Why Your 401(k) Might Sabotage Your Medicare Premiums (And What to Do About It)

John Henderson thought he'd done everything right. The 68-year-old retired Boeing engineer had maxed out his 401(k) contributions for decades, accumulating nearly $800,000 by retirement. But when he turned 65 and enrolled in Medicare, he got a nasty surprise: his Medicare Part B premiums jumped from the standard $164.90 to $395.60 per month.

Welcome to IRMAA—the Income-Related Monthly Adjustment Amount that most financial advisors barely mention.

The Medicare Premium Trap Nobody Warns You About

Here's what John didn't know: Medicare doesn't just look at your current income. It examines your modified adjusted gross income (MAGI) from two years ago to determine your premiums. When John was 63, his required minimum distributions (RMDs) from his traditional 401(k), combined with his Social Security benefits, pushed his income above $103,000—triggering higher Medicare premiums for the rest of his life.

How IRMAA Actually Works

The 2024 IRMAA thresholds are:

• Single filers earning $103,000-$129,000: Extra $69.90/month for Part B
• $129,001-$161,000: Extra $174.70/month
• $161,001-$193,000: Extra $279.50/month
• $193,001-$500,000: Extra $384.30/month
• Above $500,000: Extra $419.30/month

Part D prescription drug plans get hit with surcharges too, adding another $12.90 to $81.00 monthly depending on your income bracket.

For married couples filing jointly, double these income thresholds.

The Roth Conversion Strategy That Actually Works

Here's the contrarian truth: those financial gurus pushing aggressive traditional 401(k) contributions are setting you up for a Medicare penalty. The smarter play? Strategic Roth conversions during your early retirement years.

Take Susan Martinez, a former teacher from Austin. At 62, she began converting $50,000 annually from her traditional IRA to a Roth IRA. Yes, she paid taxes upfront—roughly $12,000 per year at her 24% tax rate. But by 65, she'd moved $200,000 to tax-free Roth accounts.

The payoff? When Susan's RMDs kick in at 73, they'll be significantly smaller. Her Medicare premiums will stay at the standard rate, saving her approximately $2,800 annually compared to someone in the first IRMAA bracket.

The Sweet Spot for Conversions

The ideal conversion window runs from retirement until you claim Social Security (typically ages 62-70). During these years, many retirees have lower taxable income, creating room for conversions without jumping into higher tax brackets.

For 2024, a married couple can convert up to $89,450 and stay in the 12% tax bracket. That's potentially $716,000 over eight years of strategic conversions.

Geographic Arbitrage: Move Before You Convert

Here's something most advisors miss: state taxes matter enormously for Roth conversions. Converting $50,000 in California costs about $3,000 more in state taxes than doing it in Texas or Florida.

Consider Tom and Linda Peterson from San Jose. They retired in 2021 and immediately moved to Henderson, Nevada. By avoiding California's 9.3% state tax on their $400,000 in Roth conversions, they saved $37,200 over four years. That's real money that stays in their retirement accounts.

States to Avoid for Large Conversions

• California: Up to 13.3% on high incomes
• New York: Up to 10.9%
• New Jersey: Up to 10.75%
• Oregon: Up to 9.9%

Best States for Roth Conversions

• Texas, Florida, Nevada, Washington: No state income tax
• Tennessee: Only taxes investment income
• New Hampshire: No tax on retirement account distributions

The Health Savings Account Wild Card

If you're still working past 65 and have access to a high-deductible health plan, keep funding that HSA. Unlike every other retirement account, HSA distributions for medical expenses are completely tax-free at any age.

Dr. Sarah Kim, a radiologist who worked until 68, contributed $4,300 annually to her HSA during those extra working years. She now uses these tax-free dollars to pay her Medicare premiums, effectively reducing her IRMAA impact.

Asset Location Matters More Than You Think

Where you hold different investments can significantly impact your Medicare premiums. Municipal bonds, for example, generate tax-free income that doesn't count toward IRMAA calculations.

Consider holding:

• Municipal bonds in taxable accounts
• REITs and high-dividend stocks in Roth accounts
• Growth stocks with minimal dividends in traditional accounts

This strategy helped Janet Wu, a retired pharmacist from Seattle, keep her taxable income below the first IRMAA threshold while maintaining a diversified $1.2 million portfolio.

Social Security Timing Gets Complicated

The conventional wisdom says delay Social Security until 70 for maximum benefits. But if you have large traditional retirement accounts, this strategy might backfire.

Richard Chen from Phoenix learned this lesson. By delaying Social Security until 70 while taking distributions from his $900,000 traditional 401(k), his combined income at 70 pushed him into the second IRMAA bracket. He would've been better off claiming Social Security at 67 and doing larger Roth conversions earlier.

Start Planning Now, Even If You're 40

The biggest mistake high earners make is assuming their retirement tax rate will be lower. Between IRMAA, potential Social Security taxation, and possible future tax increases, many retirees face marginal rates above 30%.

If you're currently in the 24% bracket and your employer offers a Roth 401(k), consider splitting contributions 50/50 between traditional and Roth accounts. This creates tax diversification that gives you options later.

Don't wait until 65 to think about Medicare premiums. Start planning your tax-efficient withdrawal strategy now, because once those IRMAA surcharges hit, they're nearly impossible to avoid without major lifestyle changes.

The two-year lookback rule means every financial decision you make today will affect your Medicare costs tomorrow.