Why a Big 401(k) Distribution Could Be a Lot More Costly After Age 63

Deciding when to withdraw funds from your 401(k) is key to making a successful retirement plan. And there's a lot to think about, from making sure you take your required minimum distributions to maintaining a safe withdrawal rate so you don't run out of money.

Once you turn 63, there's also another crucial consideration that has to be part of any decision you'll make about a large withdrawal. Unfortunately, many retirees are unaware that a large 401(k) distribution at age 63 or older could have major financial implications that lead to big surprise costs.

Here's what the issue is.

Why a large 401(k) withdrawal could come at an extra cost after age 63

Withdrawing a substantial amount of money after age 63 could become a problem because of special rules for Medicare coverage.

Seniors become eligible for Medicare starting at 65. Most people pay standard premiums for Medicare Part B. However, there is an Income-Related Monthly Adjustment Amount (IRMAA) that applies to high earners.

IRMAA is a government surcharge that is added to your premiums for Medicare Part B and Medicare Part D if your modified adjusted gross income (MAGI) exceeds certain thresholds. And since 401(k) distributions count in your MAGI, a big withdrawal could push your income above the amount where IRMAA affects you.

Why does age 63 matter?

Since eligibility for Medicare coverage starts at 65, and you begin paying premiums when you get covered, you may wonder why age 63 is the key age when a large 401(k) withdrawal becomes a problem.

The reason is simple. The Social Security Administration looks at your tax returns from two years prior when calculating your MAGI to see if IRMAA applies.

So, when you turn 65 and become eligible for Medicare for the first time, your income from age 63 is the income that is used to determine if you'll pay higher premiums.

What are the IRMAA thresholds?

The IRMAA thresholds change over time and are based on your tax filing status. In 2026, individuals with a MAGI above $109,000 and married couples with a MAGI above $218,000 are subject to surcharges. And the higher your income, the more your premiums are likely to increase.

For example, the standard premium in 2026 is $202.90, but here are a few examples of how much people who have high incomes pay:

• Individuals with a MAGI above $109,000 up to $137,000, and married couples earning above $218,000 up to $274,000, pay $284.10 per month for Part B and an additional $14.50/month for prescription drug coverage.

• Individuals with a MAGI above $171,000 up to $205,000 and married couples earning above $342,000 up to $410,000 pay $527.50/month for Part B and an additional $60.40/month for prescription drug coverage.

• Individuals with a MAGI of $500,000 or more and married couples earning $750,000 or more pay $689.90/month for Part B and an additional $91.00/month for prescription drug coverage.

That means the highest earners end up with a $487.00 extra monthly cost.

How could you minimize the consequences of a big withdrawal?

If you need to make a substantial withdrawal from a 401(k), you may want to try to do it before age 63, as then you won't affect your Medicare premiums. You still need to think about the tax implications (including being pushed into a higher bracket), but at least extra health insurance costs aren't an issue. This is one reason why Roth IRA conversions could make sense earlier in your 60s.

If you're already 63, you could try to split the withdrawal over two years to limit the impact and ideally stay below the IRMAA thresholds. For example, you could take some of the money out you need in December 2026 and the rest in January 2027 so you don't increase your income so much in a single year.

A financial professional could help you explore these options to see what makes sense.

Is there anything you should do if you're worried about rising premiums?

Since the Social Security Administration uses old income data, there's a chance your financial circumstances may have changed between the time of your large withdrawal and the time your Medicare surcharge hits.

If you experienced a "qualifying life event" in the interim, you could submit a Request to lower an Income-Related Monthly Adjustment Amount (IRMAA). However, only specific life events qualify, such as:

• Marriage
• Divorce or annulment
• The death of a spouse
• Stopping work completely (such as by retiring)
• Substantially reducing work hours
• Losing an income-producing property
• Losing pension income

You have to show that these events mean you're in a lower income bracket now than you were in the year you took the big distribution.

Bottom line

IRMAA rules are something you must be aware of and plan for in your later years, as making 401(k) withdrawals without looking at the big picture is one of the biggest financial mistakes you could make.

If you suspect a large distribution may trigger IRMAA, you need to either plan and prepare for much higher Medicare premiums or work with a financial professional to understand your options.