Grand Junction · IRMAA and annuity income

Does Annuity Income Count Toward IRMAA for Medicare in 2026?

A Mesa County reader wrote in with a 1099-R and a worry: the annuity she bought years ago started paying this year, her neighbor said it would push her Medicare premium up, and the agent who sold it never mentioned Medicare at all. The answer depends on one line of the tax return, not on the word "annuity." Here is which annuity money counts, which does not, why the same contract can count 100% or a third depending on how you take the money, and where the 2026 and 2027 lines sit.

Medicare On Main Data Desk

Published October 2, 2026 · 10 min read · Reviewed by Brian Penner, 22+ years in Medicare

Start where Social Security starts. The regulation that runs IRMAA, 20 CFR § 418.1010(b)(6), says modified adjusted gross income "is your adjusted gross income as defined by the Internal Revenue Code, plus the following forms of tax-exempt income: (i) Tax-exempt interest income; (ii) Income from United States savings bonds used to pay higher education tuition and fees; (iii) Foreign earned income; (iv) Income derived from sources within Guam, American Samoa, or the Northern Mariana Islands; and (v) Income from sources within Puerto Rico." The statute behind it, 42 U.S.C. § 1395r(i)(4), says the same thing in fewer words. Annuities appear in neither. That means there is no special Medicare rule for annuity income at all: it counts toward IRMAA to exactly the extent it is already inside adjusted gross income, and not a dollar more.

So the real question is a tax question: how much of an annuity payment is taxable? IRS Publication 575 gives the mechanics and the geography. Pension and annuity payments go on Form 1040 "lines 5a and 5b": 5a is the gross amount the insurer or plan paid you, 5b is the taxable amount, and only 5b flows down to adjusted gross income. The gap between the two lines is the return of your own after-tax cost, which the publication calls your "investment in the contract," and that gap is the whole story for Medicare. An annuity with no after-tax cost has no gap. An annuity bought with money you already paid tax on has a gap, and how big the gap is in any given year depends on how you take the money out.

Eight kinds of annuity money and what Medicare counts

Sources: IRS Topic 410; IRS Publication 575; IRS Publication 939; 26 U.S.C. § 72; Instructions for Form 1099-R; IRS Publication 590-B. Federal income tax only; Colorado's treatment of retirement income does not change what Medicare counts.

The first two rows are the ones most Mesa County retirees actually have, and they are the simple case. A pension from the school district, the county or a private employer, or an annuity that was bought inside an IRA or 401(k) with money that was never taxed, has no investment in the contract. Topic 410 is blunt about it: the payments "are fully taxable if you have no investment in the contract (sometimes referred to as 'cost' or 'basis')." Line 5a equals line 5b, and every dollar counts toward IRMAA the same way a required minimum distribution does, which our RMD post covers. If that is your situation, you can stop here: the annuity counts in full, two years later, and the only question is whether it is the dollar that crosses a line.

The exclusion ratio: why a non-qualified annuity counts less

The interesting case is a commercial annuity bought with after-tax money, outside any retirement account, and then turned into a stream of payments. Those payments are taxed under what the IRS calls the General Rule, and Publication 939 says you must use it for "a purchased commercial annuity." The rule is one sentence: "the tax-free part of each annuity payment is based on the ratio of your investment in the contract to the total expected return." The statute, 26 U.S.C. § 72(b)(1), excludes from gross income the part of each payment "which bears the same ratio to such amount as the investment in the contract ... bears to the expected return under the contract." Investment is what you paid in. Expected return is the annual payment multiplied by an IRS life-expectancy factor fixed on the day payments start.

Publication 939 works its own example, and we will borrow it. "You bought an annuity contract that will give you an annuity of $500 a month for life. If at the annuity starting date, your nearest birthday is 66," the annual payment of $6,000 is multiplied by the Table V factor of 19.2 for an expected return of $115,200. The publication stops there, so add one number of our own: suppose the contract cost $80,000. The exclusion percentage is $80,000 ÷ $115,200, or 69.4%. Of each year's $6,000, about $4,167 is a tax-free return of cost and about $1,833 is ordinary income on line 5b. For Medicare, that annuity adds $1,833 to MAGI, not $6,000. The cost basis here is illustrative; your contract's numbers come from the insurer's statement and the tables in Pub 939, and your tax advisor should run them.

Two edges on that rule. First, the exclusion is "limited to investment": § 72(b)(2) says the tax-free part "shall not exceed the unrecovered investment in the contract," and Pub 939 adds that for annuities starting after 1986 "the total amount of annuity income that is tax free over the years can't exceed your net cost." Outlive the table and every payment after your cost is recovered is 100% taxable, and 100% counted. Second, an annuity from an employer plan with some after-tax contributions uses a cousin of this rule, the Simplified Method, which Pub 575 requires for qualified-plan annuities starting after November 18, 1996; the logic is the same, a fixed tax-free slice of each payment until cost is recovered.

Withdrawals and surrenders: the order flips

The exclusion ratio only applies to money "received as an annuity," meaning a stream of payments after the contract's annuity starting date. Most deferred annuities never get there. People take a withdrawal when they need cash, or surrender the contract outright, and for those the tax code uses the opposite order. Publication 575: "If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer." The statute is § 72(e)(2)(B) and (e)(3)(A): the amount is income "to the extent that such amount does not exceed the excess" of the cash value over the investment in the contract.

Pub 575's example makes it concrete: a $7,000 withdrawal from a contract with a $16,000 cash value and a $10,000 investment is $6,000 of income, "the smaller of" the distribution or the gain. In plain terms, every dollar of gain comes out first, taxed as ordinary income, before you touch a dollar of your own money. For Medicare that is the worst possible order, because the earnings that the exclusion ratio would have spread over twenty years arrive on one or two returns instead. A full surrender is the extreme case: cash value minus investment, the entire gain, on the surrender year's line 5b. Below 59½, § 72(q) adds a 10% penalty on the taxable part, though that is rarely the Medicare reader's problem.

What never counts is a section 1035 exchange, moving one annuity contract into another: "No gain or loss is recognized on an exchange of an annuity contract for another annuity contract if the insured or annuitant remains the same," and the 1099-R instructions tell the insurer to "Enter -0- (zero) in box 2a" for a nontaxable 1035 exchange. The form arrives in your mailbox, which frightens people, but box 2a is where IRMAA looks and it says zero. Cashing out and buying a new contract with the check is not an exchange.

A Mesa County couple and one contract, three ways

Take a Grand Junction couple with $200,000 of modified adjusted gross income in 2026: two Social Security checks, a pension, required distributions from an IRA. They are $18,000 under the $218,000 joint line. Years ago they put $100,000 of after-tax savings into a deferred annuity, and it is now worth $150,000, so the contract holds $50,000 of untaxed gain. They want some of it for a new roof and a long trip. The three ways to get it produce three different Medicare bills in 2028, because 20 CFR § 418.1135 sets that year's premium from "the tax year 2 years prior."

• Surrender it. Line 5b shows $50,000. MAGI is $250,000, which is over $218,000, into the first tier: $81.20 a month on Part B and $14.50 on Part D, per person, so $95.70 each and $2,296.80 for the household in 2028, on top of the ordinary income tax on the gain. It is also exactly at the $250,000 line where Topic 559's 3.8% net investment income tax begins, and Pub 575 confirms non-qualified annuity income counts for that tax too.
• Withdraw $40,000. Earnings come out first and the contract has $50,000 of them, so all $40,000 is taxable. MAGI is $240,000: still over the line, still $2,296.80. Splitting it into two $20,000 withdrawals in December and January puts each year at $220,000, which is still $2,000 over. The split only works if the other income leaves room; here it does not.
• Annuitize it. Turn the $150,000 into lifetime payments and the exclusion ratio spreads the $50,000 of gain across the expected-return period, so each year's line 5b carries only that year's slice of earnings. On Pub 939's arithmetic the taxable share of a payment is the gain divided by the expected return, a fraction of each check rather than the whole gain in one year. Whether the resulting annual income keeps them under $218,000 depends on the contract's payout and their other income, and the trade is a permanent one: the lump sum is gone. That is a decision for a licensed professional and their tax advisor. The Medicare side of it is simply that the annuitized route adds the least to any single year's MAGI of the three.

Notice what the example does not say. It does not say annuities are bad for Medicare, or good. The same $50,000 of gain is going to be taxed either way; the only question IRMAA asks is how much of it lands in one year, and the answer to that is in the owner's hands until the 1099-R is issued. It is also why the right time to think about this is the year before the money is needed, not April.

Two more places annuity income shows up

Your Social Security check. Taxable annuity income also raises the share of your Social Security benefit that is taxable, because that share is set by a provisional-income formula that counts other income. More taxable annuity income can mean more taxable Social Security, and both land in adjusted gross income. A $1,833 slice of annuity earnings can therefore move MAGI by somewhat more than $1,833. We wrote the Social Security side up separately in this post; the mechanics are the same in Colorado.

The 2027 line. The 2026 tiers come from the CMS fact sheet of November 14, 2025: no surcharge at or under $109,000 single and $218,000 joint, then $81.20, $202.90, $324.60, $446.30 and $487.00 a month on Part B, with Part D amounts of $14.50, $37.50, $60.40, $83.30 and $91.00. CMS has not announced the 2027 table, but the Medicare & You 2027 handbook, page 86, already prints the first 2027 threshold: "in 2027 it's $111,000 if you file individually or $222,000 if you're married and file jointly." That is the line your 2025 return is being read against right now, and the line a 2026 surrender is measured against when 2028 premiums are set is likely to be higher again, but the dollar amounts above the line are what move, and $2,296.80 is the 2026 price of the first tier for two people.

No appeal for a choice you made

Form SSA-44 lowers an IRMAA only after a major life-changing event, and 20 CFR § 418.1205 lists seven: a spouse's death, marriage, divorce or annulment, stopping or reducing work, loss of income-producing property not "at the direction of you or your spouse," an employer settlement, and, the one that matters here, "(f) You or your spouse experiences a scheduled cessation, termination, or reorganization of an employer's pension plan." A pension that stops paying is an event Social Security will act on. Starting an annuity, surrendering one, or taking a withdrawal is not, and § 418.1210 closes the door: "We will not consider events other than those described in § 418.1205 to be major life-changing events." The same logic governs Roth conversions and stock sales. If the income was your decision, the surcharge stands for the one year it applies, and then it falls away when the next return is read.

What I would do

Pull the contract's statement and find two numbers: what you paid in, and what it is worth today. The difference is the gain, and the gain is the only part Medicare will ever see. Then pull last year's return, read line 11, and lay it against $218,000 joint or $109,000 single for the current year and $222,000 or $111,000 for next. If the gain fits under the line in one year, a withdrawal or surrender costs you nothing on the Medicare side. If it does not, ask your tax advisor and the licensed professional who handles the contract what the annuitized route and a multi-year withdrawal schedule would each put on line 5b, and bring us the answers. And keep it in proportion: in a county where 26.6% of adults live with high blood pressure and 8.1% with diabetes, per CDC PLACES, the plan you choose during Open Enrollment, October 15 to December 7, moves your yearly costs more than a one-year tier does. Get the withdrawal sequenced, then get the plan right.

How we know all this: the Medicare On Main Data Desk frames every article with public data — here, 20 CFR § 418.1010 and 42 U.S.C. § 1395r(i)(4) for the definition of modified adjusted gross income, § 418.1135 for the two-year lookback, §§ 418.1205 and 418.1210 for what can and cannot be appealed, and 26 U.S.C. § 72 for the exclusion ratio and the earnings-first rule, all quoted as published on Cornell LII; IRS Publications 575, 939 and 590-B, Topics 410 and 559, and the Instructions for Form 1099-R; the CMS fact sheet of November 14, 2025 for the 2026 IRMAA tiers; the Medicare & You 2027 handbook for the 2027 first threshold; and CDC PLACES county data (2023). The cost basis in the Pub 939 example and the Mesa County example are illustrative and are not tax advice. Annuities are not Medicare products and Medicare On Main does not sell them; we quote no rates, returns or products, and nothing here recommends buying, keeping, annuitizing or surrendering any contract. Review any annuity decision with a licensed professional and your tax advisor, and confirm plans, costs and eligibility with a licensed agent or Medicare.gov. We take no payment from any carrier to feature a plan.