Why Paying Off Your Mortgage Could Raise Your Medicare Premium by Thousands
Most retirees assume Medicare premiums stay relatively stable. Then something strange happens. They retire, take a large withdrawal from their IRA to pay off debt, renovate a home, or help a child financially – and two years later Medicare premiums jump by thousands of dollars.
The reason is a little-known rule called IRMAA. Understanding how it works could save you a surprising amount of money in retirement.
What Is IRMAA?
IRMAA stands for Income-Related Monthly Adjustment Amount. It is essentially a surcharge added to your Medicare Part B and Part D premiums if your income exceeds certain levels.
Many retirees believe everyone pays the same Medicare premium. That is true for some people. But higher-income retirees can pay substantially more. The key detail most people miss: Medicare does not look at your current income. It looks at your income from two years earlier.
Medicare Uses a Two-Year Lookback Rule
Your Medicare premiums for this year are generally based on your Modified Adjusted Gross Income (MAGI) from two years ago.
Examples:
- Age 65 this year → Medicare reviews income from age 63
- Age 67 this year → Medicare reviews income from age 65
This applies every year you are on Medicare – not just when you first enroll. That means a large withdrawal today could raise premiums two years from now.
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What Income Counts Toward IRMAA?
Many retirees underestimate what Medicare considers income.
Items commonly included in MAGI:
- IRA withdrawals
- 401(k) withdrawals
- Pension income
- Dividend income
- Social Security benefits (depending on taxation)
- Interest income, including some municipal bond interest
- Capital gains in certain situations
Large pre-tax withdrawals are often the biggest surprise. Money withdrawn from traditional IRAs and 401(k)s generally counts as ordinary taxable income.
Why One Withdrawal Can Trigger Higher Medicare Costs
Imagine a retiree with:
- $68,000 annual income
- $120,000 remaining mortgage balance
- $410,000 traditional IRA
The retiree withdraws $120,000 from the IRA to eliminate the mortgage. Financially responsible? Possibly. But now annual income jumps dramatically. Two years later Medicare may classify that retiree into a higher IRMAA bracket, increasing premiums significantly. The retiree solved one problem but accidentally created another.
Small Income Changes Can Create Big Medicare Premium Jumps
IRMAA works in tiers. Premium increases are not gradual.
Crossing a threshold by even a small amount can trigger a much larger monthly premium. For some married couples, crossing the first threshold may increase annual Medicare costs by nearly $2,000 combined. Higher brackets can increase costs substantially more. This is before considering additional Part D surcharges.
The Rule Continues Throughout Retirement
Many retirees believe IRMAA matters only around age 65. Not true.
Examples:
- Large withdrawal at 67 → premium increase at 69
- Large withdrawal at 72 → premium increase at 74
- Required distributions later in retirement may also create issues
IRMAA planning is an ongoing retirement strategy.
There Are Situations Where You Can Appeal IRMAA
Some life events allow retirees to request reconsideration of Medicare surcharges.
Examples include:
- Retirement
- Death of a spouse
- Divorce
- Significant reduction in income
Many retirees never realize appeals exist.
Three Strategies to Reduce Future Medicare Premium Surprises
1. Spread Large Withdrawals Across Multiple Years
Instead of withdrawing a large amount all at once, spreading withdrawals over several years may keep income below key thresholds. For example:
Rather than withdrawing $120,000 in one year, some retirees might withdraw $40,000 annually over three years. The expense still gets covered. The tax and Medicare impact may be smaller.
2. Use Taxable Brokerage Accounts Carefully
Taxable brokerage accounts sometimes create less reportable income than traditional retirement accounts. Why? Only gains above your cost basis may become taxable. That can reduce MAGI compared to IRA withdrawals.
3. Consider Roth Accounts Strategically
Qualified Roth withdrawals generally do not increase MAGI for IRMAA purposes. This can make Roth assets valuable for:
- Home repairs
- Major purchases
- Unexpected healthcare costs
- One-time retirement expenses
Many retirees intentionally complete Roth conversions before Medicare begins because those earlier years may create planning opportunities.
Withdrawal Order Matters More Than Many Retirees Realize
A thoughtful withdrawal sequence can help reduce taxes and Medicare costs. One common framework:
- Cover foundational expenses with guaranteed income sources (Social Security, pensions)
- Use brokerage or Roth assets for moderate expenses
- Spread large pre-tax withdrawals carefully over lower-income years
Poor sequencing can increase lifetime taxes and Medicare premiums.
The Bigger Retirement Lesson
Retirement planning is not only about accumulating money. It is also about how and when money is withdrawn. A financially responsible action – paying off debt, helping family, remodeling a home – can unintentionally trigger higher Medicare costs years later.
The good news: Most IRMAA problems are avoidable with planning. Understanding the two-year Medicare lookback rule may save more than many retirees expect.
Chapter Advisory, LLC (“Chapter”) is a private health insurance agency. In California, Chapter does business as Chapter Insurance Services (Lic. No. 6003691). Chapter is not affiliated with or endorsed by any government entity. While Chapter has a database of every Medicare plan option nationwide and can help you to search among all options, it has contracts with many but not all plans. As a result, Chapter does not offer every plan available in your area. Currently, Chapter represents 50 organizations which offer 18,601 products nationwide. You can contact a licensed Chapter agent to find out the number of products available in your specific area. Please contact Medicare.gov, 1-800-Medicare, or your local State Health Insurance Program (SHIP) to get information on all of your options. Enrollment in a plan may be limited to certain times of the year unless you qualify for a Special Enrollment Period or you are in your Medicare Initial Enrollment Period. Average potential savings are based on realized premium, co-pay, and out of pocket savings estimates self-reported by consumers that worked with Chapter Advisory LLC to enroll in a Medicare Supplement, Medicare Advantage, and/or Part D Prescription Drug Plan. The average is limited to consumers that chose to self-report. Savings information is subject to periodic updates and corrections. There is no guarantee of savings and any savings may vary by policy type, state, or other factors.
