Key Takeaways
- A poster in Reddit’s r/personalfinance says their in-laws are in their mid-70s and want to move $500,000 of a roughly $800,000 IRA into an annuity.
- If the $500,000 comes out of the IRA to buy the annuity, all of it is taxed as income that year: just over $101,500 in federal tax, even if it’s their only income.
- The withdrawal also puts them past Medicare’s $410,000 income line for joint filers. At this year’s rates, that adds $446.30 a month to each of their Part B premiums two years later.
- If they buy the annuity inside the IRA, with the money moved directly from one IRA to another, the $500,000 stays off their tax return and their premiums don’t change.
It’s easy to think of an annuity as an investment decision and nothing more. But a retiree on Medicare who pulls money out of an IRA to buy one can end up paying hundreds of dollars a month more for Part B two years later.
Medicare open enrollment runs through Dec. 7, so plenty of retirees are looking hard at what their coverage costs. Few of them would think to look at their IRA. One Reddit poster’s in-laws show why they should.
Their in-laws want a safety net
A poster in Reddit’s r/personalfinance forum says their in-laws are in their mid-70s and have roughly $800,000 in an IRA. They want to put $500,000 of it in an annuity “to protect it from potential market crash and total loss of their retirement.” The poster and their spouse are uneasy about it. The in-laws’ health isn’t great, so they may never get the full amount back, and the couple would rather see the money in a high-yield savings account or Treasury bonds.
That’s a fair debate to have. But the post doesn’t say whether the $500,000 would come out of the IRA to buy the annuity. If it does, the in-laws could owe well over $100,000 between tax and Medicare. So let’s say it’s a traditional IRA, they file a joint return, both are on Medicare Part B, and the $500,000 comes out this year to buy an annuity outside the IRA.
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Part B costs more after a big year
Medicare charges higher earners a monthly surcharge on top of the standard Part B premium. The surcharge comes in bands set by the income on their tax return from two years before. So Medicare would use this year’s return, withdrawal and all, to set the in-laws’ premiums for 2028. And since withdrawals from a traditional IRA are taxed as ordinary income, every dollar of the $500,000 goes on that return.
For a couple filing jointly, the 2026 surcharge is $446.30 a month each on income above $410,000 and below $750,000. At $750,000 or more, it’s $487. Their Part D drug coverage has its own surcharge on top.
Cashed out, the $500,000 clears the line on its own
Even if the withdrawal were the only income on their return, it would put the in-laws $90,000 past the $410,000 line. The standard deduction doesn’t lower the income Medicare counts. As long as the rest of their income stays under $250,000, they’d land in the $446.30 band. At this year’s rates, that comes to about $10,700 a year in surcharges for the two of them. Since each year’s premium is set from a single year’s return, it’s a one-year hit, as long as their income drops back the year after.
The tax bill comes on top of that. They get the $32,200 standard deduction plus an extra $1,650 each for being over 65, which leaves $464,500 of the withdrawal taxable. Here’s how 2026’s brackets for joint filers tax it:
- 10% on the first $24,800: $2,480
- 12% on the next $76,000: $9,120
- 22% on the next $110,600: $24,332
- 24% on the next $192,150: $46,116
- 32% on the last $60,950: $19,504
That’s just over $101,500 of federal income tax on the withdrawal. Any other taxable income they have is taxed at 32% or more on top of that. Which is a lot to pay for protection from a market crash.
Fortunately, they can buy the annuity inside the IRA
The IRS lets anyone open an individual retirement annuity by buying an annuity contract from a life insurance company, according to its Publication 590-A. A trustee-to-trustee transfer moves money from one IRA to another without tax. Bought that way, the $500,000 never lands on this year’s return. The in-laws owe tax only as the annuity pays them, and their Medicare premiums stay where they are.
The same choice comes up with the poster’s own idea. Treasury bonds bought inside the IRA leave the money where it is. Moving it to a savings account outside the IRA is the same $500,000 withdrawal. And if the in-laws do want some of the money out, spreading it over more than one tax year would keep each year’s income lower, and their surcharge band with it.
Keep the $500,000 in the IRA, whatever they buy
Whether an annuity is right for them is a family call, and the poster’s worry about getting the principal back is a fair one to raise. But whatever the in-laws buy, I’d make sure the $500,000 never leaves the IRA to pay for it. Cashing it out would cost them over $100,000 in federal tax plus about $10,700 in Medicare surcharges, for protection they can get without paying either.
And if any of it does come out, the timing matters. A withdrawal by Dec. 31 goes on 2026’s return and sets their 2028 premiums, at rates nobody knows yet. CMS is due to publish 2027’s Part B premium and surcharge bands later this month (last year, it put out this year’s on Nov. 14), so those should show us which way 2028’s are headed.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
