What is MAGI retirement income & how does it affect you?

As you enter your retirement years, your finances change. The bulk of your income isn't coming from a paycheck—it may include Social Security, investment returns, retirement account withdrawals, pensions, annuities or even your checking/savings accounts.

Your modified adjusted gross income (MAGI) changes with your income, and it can have a big impact on your finances. This includes the tax deductions and credits you claim, whether you pay net investment income tax and how much you pay for Medicare. It doesn't have to be daunting, though. Learning about MAGI empowers you to manage your life savings in a tax-efficient way.

Your modified adjusted gross income (MAGI) is essentially the adjusted gross income (AGI) from your federal income tax return with certain deductions and exclusions added back in.

It might sound like just another acronym in the tax code, but MAGI is important for retirees. It determines your eligibility for various benefits and retirement account contributions. Plus, knowing how it affects your retirement options helps you make smarter decisions to maximize your savings and retirement income.

The tax code has multiple ways of calculating MAGI depending on the tax benefit in question—deducting for traditional IRA contributions, determining eligibility for a Roth IRA, taking the premium tax credit—but each has some common threads. Every formula starts with your AGI and then adds back certain deductions or previously excluded income categories.

You start with your AGI, then add back deductions, excluded income, excluded benefits, or losses such as:

• Deductions for traditional IRA contributions
• Deductions for self-employment retirement contributions plus half of any self-employment tax paid
• Deductions for student loan interest paid
• Deductions for health savings accounts
• Any foreign earned income and housing exclusions and foreign housing deductions
• Excluded savings bond interest income
• Passive income or loss, including from rentals

Once you have your MAGI number, here are the MAGI limits for Roth IRA contributions for the 2024 tax year:

When you begin withdrawing from retirement accounts like IRAs or 401(k)s, these distributions affect your MAGI and influence your overall tax situation. Withdrawals from traditional IRAs, 401(k)s, 403(b)s and 457(b)s are taxable income, so they increase your AGI and therefore your MAGI.

A higher MAGI can limit your ability to contribute to tax-advantaged accounts like Roth IRAs, claim deductions for traditional IRA contributions or reduce other tax deductions and credits.

However, Roth distributions are generally tax-free and don't increase your MAGI. This potentially allows you to take advantage of tax-efficient withdrawal strategies, such as:

• Roth IRA conversions. Converting a traditional IRA to a Roth IRA in lower-income years can reduce future taxable income and limit its impact on MAGI.
• Strategic withdrawals. Take more taxable distributions in years when your income is lower to avoid higher tax brackets.
• Diversified income sources. Use a combination of taxable, tax-deferred and tax-free accounts to manage your MAGI and minimize taxes.

The taxability of Social Security benefits isn't based directly on your MAGI. Instead, the Social Security Administration (SSA) uses a similar figure called your combined income.

Combined income is your AGI plus non-taxable interest, plus half of your Social Security benefits. If your combined income exceeds certain thresholds, a portion of your Social Security benefits is taxable.

Here's a quick breakdown of the income thresholds:

To minimize the impact of income on your Social Security benefits:

• Manage retirement account withdrawals. Be strategic about when and how you take distributions from your retirement accounts. By controlling the timing and amount of your withdrawals, you may be able to manage your combined income and stay below the highest thresholds.
• Consider Roth conversions. Since qualified Roth IRA withdrawals don't count toward your AGI, converting to a Roth IRA in lower-income years can help reduce future combined income and limit the taxability of Social Security benefits.
  

Nearing retirement age?

Our taxes in retirement guide provides tax-efficient strategies to help you manage your savings.
See tax-efficient retirement guide

Your MAGI also plays a role in determining your Medicare Part B and D premiums. A higher MAGI triggers the Income-Related Monthly Adjustment Amount (IRMAA), which is an additional surcharge on top of the Medicare Part B (medical coverage) and Part D (prescription drug coverage) baseline premiums.

The U.S. government bases your Medicare premiums and surcharges on your filing status and MAGI with a two-year look-back period. That means your 2024 premiums and IRMAA surcharge are based on MAGI from your 2022 federal income tax return.

For these purposes, your MAGI is the AGI shown on your return plus any tax-exempt income.

The table below shows the base premiums and IRMAA surcharges you'll pay for Medicare in 2024:

Having to pay more for Medicare can surprise some retirees, but careful planning helps manage your MAGI to avoid sudden cost increases.

• Monitor your MAGI carefully. Since IRMAA is based on MAGI from two years prior, keep an eye on your income, especially if you plan to take large withdrawals from retirement accounts.
• Consider Roth conversions. Similar to the strategy for minimizing Social Security taxes, converting to a Roth IRA before retirement or during lower-income years can help reduce future taxable income and manage your MAGI.
• Spread out withdrawals. Instead of taking large lump-sum withdrawals that can spike your MAGI, spread them out over several years to stay below critical IRMAA thresholds.
• Consider charitable contributions. Use qualified charitable distributions (QCDs) from your IRA to fulfill your charitable giving goals. QCDs satisfy your required minimum distributions but aren't included in your MAGI.

By paying attention to your MAGI and adopting tax-efficient strategies, you can avoid unexpected increases in your Medicare premiums and maintain control over your health care costs in retirement.

You also have other options to manage your MAGI and navigate retirement more tax-efficiently.

Certain losses, tax breaks and adjustments to income (also known as above-the-line deductions) can reduce your AGI, lowering your MAGI. Just keep in mind that some MAGI calculations require you to add certain deductions back to your AGI.

Some examples include:

• Foreign income exclusion. If you earn income abroad, you may qualify for the foreign earned income exclusion, which can reduce your taxable income and MAGI.
• Rental losses. If you own rental property and experience losses, you may be able to use these losses to offset other income, lowering your MAGI.
• Tax-advantaged retirement accounts. Contributing to traditional IRAs, 401(k)s and other tax-deferred retirement accounts may help lower your taxable income. Roth IRA contributions won't reduce your MAGI immediately, but they benefit you in retirement by providing tax-free income that doesn't increase your MAGI.
• Health savings accounts. If you have a high-deductible health plan (HDHP), you can save for future health care expenses with a health savings account (HSA). Contributions to an HSA lower your AGI.
• 529 plans. Investing in a 529 college savings plan can lower your MAGI. While contributions aren't deductible, you don't pay taxes on investment earnings, and withdrawals are tax-free as long as you use them for qualified education expenses.
• Self-employed health insurance. If you're self-employed, you can deduct the premiums you pay for medical, dental, vision and long-term care coverage for you, your spouse and dependents.
• Municipal bonds. Municipal bonds are bonds issued by entities like a state, county, municipality or other entity to raise money for things like building schools and public works. Municipal bond interest is generally tax-free at the federal level, so income from muni bonds may not count toward your AGI or MAGI in some cases.
• Capital losses. If you have investments that have declined in value, you can sell them at a loss to offset capital gains from other investments. If capital losses exceed capital gains, you can use excess losses to offset up to $3,000 of ordinary income each year. This strategy, known as tax-loss harvesting, reduces your taxable income and MAGI.

Designing a tax-efficient retirement strategy benefits from expert guidance. Before you take steps to lower your MAGI, connect with a local Thrivent financial advisor. Our advisors have the knowledge and experience to provide personalized advice to help current and future retirees maximize retirement income and plan for the future.