MAGI: The Number That
Determines
Your IRMAA
Modified Adjusted Gross Income, known as MAGI, is the specific income figure Medicare uses to place you in an IRMAA bracket. Understanding what counts toward it, and what doesn't, is essential for effective planning.
How MAGI is calculated
The IRMAA MAGI Formula
(Line 11 of Form 1040)
Municipal bonds, etc.
This is a broader definition of income than most people expect.
Notice that tax-exempt interest is added back in for IRMAA purposes. This surprises many retirees who assumed their municipal bond income would not count. It does. Medicare's definition of income is intentionally broad.
What counts and what doesn't
Not all income is treated equally under IRMAA. Here is a breakdown of common income sources and how they affect your MAGI.
Wages and Salary COUNTS
If you are still working, all earned income counts toward your MAGI. This includes W-2 wages, self-employment income, and consulting fees.
Traditional IRA and 401(k) Distributions COUNTS
All distributions from pre-tax retirement accounts are fully taxable and count toward MAGI. This includes Required Minimum Distributions (RMDs) starting at age 73.
Capital Gains COUNTS
Both short-term and long-term capital gains from selling stocks, real estate, or other assets count toward MAGI. Even a one-time asset sale can spike your MAGI for that year. The gain portion of selling a home above the exclusion also counts.
Municipal Bond Interest COUNTS ⚠️
Even though muni bond interest is exempt from federal income tax, it is added back into MAGI for IRMAA calculations. Many retirees do not discover this until they receive their first IRMAA determination notice. The assumption that "tax-free" means IRMAA-free is one of the most common and costly misconceptions in retirement income planning.
Roth Conversions COUNTS in conversion year
The amount you convert from a traditional IRA to a Roth IRA is taxable income in the year of conversion and counts toward MAGI. Conversions done in year X affect your IRMAA in year X+2, because IRMAA uses a two-year lookback period.
Social Security Benefits (taxable portion) COUNTS
Up to 85% of your Social Security benefits may be taxable depending on your total income. The taxable portion counts toward MAGI. The non-taxable portion of Social Security is not added back for IRMAA purposes; only tax-exempt interest income is subject to the add-back.
Pension and Annuity Income: Qualified COUNTS
Pension distributions and annuity payments from qualified plans, those funded with pre-tax dollars such as distributions from a traditional IRA annuity or a 401(k) annuity, are fully taxable and count toward MAGI in full.
Rental Income and Business Income COUNTS
Net rental income and net business income both count toward your AGI and, by extension, your MAGI. This includes income from real estate holdings, partnerships, S corporations, and self-employment activities.
Roth IRA and Roth 401(k) Qualified Distributions DOES NOT COUNT
Qualified withdrawals from Roth IRA and Roth 401(k) accounts are completely tax-free and do not appear in your MAGI. This is one of the most powerful IRMAA planning tools for retirees. Roth distributions are entirely excluded from gross income, which is why Roth conversions done years before Medicare enrollment can dramatically reduce long-term IRMAA exposure.
HSA Qualified Distributions DOES NOT COUNT
Distributions from a Health Savings Account used for qualified medical expenses are tax-free and do not count toward MAGI. HSA distributions for non-medical purposes after age 65 are treated as ordinary income and do count. A related vehicle worth knowing: 401(h) plans are employer-sponsored retiree medical accounts most commonly available to public-sector and union employees. They also provide tax-free, MAGI-neutral distributions when used for qualified medical expenses.
Qualified Charitable Distributions (QCDs) DOES NOT COUNT
Direct IRA-to-charity transfers for those age 70½ or older are excluded from taxable income entirely and therefore reduce MAGI. The 2026 QCD limit is $108,000 per person. QCDs can also satisfy Required Minimum Distributions without adding to your MAGI, making them one of the highest-impact tools available to retirees in the RMD phase.
Non-Qualified Annuity: Return of Principal DOES NOT COUNT
Non-qualified annuities, those purchased with after-tax dollars, pay out as a combination of taxable gain and tax-free return of principal. Only the gain portion counts toward MAGI. The return-of-principal portion is excluded. The ratio is determined by the exclusion ratio established at annuitization, providing a predictable stream of partially MAGI-neutral income in retirement.
Loans Including Reverse Mortgage Proceeds DOES NOT COUNT
Money received as a loan is not income and does not count toward MAGI. This includes home equity loans, lines of credit, policy loans from non-MEC life insurance, and proceeds from a reverse mortgage (Home Equity Conversion Mortgage, or HECM). Reverse mortgage proceeds are explicitly classified as loan advances, not income, and are therefore excluded from gross income and MAGI entirely, regardless of the amount received.
Return of Principal (Asset Sales at or Below Cost Basis) DOES NOT COUNT
Selling an asset for exactly what you paid, or less, produces no capital gain, and therefore no MAGI impact. Only the gain portion of an asset sale counts toward MAGI. This is why understanding your cost basis matters before triggering a sale in retirement.
Life Insurance Death Benefits and Inheritances DOES NOT COUNT
Life insurance death benefits received as a beneficiary are excluded from gross income and do not count toward MAGI. Similarly, cash or assets received as an inheritance are not income to the recipient and do not affect MAGI. Note that any subsequent gains on inherited assets, such as capital gains from selling inherited stock, do count toward MAGI when realized.
Veterans Benefits and Workers' Compensation DOES NOT COUNT
VA benefits and workers' compensation payments are excluded from gross income and do not count toward MAGI. Gifts received by the recipient are also excluded and do not affect MAGI.
⚠️ The Municipal Bond Trap
This is one of the most common surprises in Medicare planning. Retirees holding municipal bonds assume that because the interest is "tax-free," it won't affect their Medicare premiums. It will. Tax-exempt interest is specifically added back into your income for IRMAA purposes under federal law. A retiree receiving $40,000 a year in muni bond income may have no federal income tax liability on that income, but every dollar of it is still counted in their IRMAA MAGI calculation. This should be proactively flagged in any retirement income review that includes muni bonds.
How MAGI adds up for a retired couple
Example: MAGI Calculation, Married Filing Jointly
This example is illustrative only. Not financial advice. At $222,000 (joint filers), this MAGI falls in the first IRMAA tier for 2026, resulting in a Part B premium of $284.10 per person per month rather than the standard $202.90. Without the $15,000 QCD and $50,000 in Roth distributions, this couple's MAGI would have been $65,000 higher at $287,000, pushing them into the second tier at $405.80 per person per month.
The lookback makes planning urgent
IRMAA is not based on your current year income. It is based on your MAGI from two years prior. Your 2026 Medicare premiums are determined by your 2024 tax return. This means the window to act is earlier than most people realize, and once a high-income year is on your tax return, the only way to undo its IRMAA impact is to file a successful appeal with SSA using Form SSA-44, and only then if a qualifying life event applies.
The most effective MAGI management happens in the years before and during Medicare enrollment. For most people, the planning window starts at age 60 to 63, before Medicare begins at 65, and while there is still time to execute Roth conversions, optimize withdrawal sequencing, and review the composition of investment accounts.