This One 401(k) Decision at 63 Could Hit Retirees Where It Hurts Later

If you're looking to take out a large 401(k) withdrawal for a major expense or move pretax savings into a Roth, you may already expect an income-tax bill. But before you think that's the only consequence, consider a separate delayed cost that can secretly eat into an already tight retirement budget.

The shuffling of cash isn't in and of itself a financial mistake, but it may need some careful planning. Read on to see why the timing and size deserve your attention before you decide.

Your Medicare bill looks back two years

Income-related monthly adjustment amount, or IRMAA, is an extra premium for higher-income Medicare beneficiaries. It's not a penalty, but it can feel like one when your premium bill hits.

Social Security can determine that you owe income-related surcharges for Medicare Part B and Part D, and it generally uses tax information from two years earlier for its calculation. Income in the calendar year someone turns 63 can affect premiums in the year they turn 65, something that's not always considered when moving funds around.

So, even if you've long since spent the money from your 401(k) withdrawal for some emergency that mattered at the time, you could still face larger premiums two years later.

Every dollar matters

The 2026 standard Part B premium is $202.90 a month, but surcharges begin above $109,000 for individual filers and $218,000 for married couples filing jointly. Crossing a threshold triggers the full surcharge for that tier; it doesn't work like a marginal income-tax bracket. If you're a single filer with $109,001 in modified adjusted gross income, you cross the first 2026 threshold.

What happens? For someone enrolled in both Part B and Part D, the first tier adds $81.20 for Part B and $14.50 for Part D — that's $95.70 a month or $1,148.40 for a full year. These are on top of the ordinary premiums you pay. And if both spouses are enrolled in Medicare, each can owe a separate surcharge based on their joint income.

Surcharges for the top tier are even higher at $487 a month for Part B and $91 for Part D, per person.

More than retirement income counts

While moving money from a 401(k) is getting the most attention here, it's not the only way to trigger this surcharge. Medicare measures modified adjusted gross income (MAGI), which equals your adjusted gross income plus tax-exempt interest.

This is usually a larger number than taxable income after the standard deduction or itemized deductions you may be familiar with.

What counts?

Withdrawals of pretax money from traditional retirement accounts, like your 401(k), and conversions of that money to a Roth generally increase the income Medicare uses to set premiums. These transactions are different from a tax-free rollover into a traditional IRA or a qualified withdrawal from an existing Roth account.

Other activities that can increase your MAGI are capital gains from taxable investments or property sales. (The sale of a main home may keep some or all of that gain out of income.) Tax-exempt interest also counts for the Medicare calculation, even if it doesn't count for income tax purposes.

A Roth conversion can still make sense

This Medicare "gotcha" doesn't mean all seniors should avoid conversions. There could be a significant stretch of time after retirement but before required minimum distributions begin when your annual income is much lower, and this could be a useful conversion window.

Paying tax on conversions now can reduce future pretax balances and future required distributions, which may lower later income-related premiums.

Spread out conversions and time carefully

If you convert smaller amounts across multiple tax years, you may keep one year's income from becoming too high for Medicare's later calculations. Use annual income estimates as a strategy rather than aiming for a certain number.

Look at your expected wages, retirement distributions, gains, and interest, and compare your estimated MAGI with the current thresholds as a conservative planning guide. The thresholds that apply two years later may differ. Then, settle on a conversion size that leaves room below the threshold you're trying to stay under.

If in doubt later, consider giving some away

Qualified charitable distributions may be a later-in-life option for those age 70½ and older, rather than a strategy available at age 63. An eligible QCD goes directly from an IRA to a qualified charity and can keep otherwise taxable IRA distributions out of Medicare's income calculation for that tax year. It does not undo income from an earlier withdrawal or Roth conversion.

This is an IRA strategy, not a direct charitable withdrawal from a 401(k), but it can satisfy some or all of an IRA RMD when those distributions apply.

Bottom line

A large withdrawal or conversion can affect your current tax bill as well as future Medicare premiums. The goal then is to coordinate size and timing rather than avoiding conversions altogether.

Someone whose income falls after a qualifying life-changing event, such as retirement or reduced work, can ask Social Security to use more recent income information. You can use Form SSA-44 and provide supporting documentation to request a new determination that more accurately reflects your current retirement plan reality. A one-time withdrawal or Roth conversion, by itself, is not a qualifying life-changing event.

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