess whether you have to pay extra out of your benefits to cover higher Medicare costs at 65.
The good news is that you can submit a form and ask the Social Security Administration to reconsider the extra surcharge if you’ve had a life-changing event in the intervening years that caused your income to decline. However, the lifestyle change must have been major and typically includes events such as a marriage, divorce, the death of your spouse, a work stoppage or reduction, a loss of pension income, or a loss of income-producing property.
Unless one of these situations applies, there is nothing you can do to undo the impact of the IRMAA once the distribution has been taken. The IRMAA will apply for the entire year if the distribution pushes your income above the threshold, and will be recalculated the next year.
It’s important to understand this rule so you can make strategic choices on how you structure withdrawals from your 401(k) account or other retirement plans.
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