This 401(k) Move Could Cost Retirees Up to $487 a Month for a Year

When you withdraw money from a 401(k), you probably already know that you have to consider the effect on your tax rate. Too large a withdrawal could push you into a higher tax bracket by increasing your household income. Withdrawing too much from your account could also put you at risk of draining the account if you don't leave enough invested.

There's another risk, though. If you aren't careful, it's possible that a big 401(k) withdrawal could cost you as much as an extra $487 per month for a year. That's because of a rule many people don't know about, and it could come as a very unpleasant financial shock.

Image source: Getty Images.

This rule means a big 401(k) withdrawal could cost you $487 a month

The rules you need to know about when it comes to a big 401(k) withdrawal relate to the cost of your Medicare premiums. Many seniors get health insurance coverage through Medicare once they turn 65, and some parts of Medicare have premiums that seniors must pay. In 2026, for example, the standard premium for Medicare Part B is $202.90 per month.

However, an Income-Related Monthly Adjustment Amount (IRMAA) is added onto your Medicare Part B premiums once your modified adjusted gross income (MAGI) goes above a certain threshold. Distributions from most retirement plans, including your 401(k), can push your MAGI above that amount.

While qualified distributions from a Roth IRA or Roth 401(k) are not part of your MAGI, withdrawals from most retirement plans do count. Your MAGI from two years prior is reviewed when setting your Medicare premiums for the year, so a large withdrawal any time at age 63 or later could result in your taxable income climbing above the threshold where you have to pay extra.

The specifics of your additional premium amount vary based on your MAGI. However, if you are a single tax filer with a MAGI of $500,000 per year or a married joint filer with an income of $750,000, your Medicare Part B premiums jump to $689.90.

That's an extra $487 in monthly Part B premiums you would have to pay.

How to plan for large 401(k) withdrawals as a retiree

Premiums don't just increase once your income hits $500,000 or $750,000. In fact, IRMAA kicks in at a much lower income level: Anything above $109,000 for a single filer or $218,000 for a married joint filer is going to trigger higher Part B premiums.

There may not be anything you can do about this if you need to make a distribution. But you should take this into account in your retirement planning process.

For example, you could potentially space your distributions out over two years to avoid one large withdrawal that pushes you above the threshold where premiums increase. Or you could try taking large withdrawals or even doing Roth conversions before you turn 63, since that's the first year your income matters for Medicare purposes.

Being aware of the IRMAA rule is the first key step in developing a strategic plan, so make sure you understand these thresholds as you plan for the future.

The Motley Fool has a disclosure policy.