Watch Out! RMDs Can Trigger Massive Medicare Means Testing Surcharges
Saving too much in tax-deferred retirement accounts could mean you’ll pay hundreds of thousands more than necessary on Medicare premiums in retirement. For some couples, the hit could even top $1 million. Here’s what you need to know.


Editor’s note: This is part three of a seven-part series. It dives more deeply into how high income from required minimum distributions (RMDs) can cost retirees hundreds of thousands of dollars in Medicare surcharges. If you missed the introductory article, you may find it helpful to start here.
No one wants to pay hundreds of thousands of dollars or even over $1 million more than they have to for Medicare in retirement. But due to means testing, that’s what could happen if you’re a diligent saver who stashes every penny you can into your 401(k) or other pre-tax retirement savings account.
This article is a summary of a ground-breaking white paper I published in 2019, in case you want to dive deeper into the history and mechanics of Medicare means testing. All general data cited in today’s article about Medicare can be found in the 2019 paper.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How Medicare Premiums Work
Traditional Medicare services consist of Part A (hospital care), Part B (doctor) and Part D (prescription drug) coverage. Many retirees mistakenly think Medicare is free because they’ve been paying Medicare taxes into the system for their working lives. But for most retirees, only Part A is free, while Part B and Part D have monthly premiums, usually deducted from retirees’ Social Security checks.
As my white paper indicates, Medicare Part B costs rose 8.8% annually from 1970 to 2019, a shockingly high rate over an extended period. That’s similar to the inflation rates we’ve been experiencing in 2022, but instead over a 49-year period. High compound inflation rates like this can have a devastating impact over time.
The government subsidizes Medicare costs by setting the base premium equal to 25% of projected per capita costs, meaning the government is covering the other 75% for most (but not all) retirees. Despite the subsidies, significant cost increases have been passed on to retirees. Base Medicare Part B premiums rose 7.5% annually from 1966 to 2019 (from $3.00 a month to $135.50 a month). In comparison, the core annual inflation rate (at least through 2019) has been about 2.3%.
Medicare itself faces solvency questions even more severe than Social Security. The only way to improve the solvency of Medicare is to raise taxes, reduce benefits or incur larger deficits. That’s not a political statement. It’s math. And it’s why, as of 2019, the Medicare trustees expected Medicare Part B premiums on average to rise 5.17% annually from 2020 to 2027.
What Is Medicare Means Testing?
Following 2003 legislation, the government started reducing the subsidy for high-income individuals, forcing them to pay higher premiums on Part B and Part D beginning in 2007. These higher premiums are known as Income-Related Monthly Adjustment Amount (IRMAA) surcharges or “means testing.” I think of them as avoidable taxes, provided you do some long-term planning.
The charts below show Part B and Part D premiums for 2022 (the Part D premiums are for a plan in Austin, Texas). Premiums are tied to modified adjusted gross income from two years prior, so 2022 rates use income from 2020. Premiums for the highest earners compared to the lowest earners are 3.4 times higher for Part B and 4.4 times higher for Part D.
Premiums for couples filing jointly
Premiums for those filing as singles
At higher income levels the government reduces the per capita federal subsidy, causing retirees to bear a greater portion of the cost. From 2007 to 2019, the base premium increased by 3.1% annually, while premiums for means testing tiers increased from 5.0% to 8.6% annually.
The concept of means testing shouldn’t be a big surprise because the most politically acceptable way to improve Medicare’s finances is to make wealthier people pay more. All the signs suggest means testing will become more severe over time.
From 2009 through 2019, income brackets were not indexed for inflation, and in some years, the government even reduced income brackets. So over time, more people have been getting snared by means testing. Starting in 2020, income brackets were indexed for inflation, which was good news for retirees, but the government could easily halt inflation adjustments to help balance the Medicare books.
RMDs and Medicare Means Testing
Recall from last week’s article on RMDs, the case study of a 40-year-old couple who saved $500,000 combined in pre-tax retirement accounts and continue to max out pre-tax contributions until retirement at age 65.
The couple’s tax-deferred retirement accounts grow to $11.9 million by age 72, when they take their first taxable RMD of $435,820. The RMD snowballs, growing to $1.3 million of taxable income at age 90.
In the table above, the couple is projected to be in means testing tier three from age 74-76 and tier four from age 77 to 90. Their total “base” Medicare Part B and Part D premiums from age 65 to age 90 are projected at $856,526 (in future dollars, with each income bracket inflated using the historical Medicare inflation rate of 5.17% as of 2019). However, the couple will face an additional $1.5 million in Medicare means testing surcharges through age 90.
So far, this series has looked at how tax-deferred saving can create problems with RMD income and Medicare means testing surcharges. My next article focuses on problem No. 3: inherited tax liabilities.
- Part 1: Is Your Retirement Portfolio a Tax Bomb?
- Part 2: When It Comes to Your RMDs, Be Very, Very Afraid!
- Part 3: Watch Out! RMDs Can Trigger Massive Medicare Means Testing Surcharges
- Part 4: Will Your Kids Inherit a Tax Bomb from You?
- Part 5: How to Defuse a Retirement Tax Bomb, Starting With 1 Simple Move
- Part 6: Using Asset Location to Defuse a Retirement Tax Bomb
- Part 7: Roth Conversions Play Key Role in Defusing a Retirement Tax Bomb
- Bonus article 1: 2 Ways Retirees Can Defuse a Tax Bomb (It’s Not Too Late!)
- Bonus article 2: Can My Pension Trigger a Retirement Tax Bomb?
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

David McClellan is a partner with Forum Financial Management, LP, a Registered Investment Adviser that manages more than $7 billion in client assets. He is also VP and Head of Wealth Management Solutions at AiVante, a technology company that uses artificial intelligence to predict lifetime medical expenses. Previously David spent nearly 15 years in executive roles with Morningstar (where he designed retirement income planning software) and Pershing. David is based in Austin, Texas, but works with clients nationwide. His practice focuses on financial life coaching and retirement planning. He frequently helps clients assess and defuse retirement tax bombs.
-
The Most Tax-Friendly State for Retirement in 2025: Here It Is
Retirement Tax How do you retire ‘tax-free’? This state doesn’t tax retirement income, has a low median property tax bill, and even offers savings on gas. Are you ready for a move?
-
Plan for Higher Health Care Costs in 2026: Projected Medicare Part B and Part D Premiums
In 2026, Medicare participants will pay more for their health care. Part B costs are expected to rise more than 10%. Here's what you can do.
-
Avoid Medicare's 'Shadow Tax' With This Financial Expert's IRMAA-Busting Tips
You're cruising along in retirement, and then bam: Your Medicare premiums soar because your income crossed the limit. Take a breath. There could be a solution.
-
Grilling Season and ETFs: There's More Than One Way to Cook Up a Portfolio
Exchange-traded funds come in a multitude of 'flavors' these days, from passive to active to factor-based. Their flexibility is what makes them so delicious.
-
You Don't Want It, But You Should Plan for It Anyway: An Expert Guide to Long-Term Care
Planning for long-term care is crucial to protect your independence, family and financial stability against unexpected health events and rising care costs not covered by standard insurance.
-
Five Questions to Help Ensure a Happy, Secure Retirement
You need to drill down to what you really want out of retirement. Then you can get down to the business of crafting a financial plan to make it happen.
-
I'm a Financial Adviser: This Is How You Can Save for Big Goals Even if You Feel Like You're Barely Getting By
Learning good financial habits — building an emergency fund, paying down debt, saving consistently — gives you flexibility, options and a path to security.
-
How to Buy an Annuity Online (Without Regret)
You should never be rushed into buying an annuity. But now that they can be sold quickly and easily online, you need to be more alert than ever to pushy salesmanship. Here are four signs you're working online with a professional.
-
How Much Income Will an Indexed Annuity Get You? An Annuities Expert Lays Out the Numbers
Guaranteed lifetime income sounds great, but how much will it be? Several factors determine your future payout on indexed annuities with an income rider.
-
Financial Fact vs Fiction: Why Inflation Is Lower, But Prices Are Not
Do you think bonds protect you from stock losses? Are you confident your assets will go to your intended heirs if all you have is a will? Think again — and read on for other myths that could be leading you astray.