Annuity Income and IRMAA: How Annuity Distributions Affect Medicare Premiums

Whether and how much an annuity distribution counts toward IRMAA depends on the type of annuity and how it was funded. A qualified annuity rollover pays full ordinary income on every distribution. A non-qualified deferred annuity has a trap: partial withdrawals are taxed as earnings first, not as basis — meaning the first dollars you take out are 100% taxable, even if most of your account is after-tax principal. A single partial withdrawal of $50,000 from a deferred annuity with $200,000 in accumulated gains can push a retiree with $90,000 in base income from zero IRMAA to $2,884/year in surcharges.

Which annuities count toward IRMAA MAGI

The non-qualified LIFO trap: worked example

Patricia, 68, bought a non-qualified variable annuity 20 years ago for $150,000 (her "cost basis"). It has grown to $430,000. The accumulated earnings are $280,000. She decides to take a $60,000 partial withdrawal to fund home repairs.

The full $60,000 is taxable — it all flows to IRMAA MAGI. Patricia had expected that ~35% of her withdrawal would be tax-free return of basis ("the gain is 65% of the account, so 65% should be taxable"). That's the common misconception. The LIFO rule means all $60,000 is earnings until she has exhausted all $280,000 of accumulated gains across multiple future withdrawals.

If Patricia's other retirement income (Social Security 85%, RMDs) was $80,000, adding $60,000 in annuity income brings her 2024 MAGI to $140,000 — crossing the $137,000 Tier 2 threshold. Her 2026 Medicare surcharges increase by $2,884/year. Over two years: $5,768 in additional premiums from a withdrawal she thought was largely tax-free.

SPIA exclusion ratio: the better scenario

Once a non-qualified deferred annuity is annuitized — converted into a stream of periodic payments — the LIFO rule no longer applies. The IRS switches to the exclusion ratio under IRC § 72(b):¹

Exclusion ratio = investment in contract ÷ expected return from annuity

Each monthly payment is split: the exclusion percentage is return of basis (non-taxable), and the remainder is ordinary income (counts toward IRMAA MAGI). Once you have recovered your full basis across all payments, subsequent payments become 100% taxable.

Example: David, 70, annuitizes a $400,000 non-qualified contract (cost basis $200,000) into a single-life SPIA paying $2,100/month. Based on IRS actuarial tables, his expected return (life expectancy × annual payment) is $504,000.

• Exclusion ratio = $200,000 ÷ $504,000 = 39.7%
• Each $2,100 payment: $834 return of basis (non-taxable), $1,266 ordinary income (taxable → IRMAA MAGI)
• Annual taxable annuity income: $1,266 × 12 = $15,192
• Basis is fully recovered after ~20 years; after that, $2,100/month is 100% taxable

Compared to a partial withdrawal strategy, annuitization creates smaller, predictable IRMAA MAGI each year — making it easier to manage bracket exposure across the two-year look-back window.

How annuity income appears on your tax return

Annuity distributions are reported on Form 1099-R:

• Box 1 — Gross distribution (total amount received)
• Box 2a — Taxable amount (what flows into IRMAA MAGI)
• Box 7 — Distribution code (code 1: early, no exception; code 7: normal; code D: annuity; varies by type)

The Box 2a amount flows to Form 1040: IRA distributions on Line 4b, pension/annuity distributions on Line 5b. Both are included in AGI (Line 11). IRMAA MAGI adds tax-exempt interest (Form 1040 Line 2a) back on top. For most retirees: IRMAA MAGI ≈ AGI + municipal bond interest.

2026 IRMAA brackets (based on 2024 MAGI)

Because of the two-year look-back, annuity distributions taken in 2024 determine your 2026 Medicare Part B and Part D premiums.³

For married couples, both spouses pay surcharges based on the combined household MAGI. A $60,000 annuity distribution that moves a couple from $270,000 to $330,000 MAGI shifts both from Tier 1 to Tier 2 — costing $3,472/year combined, for two years. That's $6,944 in added Medicare costs for one year's annuity withdrawal decision.

Calculate your annuity IRMAA impact

Enter your base retirement income and the taxable portion of your annuity distribution. For non-qualified deferred annuities with accumulated earnings exceeding the planned withdrawal, enter the full withdrawal amount as taxable. For SPIAs or annuitized contracts, enter the annual taxable amount shown on your 1099-R box 2a.

Five strategies to reduce annuity IRMAA exposure

1. Spread large non-qualified withdrawals across multiple tax years

If you have a large accumulated-earnings balance in a deferred annuity, taking smaller partial withdrawals spread across 3–5 years keeps each year's taxable MAGI in a lower IRMAA tier. A single $150,000 withdrawal from a high-gain annuity may push you to Tier 4 ($4,619/year additional); three withdrawals of $50,000/year may keep you in Tier 1 or Tier 2. Because of the two-year look-back, you can plan annuity distributions now and know their IRMAA impact for years 2–3 ahead.

2. Annuitize to shift from LIFO to exclusion-ratio treatment

Once you annuitize, the LIFO rule no longer applies. Monthly annuity payments are taxed on an exclusion-ratio basis — a fixed percentage of each payment is return of basis (non-taxable). For high-gain non-qualified deferred annuities where most of the balance is earnings, annuitization can meaningfully reduce the taxable portion of each annual distribution, even if the total payments over time are the same.

Annuitization is generally irreversible. It's a one-time decision that also removes the flexibility to take larger withdrawals in low-income years. Modeling the exclusion ratio and comparing it against a spread-withdrawal strategy is worth doing before you commit.

3. 1035 exchange to shift gains into a Roth IRA (if eligible)

A non-qualified annuity can be exchanged for a Roth IRA under IRC § 1035 only if the annuity was held in a Roth IRA to begin with — direct 1035 exchanges from non-qualified annuities to Roth IRAs are not permitted. However, a 1035 exchange to a new non-qualified annuity, followed by partial withdrawals structured to stay below IRMAA cliffs, can be combined with Roth conversion planning in low-income years to gradually shift wealth out of the taxable annuity structure.⁴

4. Use QCDs to offset stacked MAGI from annuity + RMDs

If you are age 70½ or older, Qualified Charitable Distributions up to $111,000/person in 2026 remove IRA distributions from AGI entirely — they never appear on your return.⁵ If your annuity distribution will push you close to or over an IRMAA threshold, redirecting a portion of your IRA RMD as a QCD can create headroom. QCDs cannot offset non-IRA annuity income directly, but they reduce the total MAGI stack that the annuity income lands on top of.

5. Time large one-time withdrawals to low-income years

Partial lump-sum withdrawals from deferred annuities are best taken in years when other income is temporarily low: after retirement (before RMDs begin), in a year with large deductions, or in a year when capital gains were light. The worst year for a large annuity withdrawal is one where you also have a large RMD, a capital gain from a home sale, or a Roth conversion. Each dollar of annuity income stacks on top of other income — one more tier crossing costs $1,735/year per person minimum.

What about SSA-44?

The SSA-44 life-changing event appeal allows you to use current-year income instead of the two-year-old MAGI in limited circumstances: retirement, divorce, death of spouse, cessation or reduction of income-producing property. A voluntary annuity withdrawal is not a qualifying event. If high IRMAA from an annuity withdrawal is baked into your 2024 return, you will pay the 2026 surcharges regardless — SSA-44 is not a remedy here.⁶