Beware! RMDs Are Silently Increasing Medicare Premiums

Without proper planning, RMDs in retirement can sharply increase Medicare premiums.

As federal employees approach their late 50s, it’s wise to start considering Medicare and the decision of whether to enroll. Many people don’t think about Medicare until just a few years before they turn 65, when it’s time to apply, which can be a mistake.

Proper planning and preparation can significantly improve both your decision-making and your overall financial situation. It’s crucial to understand the various factors that influence Medicare premiums, including earned income, self-employment income, investments, real estate, rental income, retirement withdrawals, Social Security, and pensions.

In this article, we’ll explore how Medicare premiums relate to Required Minimum Distributions (RMDs) and their impact on retirement income planning and healthcare costs.

What is a Required Minimum Distribution? 

A Required Minimum Distribution (RMD) is the minimum amount that you must withdraw from your retirement accounts, such as a traditional TSP, IRA or 401(k), starting at a certain age. The IRS mandates these withdrawals to ensure that individuals eventually pay taxes on their tax-deferred savings.

When do RMDs Start?

The age for RMDs has recently changed due to SECURE Act 2.0. The current age to begin RMDs has been increased to age 73 starting in 2023 (up from age 72). RMDs will increase to age 75 starting in 2033.

RMDs only require withdrawals from traditional funds whether that is a 401(k), TSP, IRA, or other traditional type retirement plan. Roth funds are NOT subject to RMDs.

RMD Begins at Age:

72Born in 1950 or earlier
73Born 1951 to 1960
75Born after 1960

How to Handle RMDs for Inherited IRA Accounts

RMDs are still required for inherited IRAs as well. If you have inherited a retirement account after January 1, 2020, the rules have changed due to the SECURE Act.

The 10-Year RMD Rule for Inherited IRAs

The SECURE Act of 2019 introduced a 10-year rule for most non-spouse beneficiaries, requiring them to empty inherited accounts within ten years of the original owner’s death.

Two Scenarios: The IRS regulations create two distinct situations:

  1. Passed Before January 1, 2020: If the original owner hasn’t yet reached the age for RMDs, beneficiaries can choose to distribute the assets over their lifetime or within five years. 
  2. Passed in 2020 and Beyond: If the original owner has already reached their RMD age, beneficiaries must take annual IRA RMDs, and the inherited account needs to be depleted by the end of the 10-year period. If the original owner has not started RMD, the beneficiary must deplete the inherited IRA within 10 years. Certain eligible designated beneficiaries may extend beyond the new 10-year rule. They are:
    • IRA account owner’s spouse
    • IRA account owner’s minor child (10-year rule starts after they reach the age of majority)
    • Individual beneficiaries not 10 years younger than the IRA account owner
    • Disabled beneficiary defined by IRS
    • Chronically ill beneficiary defined by IRS

How to Calculate the RMD

The required minimum distribution for any year is the account balance as of the end of the immediately preceding calendar year divided by a distribution period from the IRS’s “Uniform Lifetime Table.” There is a different table if the sole beneficiary is the owner’s spouse who is ten or more years younger than the owner.

Below is the Uniform Lifetime Table used to calculate an RMD for a single person.

$1,250,000 – TSP Balance

AgeDistribution Period% of Account ValueRMD Due
7227.43.65%$ 45,620.44
7326.53.77%$ 47,169.81
7425.53.92%$ 49,019.61
7524.64.07%$ 50,813.01
7623.74.22%$ 52,742.62
7722.94.37%$ 54,585.15
7822.04.55%$ 56,818.18
7921.14.74%$ 59,241.71
8020.24.95%$ 61,881.19
8119.45.15%$ 64,432.99
8218.55.41%$ 67,567.57
8317.75.65%$ 70,621.47
8416.85.95%$ 74,404.76
8516.06.25%$ 78,125.00
8615.26.58%$ 82,236.84
8714.46.94%$ 86,805.56
8813.77.30%$ 91,240.88
8912.97.75%$ 96,899.22
9012.28.20%$102,459.02

Medicare Part B & D Premiums are Based on Income – Estimated 2025 IRMAA and Premiums

SingleCouple MAGIPart BPart D
< $105,000< $210,000$185.00 Premium (varies)
$105,000 to $131,000$210,000 to $262,000$259.00 Premium + $13.70
$131,000 to $163,000$262,000 to $326,000$369.90 Premium + $35.30
$163,000 to $196,000$326,000 to $392,000$480.80 Premium + $57.00
$196,000 to $500,000$392,000 to $750,000$591.90 Premium + $78.60
> $500,000> $750,000$628.90 Premium + $85.80

RMDs Can Push You Into Higher Medicare Part B & D Premiums

Prior to receiving RMDs, you may have been enjoying a comfortable retirement between Social Security, a FERS or CSRS pension, and maybe the occasional withdrawal from TSP or an IRA.

In the years leading up to age 73, the money in the traditional retirement accounts has been growing and compounding over the years. Looming in the background are RMDs that can launch you into a higher tax bracket and increase the annual cost of Medicare health insurance. Proper knowledge of how RMDs work and a plan to lower a future RMD burden can help prevent this. 

Let’s look at a few examples. You are a single, retired FERS annuitant and age 65. You are receiving a $5,000/month FERS pension, $2,780/month for Social Security, and taking no withdrawals from a TSP that is valued at $1,250,000.

FERS Pension$60,000
Social Security$33, 360
TSP Withdrawals$0
Total Income$93,360

Your total income would place you in the lowest Medicare Part B premium at $185/month and $0/month for Part D. 

Now, if we swap the age from 65 to 73, the Medicare Part B premium jumps to $369.90/month for Medicare Part B and $35.30/month for Part D. That’s over $2,600/year MORE for the same health coverage. The RMDs from the traditional retirement accounts are now due and withdrawals are required.

FERS Pension$60,000
Social Security$33, 360
TSP Withdrawals$47,169
Total Income$140,529

The above example does not consider your investments growing and outpacing inflation. The most likely scenario may be even worse. A balanced investment strategy will generally outgrow inflation plus withdrawals over time.

In the previous example of the retiree, let’s assume the TSP is growing at a rate of 6% with no withdrawals until age 73. The account value will have grown from $1,250,000 to $1,992,310 at age 73. The RMD is much larger now.

FERS Pension$60,000
Social Security$33, 360
TSP Withdrawals$75,181
Total Income$168,541

The TSP will not stop growing if you have the funds invested and are taking no or moderate withdrawals. The compounding growth over the years will balloon the RMD down the road.

Yes, Medicare income brackets will increase, however, the increase in IRMAA income brackets follows a modest inflation increase. The goal of an investment strategy is to exceed inflation in the long-term.

In this scenario, your Medicare Part B premium is now $480.80/month and Part D is $57.00/month which is an increase of over $4,200/year.

What Can You Do?

There are some strategies to reduce health insurance premiums and taxes down the road. Conducting Roth conversions is a great way to reduce RMDs in the future as Roth IRAs do not have RMDs. You can also make small systematic withdrawals below higher tax brackets. If you are charitable, the use of a Qualified Charitable Distribution (QCD) will reduce income while giving to a charitable cause. There is also the Qualified Longevity Annuity Contract (QLAC) that can avoid taking RMDs until age 85. 

Important!

Federal employees should take the time to understand their decision on whether to take Medicare Part B or not at age 65. If you will fall into a premium of $369.90 or higher, you may not see the financial incentive of taking Part B. Proper planning now can help you save thousands of dollars in the future.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. 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. Securities and advisory services offered through Osaic Wealth, Inc., member FINRASIPCOsaic Wealth is separately owned and other entities and/or marketing names, products or services referenced here are independent of Osaic Wealth. Representatives may not be registered to provide securities and advisory services in all states. Branch address: 10701 Parkridge Blvd, Ste 130, Reston, VA 20191. Branch phone: 571-543-2783.

About the Author

Brennan Rhule, co-founder of PlanWell Financial Planning, is focused on empowering federal employees to retire with confidence. PlanWell is committed to providing financial education to Feds on a national level, delivered through weekly articles, webinars, and personalized guidance. Sign up to attend our Federal Retirement Webinars – we hope to see you there!