Pension Income and Medicare: How Your Pension Affects IRMAA Surcharges

Every dollar of pension income that appears on your tax return counts toward IRMAA MAGI — the number that sets your Medicare Part B and Part D surcharges. Many pension retirees are surprised to find they owe $1,148–$6,354 per person in annual Medicare surcharges despite having no salary, no Roth conversions, and no investment activity to speak of. Here's why, and what limited levers remain.

How pension income counts toward IRMAA MAGI

IRMAA MAGI = your AGI (Form 1040, Line 11) plus tax-exempt interest (Line 2a). Pension and annuity income is ordinary income that flows into AGI in full — specifically the taxable portion after recovering your after-tax cost basis using the IRS Simplified Method.

For most pension retirees, nearly all of the monthly payment is taxable:

The Simplified Method worksheet (IRS Publication 575) determines the non-taxable monthly exclusion based on your after-tax contributions and your age at the annuity start date.² FERS retirees hired after 1987 have small employee contributions — the recovery period runs 300–360 months. CSRS retirees recover more basis, but it's still exhausted over 10–30 years. Most retirees who've been collecting for a decade or more have already recovered their basis and now pay tax on 100% of each payment.

The WEP/GPO repeal: government pensioners now face higher IRMAA exposure

The Social Security Fairness Act, signed January 5, 2025, repealed the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) retroactively to January 2024.³ About 3.2 million government workers and retirees — primarily teachers, police officers, firefighters, and federal CSRS retirees who also paid into Social Security through other employment — saw their SS benefits increase, often by $300–$800/month.

The unintended IRMAA consequence: higher SS benefits mean higher MAGI. A teacher on a state pension who previously received a $400/month SS benefit reduced to $50/month by WEP now receives $400/month — an extra $4,200/year in gross income. At the 85% inclusion rate for high earners (virtually all pension retirees with meaningful pension income), that adds ~$3,570 to IRMAA MAGI. Depending on total income, this can push someone from below the IRMAA threshold into Tier 1, or from Tier 1 to Tier 2.

If you received a retroactive lump-sum SS payment for 2024 (distributed beginning February 2025), that payment was taxable income in 2024 — flowing into 2026 Medicare premiums via the two-year look-back. If your 2026 premiums jumped unexpectedly and you had a WEP/GPO restoration payment in 2024, this is the mechanism.

Pension + Social Security: the taxability cascade

Pension income creates a second-order IRMAA problem by driving up the taxable fraction of Social Security benefits. The SS "provisional income" test determines how much of your SS benefit is taxable:⁴

• Provisional income = AGI (excluding SS) + tax-exempt interest + 50% of gross SS benefit
• Above $34,000 single / $44,000 MFJ → up to 85% of SS benefit is taxable

These thresholds were set in 1993 and have never been inflation-adjusted. Almost every pension retiree with a meaningful pension exceeds $34,000 in provisional income before Social Security is counted at all. The result: 85% of gross SS benefits is ordinary income — which flows directly back into IRMAA MAGI.

Example — how pension income stacks:

This retiree avoids IRMAA. But add a $35,000 IRA RMD and MAGI jumps to $114,400 — above the $109,000 threshold — triggering $1,148/year in surcharges. The pension and SS are fixed. The only controllable variable is the IRA distribution.

2026 IRMAA surcharge tiers

2026 surcharges are based on 2024 MAGI (two-year look-back):¹

For married pension retirees where both spouses receive Medicare, each pays their own IRMAA surcharge based on the couple's combined MAGI. Two retired teachers with a combined MAGI of $230,000 each pay Tier 1: $1,148 × 2 = $2,296/year extra. This is separate from the standard Part B premium both pay. As RMDs from 403(b) or 457(b) accounts compound over time, this number grows.

Pension lump-sum option: a hidden IRMAA trade-off

Many defined benefit plans offer a lump-sum option at retirement: take the entire present value as a one-time payment instead of monthly income for life. Most retirees roll the lump sum to an IRA (no immediate tax). The IRA rollover itself is not income — no IRMAA impact in the year of rollover.

But the long-term IRMAA shape changes. Monthly pension payments create steady, predictable annual income. A lump-sum rollover converts that income stream into an IRA that generates RMDs starting at age 73 (born 1951–1959) or age 75 (born 1960+). RMDs grow as the IRA grows and the divisors shrink. At a 5% annual return, a $600,000 rollover at 65 becomes roughly $930,000 at 73, generating a first-year RMD of ~$35,100 — plus any other IRAs — on top of Social Security.

The comparison isn't one-size-fits-all, but the pension-vs.-lump-sum decision has a Medicare IRMAA dimension that most retirees don't model: steady monthly income vs. growing RMDs with an accelerating annual surcharge trajectory. A specialist who models Medicare costs alongside retirement income can quantify this trade-off for your specific numbers.

What pension retirees can still do to reduce IRMAA

Pension income is largely fixed. You can't un-retire, reduce the monthly payment, or retroactively change the structure. But these levers remain:

1. Qualified charitable distributions (QCDs) from any IRA

If you're 70½ or older and hold any IRA — even a small rollover or inherited IRA — you can direct up to $111,000 per person in 2026 directly to a qualified charity.⁵ The QCD counts toward your required minimum distribution but never enters AGI. Unlike a regular charitable deduction (which reduces taxable income but not MAGI directly), the QCD removes the income from the calculation entirely.

A retired teacher with a $55,000 pension, $20,400 in taxable SS income, and a $35,000 IRA RMD has MAGI of $110,400 — just over the $109,000 Tier 1 floor. Redirecting $5,000 of the RMD as a QCD to charity brings MAGI to $105,400 — below the threshold, saving $1,148/year for two years. The QCD costs nothing if you were going to donate anyway. Even if you weren't, the IRMAA savings can exceed the value of the donation in tax terms.

2. Roth conversions before pension and SS start

The most valuable window for pension retirees is the gap between leaving work and when pension income becomes substantial or SS begins. In that window, income may be low enough that Roth conversions fit cleanly under IRMAA thresholds — permanently reducing the IRA balance that will generate future RMDs.

Federal employees: FERS pension starts at retirement, but SS can be delayed until 70. If you retire at 62 with a modest FERS payment and delay SS, there may be room for substantial Roth conversions before SS income stacks on top. Every dollar converted from traditional IRA to Roth now is a dollar that won't generate taxable RMDs or IRMAA-relevant income at 73 or 75.

3. Minimize discretionary IRA withdrawals near tier cliffs

When pension + SS already puts you near an IRMAA threshold, each additional withdrawal from a traditional IRA must be evaluated against the bracket. An extra $15,000 withdrawal that crosses a tier cliff doesn't just cost the income tax on $15,000 — it costs an additional $1,736/year in per-person IRMAA surcharges two years later. Year-end income modeling — before any discretionary distributions — should be standard practice for pension retirees with meaningful IRA balances.

4. SSA-44 appeal for the year of retirement

If your final working year had unusually high income — a large sick-leave payout, accumulated vacation buyout, deferred compensation distribution, or one-time bonus — that income drives Medicare premiums two years later. If your actual retirement income is substantially lower, an SSA-44 life-changing event appeal is available. Retirement from work qualifies as a "life-changing event." SSA can use estimated current-year income instead of the look-back year. For government retirees with high final-year payouts, filing the SSA-44 promptly after retirement often recovers $1,148–$4,619/year in surcharges.

5. Capital gain timing on taxable investments

Pension and SS income is fixed, but capital gains from taxable brokerage accounts can be timed. Realizing a large gain in a year where pension + SS already puts you near a tier cliff can push you over. Deferring gains to a year with more headroom, or spreading realizations across multiple years, is a planning lever pension retirees do control. Municipal bond interest is another variable — it doesn't appear on your 1040 as income, but it's added back to AGI for IRMAA purposes. Holding muni bonds in a pension retiree's taxable account raises MAGI even when it doesn't raise tax. High-yield taxable bonds or equity funds may or may not generate more IRMAA depending on your total income picture.

Decision framework by situation

Sources

1. CMS: 2026 Medicare Part B Premium and IRMAA Information — IRMAA surcharge tiers by income bracket (single and MFJ), based on 2024 MAGI. Standard Part B premium $202.90/month. Verified November 2025.
2. IRS Publication 575: Pension and Annuity Income — Simplified Method for determining taxable vs. non-taxable fraction of pension and annuity distributions. Covers FERS, CSRS, and private-sector DB plans. After-tax basis recovery and the point at which 100% of each payment becomes taxable.
3. SSA: Social Security Fairness Act — WEP and GPO Repeal — Pub. L. 119-5, signed January 5, 2025. Repealed WEP and GPO retroactively to January 2024. Government pensioners who had SS reduced under WEP or GPO now receive full benefits — increasing IRMAA MAGI exposure. Retroactive payments for 2024 distributed beginning February 2025.
4. IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits — Provisional income test for SS taxability. Above $34,000 single / $44,000 MFJ, up to 85% of SS benefits are includable in AGI. These thresholds are not inflation-adjusted.
5. IRS Notice 2025-67: 2026 Retirement Plan and IRA Amounts — QCD limit for 2026: $111,000 per person (indexed annually under SECURE 2.0 § 307). QCDs satisfy RMDs without increasing AGI or IRMAA MAGI. Available at age 70½+.

Values verified as of May 2026. IRMAA brackets set annually by CMS; pension taxability per IRS Publication 575. Consult a licensed advisor for guidance specific to your situation.