Severance Bonus Triggers Medicare IRMAA: Withdrawal Sequencing Strategy — Surcharge

Why Severance and Bonus Income Catch Pre-Medicare Retirees Off Guard

A severance package or performance bonus in your early 60s can feel like a financial cushion. But for pre-Medicare retirees, that lump-sum income creates a hidden tax: the Medicare IRMAA surcharge.¹ An IRMAA surcharge is an income-related monthly adjustment amount added to your Medicare Part B and Part D premiums when your modified adjusted gross income (MAGI) exceeds certain thresholds.

The trap is timing. Medicare uses a two-year look-back at your tax returns to set your premiums.² A severance or bonus paid in 2024 appears on your 2024 tax return, which determines your 2026 Medicare Part B and Part D premiums. By the time you turn 65 and enroll in Medicare, that one-time income spike has already passed — but the surcharge remains for the full calendar year.

Consider a typical scenario: you are laid off at age 62 with a $50,000 severance paid as a lump sum in January 2024. You also receive a final performance bonus of, say, $30,000 in March 2024. Your total 2024 MAGI jumps to $160,000 for a single filer. In 2025, your income drops to $60,000 from part-time work and investment dividends. But your 2026 Medicare premiums are still calculated on the $160,000 MAGI from 2024.³

The result is an IRMAA surcharge of $74.30 per month for Part B alone in 2026, plus an additional surcharge on Part D premiums.¹ That is nearly $900 per year in extra premiums triggered by income you received three years earlier and no longer have.

The Two-Year Look-Back Rule: How Medicare Calculates Your MAGI

Medicare determines your Part B and Part D premiums using the most recent tax return on file with the IRS. For 2026 premiums, that is your 2024 tax return.² The relevant income figure is your MAGI, which is your adjusted gross income plus tax-exempt interest income.

Your MAGI includes all the usual sources: wages, self-employment income, investment dividends, capital gains, IRA distributions, pension income, and rental income. For pre-Medicare retirees, the critical items are severance pay, bonuses, and large retirement account withdrawals — each of which can push MAGI over the threshold in a single year.

The look-back rule applies regardless of whether your income drops in subsequent years. If your 2024 MAGI was $150,000 and your 2025 MAGI was $70,000, your 2026 premiums still reflect the $150,000 figure. The surcharge persists for the entire 2026 calendar year, and only resets in 2027 when the 2025 tax return becomes the basis.

2025–2026 IRMAA Thresholds: What High Earners Need to Know Now

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¹ The IRMAA surcharge is added on top of this base amount. For a single filer with 2024 MAGI of $150,000, the 2026 Part B premium becomes $259.30 per month — an extra $891.60 per year.

Part D premiums also carry an IRMAA surcharge based on the same MAGI tiers. The Part D surcharge ranges from $13.70 to $85.80 per month depending on the income bracket.¹ Combined, a single filer in the first IRMAA tier pays an additional $1,056 per year in total Medicare premium surcharges.

Withdrawal Sequencing Strategy to Minimize Lifetime IRMAA Costs

The order in which you withdraw money from retirement accounts directly affects your MAGI and your IRMAA exposure. A strategic withdrawal sequence can keep your MAGI below the IRMAA thresholds during the gap years between retirement and Medicare enrollment.

The optimal sequence for pre-Medicare retirees is:

1. Taxable accounts first. Withdraw from brokerage accounts and savings accounts that generate capital gains and dividends. These are included in MAGI, but you control the timing and amount of realized gains. You can harvest losses to offset gains and keep MAGI low.

2. Tax-deferred accounts second. Traditional IRA and 401(k) distributions are fully included in MAGI as ordinary income. Limit these withdrawals to the amount needed to meet living expenses, and stay below the IRMAA threshold.

3. Tax-free accounts last. Roth IRA distributions are not included in MAGI, making them the most IRMAA-friendly source of retirement income. Delay Roth withdrawals until after you have exhausted taxable and tax-deferred accounts in a given year.

For example, suppose you need $80,000 per year in retirement income. You have a typical portfolio mix: a taxable brokerage account, a traditional IRA, and a Roth IRA. In a given year, you withdraw $50,000 from the taxable account (realizing $15,000 in capital gains) and $30,000 from the Roth IRA. Your MAGI is $65,000 — well below the $137,000 IRMAA threshold for 2026.³ If you had instead withdrawn $80,000 from the traditional IRA, your MAGI would be $80,000, still below the threshold but with less flexibility for future years.

The key is to project your MAGI for each year before Medicare enrollment and adjust the withdrawal mix to stay under the threshold. A single large withdrawal from a tax-deferred account in one year can trigger surcharges for two years.

Roth Conversion Timing: When It Helps vs. Hurts Your Medicare Premiums

Roth conversions are a powerful tool for reducing future RMDs and tax burdens, but they create an immediate MAGI spike that can trigger IRMAA surcharges. The timing of a Roth conversion relative to Medicare enrollment determines whether it helps or hurts.

A Roth conversion adds the full converted amount to your MAGI in the year of conversion. If you convert $50,000 from a traditional IRA to a Roth IRA in 2024, your MAGI increases by $50,000. If that pushes your MAGI above $137,000 for a single filer, you trigger IRMAA surcharges for 2026.³

The optimal window for Roth conversions is before age 63, when the two-year look-back still allows time for the MAGI spike to fall off before Medicare enrollment. For example, a Roth conversion in 2023 affects 2025 premiums. If you enroll in Medicare in 2026, the 2023 conversion is no longer in the look-back window.

After age 63, Roth conversions become risky. A conversion in 2024 affects 2026 premiums, which is the year you turn 65 and enroll. A conversion in 2025 affects 2027 premiums, your second year of Medicare. The surcharge applies for the full calendar year, so even a partial-year conversion can cost thousands in extra premiums.

The better strategy for pre-Medicare retirees is to front-load Roth conversions in the early 60s, before severance or bonus income arrives, and then stop conversions in the two years before Medicare enrollment. This allows you to build tax-free assets without triggering IRMAA surcharges during the critical enrollment period.

Appealing IRMAA Surcharges: Qualifying Life Events and the SSA Process

If a severance or bonus has already triggered an IRMAA surcharge, you can appeal to the Social Security Administration using Form SSA-44, the Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event form.⁴ The SSA allows an appeal when your income drops due to a qualifying life event, including retirement, reduction in work hours, divorce, death of a spouse, or loss of pension income.

The appeal process requires you to estimate your current-year MAGI and demonstrate that it is lower than the tax return used for the IRMAA determination. For a retiree who received a severance in 2024 but has no wage income in 2025, the estimated 2025 MAGI may be below the IRMAA threshold. The SSA will use the lower estimated income to recalculate premiums.

The most common mistake in IRMAA appeals is failing to provide sufficient documentation. You need a letter explaining the life-changing event, supporting documents (severance agreement, termination letter, pay stubs showing reduced income), and a signed estimate of your current-year MAGI. The SSA processes these appeals within 30 to 60 days, and the reduced premium is applied retroactively to the start of the year.

Note that an IRMAA appeal only works if your income has actually dropped. If you received a severance in 2024 and also have substantial investment income in 2025, your estimated MAGI may still exceed the threshold. The appeal is based on your current income, not the absence of the severance.

Case Study: How a $75K Severance Can Trigger 3 Years of IRMAA Surcharges

Consider a hypothetical retiree named Michael, age 63, who is laid off in December 2023. He receives a $75,000 severance paid as a lump sum in January 2024. Say his 2024 MAGI includes the severance plus $25,000 in investment dividends and $10,000 in part-time consulting income, for a total of $110,000. As a single filer, his 2024 MAGI is below the $137,000 IRMAA threshold for 2026.³

In 2025, Michael withdraws $50,000 from his traditional IRA to cover living expenses — say a typical retiree might take a similar distribution to bridge the gap before Social Security kicks in. His 2025 MAGI is, say, $85,000. This determines his 2027 premiums, which remain at the standard rate.

In 2026, Michael turns 65 and enrolls in Medicare. His 2026 premiums are based on his 2024 MAGI — say $110,000 — no surcharge. But in 2027, his premiums are based on his 2025 MAGI — say $85,000 — still no surcharge.

Now suppose Michael instead receives the $75,000 severance in January 2024 and also withdraws $60,000 from his traditional IRA in 2024 to pay off his mortgage. His 2024 MAGI is $170,000 — a hypothetical figure for this example. This pushes him into the second IRMAA tier for 2026, with a Part B surcharge of $185.70 per month and a Part D surcharge of $35.70 per month.¹ His total annual surcharge is $2,656.80.

The surcharge applies for the full 2026 calendar year. In 2027, his premiums reset based on his 2025 MAGI, which is lower. But the extra premiums — in this hypothetical case $2,656.80 — are a direct cost of the withdrawal sequencing decision in 2024.

Your Next Step

Review your projected MAGI for the current tax year and the next two years. If you received a severance or bonus in the current year, estimate your total MAGI and compare it to the IRMAA thresholds for the year you turn 65. If you are within $20,000 of the threshold, adjust your withdrawal plan to use Roth IRA distributions or taxable account withdrawals instead of traditional IRA distributions. If you have already triggered a surcharge, gather your severance agreement and termination letter, and file Form SSA-44 with the Social Security Administration to request an IRMAA appeal based on reduced income.