You have carefully saved for retirement and now you have accumulated a substantial amount of funds in your IRA.  At some point, the funds you have been putting away for years must come out. When you reach age 73 you must take a required minimum distribution (RMD) for that year and every year thereafter.

You may be concerned about the tax hit that the RMD will bring. Besides the RMD itself being taxed, there is a ripple effect when an RMD is taken. An RMD is included in the income for the year it is taken. A bump up in your income can negatively affect the availability of deductions and can impact the taxation of Social Security. One significant negative impact of an RMD may be increased Medicare costs. This is often not paid the attention it deserves by many IRA owners until it is too late.

Increased Medicare Costs

Without careful planning, your RMD can result in much higher healthcare costs. This is because the RMD is included in your modified adjusted gross income (MAGI) that is used to determine your Medicare Part B and Part D costs two years down the road. The income-related monthly adjustment amount (IRMAA) sliding scale is a set of tables used to adjust Medicare premiums. The higher the MAGI, the higher the IRMAA. There are no phaseout ranges. If you have MAGI that is $1 over the limits, you will have to pay the full extra amount. This can be a significant amount.

How can you avoid falling into the trap of higher Medicare costs due to RMDs? Here are two strategies to consider:

1: Convert to a Roth IRA.

One way to avoid IRMAA problems due to RMDs is to eliminate RMDs. If you are in your early sixties you may want to consider converting to a Roth IRA sooner rather than later. You will want to get the conversion done before the income from the conversion would affect your MAGI for Medicare purposes. (Income in the year you turn 63 impacts IRMAA brackets in the year you turn 65.) By doing so, you can then minimize the impact of RMDs on Medicare costs.  This is because RMDs will not be needed. RMDs are not required from Roth IRAs during the Roth IRA owner’s lifetime. In addition, any qualified Roth IRA distributions are not included in MAGI for Medicare purposes.

2: Do a QCD.

If you are already taking RMDs, a qualified charitable distribution (QCD) is another strategy you may consider to minimize the impact of RMDs from an IRA on Medicare costs. With a QCD, you can transfer up to $105,000 annually from your IRA to a charity tax-free. A QCD can satisfy your RMD for the year and it is not included in MAGI for determining Medicare costs. Keeping the RMD amount out of MAGI can result in big savings. This is not the case if you take your RMD and then donate to charity and claim a charitable deduction. With that approach, the RMD would still be included in MAGI.


By Sarah Brenner, JD
Director of Retirement Education

Copyright © 2024, Ed Slott and Company, LLC Reprinted from The Slott Report, 2024, with permission. Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article. Content posted in Ed Slott’s IRA Corner was developed and produced by Ed Slott & Co. to provide information on a topic that may be of interest. Ed Slott and Ed Slott & Co. are not affiliated with Ethos Capital Management, Inc. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.  The tax information provided is general in nature and should not be construed as legal or tax advice. Information is derived from sources deemed to be reliable. Always consult an attorney or tax professional regarding your specific legal, or tax situation. Tax rules and regulations are subject to change at any time. Ethos Capital Management, Inc. is a registered investment adviser. The firm only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.