Yes — the taxable part of an annuity payment counts toward IRMAA, the income-related surcharge on your Medicare Part B and Part D premiums. The part of a payment that is a return of your own after-tax principal does not count, because it never lands on your tax return as income in the first place.
That distinction is the whole subject. Two people can each receive $40,000 a year from an annuity and have completely different Medicare premiums, because one of them is reporting $40,000 of income and the other is reporting $9,000.
What IRMAA is looking at
IRMAA is set from your modified adjusted gross income — adjusted gross income plus tax-exempt interest — on your tax return from two years prior. Your 2026 premiums come off your 2024 return (SSA.gov). For 2026 the surcharge generally begins above $109,000 of MAGI for an individual filer, doubled for joint filers, and it applies to both Part B and Part D.
That is on top of the standard 2026 Part B premium of $202.90 a month (CMS.gov). The IRMAA calculator will show you which bracket a given MAGI lands in, and our IRMAA guide walks through the mechanics.
The key structural fact: IRMAA is a cliff, not a ramp. One dollar over a threshold moves your entire premium into the next tier for the whole year. Income that arrives in a lump is therefore much more expensive than the same income spread thin.
Which part of an annuity payment is income
There is no single answer, and the difference is worth real money.
| How the contract is funded and paid | What counts toward MAGI |
|---|---|
| Qualified — funded with IRA, 401(k) or other pre-tax money | Generally the entire payment |
| Non-qualified, annuitized — after-tax money, converted to a payment stream | Only the earnings portion; the rest is a tax-free return of your cost |
| Non-qualified, withdrawal before the annuity starting date | Earnings first — the taxable part comes out ahead of your principal |
| Any contract, after your cost is fully recovered | The entire payment |
The IRS states the general rule plainly: you owe no tax on the part of a payment that represents a return of the after-tax amount you paid, and payments are fully taxable when you have no investment in the contract (IRS Topic no. 410). Once a non-qualified annuity has been annuitized, part of each payment is excluded as a recovery of your cost, that tax-free amount is fixed when the annuity starts, and “after that, your annuity payments are generally fully taxable” (IRS Publication 575).
Two mechanics catch people:
Earnings come out first. Take a withdrawal from a non-qualified deferred annuity before you have annuitized it and the amount “is allocated first to earnings (the taxable part) and then to your cost (the tax-free part)” (Publication 575). A $50,000 withdrawal from a contract sitting on $60,000 of gain is $50,000 of income, not a proportional slice.
The exclusion runs out. The tax-free portion of an annuitized payment stops once you have recovered your entire cost. Live long enough — which is the point of the product — and a payment that was partly tax-free for years becomes fully taxable, and starts counting toward IRMAA in full. Which method figures your exclusion depends on the plan: non-qualified annuities use the general rule, qualified plans generally use the simplified method (IRS Topic no. 411).
The two-year lookback is what actually stings
Because Social Security looks back two years, the bill arrives long after the decision. Cash out a non-qualified annuity in 2024 to help a child with a down payment and the surcharge shows up on your 2026 premium, in a year when your income is ordinary again and the money is gone.
It hits both parts. IRMAA is added to Part B and to Part D, so a single year of elevated income raises two premiums at once for twelve months. If you want to see what that does to a full year of costs, the annual Medicare cost estimator totals it alongside your premiums and deductibles.
Can you appeal it? The honest answer
Sometimes — but usually not on the grounds people expect.
Social Security will reconsider using current-year income after a life-changing event, filed on form SSA-44 (SSA.gov). There are eight: death of a spouse, marriage, divorce or annulment, work reduction, work stoppage, loss of income-producing property, loss of an employer pension, and receipt of a settlement payment from a current or former employer.
Social Security’s own manual is blunt about the limits: “Our list of LCEs for IRMAA purposes is exclusive. Beneficiaries may experience losses of MAGI or income that are not LCEs.” It then names one-time income events that specifically do not qualify — capital gains from the sale of property, lottery and casino winnings, conversion of an IRA, and cashing bonds (POMS HI 01120.005).
A large annuity withdrawal is not on the qualifying list either. “I took the money once and my income is back to normal” is not a life-changing event; it is simply what IRMAA is designed to capture. The appeal works when a qualifying event happened — you stopped working, your spouse died — and it is under-filed by the people who genuinely have one.
The same $40,000, two different premiums
The abstract rule is easier to see as two households. Both receive $40,000 a year from an annuity. Both are individual filers with $70,000 of other income.
| Household A | Household B | |
|---|---|---|
| Contract type | Qualified — funded from a rollover IRA | Non-qualified, annuitised, cost basis not yet recovered |
| Annuity payment | $40,000 | $40,000 |
| Taxable portion | $40,000 | $9,000 |
| Other income | $70,000 | $70,000 |
| MAGI | $110,000 | $79,000 |
| Above the 2026 IRMAA threshold? | Yes — over $109,000 | No |
Identical cash in the bank. One of them pays an IRMAA surcharge on both Part B and Part D for twelve months and the other does not, because of how the contract was funded a decade earlier.
That is not a loophole to chase after the fact. It is a reason to know the tax character of every income source before you need the money.
A Florida wrinkle worth naming
Florida has no state income tax, which means annuity income — qualified or not — is not taxed again at state level here. That is a genuine advantage of retiring in Tampa rather than in a taxing state, and it is one reason so many people do.
It does nothing for IRMAA.
IRMAA is federal, and it reads federal modified adjusted gross income. A Florida retiree and a New Jersey retiree with identical returns pay identical Medicare surcharges. The Florida saving is real, but it shows up on your 1040 and not on your Part B premium — and people who have moved here specifically for the tax treatment are often the most surprised by the Medicare bill, because they have come to expect income to be cheaper than it was.
The practical consequence: no-state-income-tax makes it cheaper to recognise income in a given year, which quietly encourages larger lump distributions. Larger lumps are precisely what IRMAA punishes. The two effects pull in opposite directions and should be planned together.
Four questions to ask before a distribution
Everything above becomes actionable at exactly one moment: before you take money out. These are the questions worth answering first, and they take one phone call to the carrier and one to your tax preparer.
- What is my cost basis in this contract, and how much of it have I recovered? This is the difference between a distribution that is mostly income and one that is mostly your own money coming back.
- Is this contract qualified or non-qualified? If it was funded from an IRA or 401(k), the whole payment counts and there is no basis question to ask.
- What will my MAGI be this year including this distribution — and which side of the threshold does it land on? The IRMAA calculator answers this in about a minute.
- Could this be split across two tax years? Because IRMAA is a cliff rather than a ramp, half now and half in January is sometimes the entire difference between a surcharge and no surcharge — for the same money, two weeks apart.
What this changes about how you take income
None of this makes annuity income bad. It makes the shape and timing of it worth planning, and that planning happens years before the premium notice.
A few things follow from the rules above rather than from anyone’s opinion:
- The year you turn 63 is the first year that sets a Medicare premium. With a two-year lookback and Medicare at 65, income recognized at 63 shows up on your first Part B bill. That is often the exact window in which people are selling a business, converting an IRA, or cleaning up old contracts.
- Annuitizing spreads income; lump withdrawals concentrate it. Same contract, same money, very different MAGI in any single year — and IRMAA only cares about single years.
- Non-qualified money is not all the same money. Your cost basis is genuinely tax-free coming back to you. Knowing the split before you take a distribution is the difference between a planned tax year and a surprise.
- One tier is not forever. IRMAA is redetermined annually, so a single elevated year raises premiums for one year, not for life.
Your tax preparer, not your insurance agent, should confirm the exclusion ratio and taxable amount on a specific contract — that is genuinely their work, and the 1099-R will tell the story. What an agent can do is make sure the income design and the Medicare timeline are looking at each other before either one is locked in.
For the broader picture of what a Medicare year costs once premiums, deductibles and the drug cap are added up, see how much Medicare costs per year in 2026.
If you are deciding how and when to turn retirement savings into income and want the Medicare consequences mapped alongside it, schedule a call. There is nothing to buy on the first conversation.