This Hidden Retirement Tax Trap Could Raise Your Medicare Premiums

Accumulating a large balance in an IRA or 401(k) is a good thing in theory. But once you turn 73 (or 75), depending on your age, there's a problem.

Traditional retirement plans eventually force savers to take required minimum distributions, or RMDs. And those mandatory withdrawals could have a bigger impact on your finances than you'd expect.

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How RMDs can increase your Medicare costs

Because traditional IRA and 401(k) withdrawals are subject to taxes, RMDs could easily bump you into a higher tax bracket if they're substantial. And that may be the case if you've managed to save a lot.

And if you're thinking, "Man, that seems like a harsh punishment for being disciplined," here's some even worse news -- RMDs could also raise your income to the point where you're forced to pay more for your Medicare premiums.

Medicare has a standard monthly premium it charges for Part B, while Part D drug plan premiums are plan-specific. But once RMDs come into play and your income rises, you could be subject to surcharges known as income-related monthly adjustment amounts that make both your Part B and Part D premiums cost more.

To put it another way, RMDs could cause a double hit. Not only will you be forced to pay taxes on your withdrawals, but you'll also potentially have to pay more for Medicare because of taking money out of your savings that you may not have even needed or wanted.

How to minimize RMDs

If you're able to keep your RMDs to a minimum, you can potentially avoid having to pay more for Medicare. And a good way to pull that off is to do a Roth conversion, where you move money from a traditional retirement account into a Roth IRA.

Now, do be aware that this strategy can create a tax bill each year you do a conversion. So it's best to spread a Roth conversion out over several years if you can. But once your money lands in a Roth IRA, withdrawals are generally tax-free and are not subject to RMDs.

If a Roth conversion isn't feasible, another option to look at is a QCD, or qualified charitable distribution. By donating money directly to charity through a traditional IRA, you can bypass taxes while satisfying your RMD.

Even though saving a lot of money for retirement is a great thing to do in theory, it could lead to an unwanted Medicare surprise. It's important to keep that on your radar so you can adjust your strategy accordingly.

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