The Retirement ‘Rule of $1 More’
People don’t agree on much these days, except maybe this: a little extra money never hurts. Nearly 9 in 10 Americans say they’d stop to pick up money off the ground.
But what if that extra dollar came with some major strings attached?
That’s the conundrum many retirees or soon-to-be retirees face. Most think in terms of tax brackets. But the real trouble often lies in the thresholds, those hidden lines where one small financial move can quietly cost thousands.
Subscribe to Kiplinger’s Personal Finance
Be a smarter, better informed investor.
Save up to 74%
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more – straight to your e-mail.
Profit and prosper with the best of expert advice – straight to your e-mail.
Cross the wrong line by even a dollar, and you might trigger higher Medicare premiums, bump more of your Social Security into the taxable column, lose out on capital gains breaks, or get hit with penalties tied to your retirement accounts.
Call it the retirement rule of $1 more. It’s the idea that even a modest increase in income — say from a Roth conversion, part-time job or selling appreciated stock — can cause a cascade of unintended consequences, unless you have a thoughtful plan in place.
Here’s where experts say that extra dollar can do the most damage, plus how to stay ahead of it.
The rule of $1 more: falling off a Medicare cliff (IRMAA)
Even though most Americans are required to enroll in Medicare at age 65, confusion about the program runs deep. One survey found that half of Americans think it’s free. But like private insurance, Medicare comes with monthly premiums. For higher earners, these costs can rise sharply.
If your income exceeds certain thresholds, you may be hit with Medicare premium surcharges known as IRMAA (Income-Related Monthly Adjustment Amount). These aren’t gradual increases. They’re cliffs. Go even $1 over the limit, and both you and your spouse could end up paying hundreds more each month for Medicare Parts B and D.
IRMAA is based on your Modified Adjusted Gross Income (MAGI) from two years prior, explains Melissa Caro, CFP® and founder of My Retirement Network. In 2025, the first surcharge kicks in at $103,000 for single filers and $206,000 for married couples filing jointly.
“People don’t realize Roth conversions, RMDs, even part-time income, can all count,” Caro adds. That means a single unplanned transaction could raise your healthcare costs for an entire year.
Fortunately, there’s some relief if the income spike was tied to a major life change, like a job loss or the death of a spouse. “If your income is unusually high due to a qualifying event, you may be able to appeal the surcharge using SSA Form-44,” says Stephen Maggard, CFP® and financial advisor at Abacus Planning Group.
Stepping into the Social Security tax trap
For most retirees, Social Security is a major source of income, according to Gallup. But, depending on how much income you have from other sources, up to 85% of your benefit could be subject to federal tax.
It all hinges on a calculation called “provisional income,” which includes half of your Social Security benefits plus all other income. This includes IRA withdrawals, wages and even tax-exempt interest, Caro notes.
Once that number crosses $25,000 for single filers or $32,000 for married couples, the tax meter starts running. And if you go above $34,000 (single) or $44,000 (joint), up to 85% of your benefit becomes taxable.
“The formula hasn’t been updated in decades,” says Caro, “which means more people are hitting that threshold every year.”
Going from 0 to 20 in capital gains taxes
One of the more generous features of the tax code is the 0% long-term capital gains rate available to many retirees. But that window can slam shut quickly.
That’s because ordinary income, such as a large withdrawal from a 401(k) or traditional IRA, stacks below your capital gains. So even a modest bump in income can nudge you into a higher tax bracket, turning gains that would’ve been tax-free into gains taxed at 15% or even 20%.
In 2025, a married couple filing jointly can realize up to $96,700 in long-term capital gains and still pay 0% in federal tax, assuming little or no other income, explains Haggard. But, he adds, “This does not apply to state taxes, which can trip people up if they’re not careful.”
Again, add just $1 in ordinary income, and you risk sending part of those gains into a higher bracket. It’s why advisors emphasize that coordination with the rest of your retirement income is everything.
The taxman cometh for retirement withdrawals
Death and taxes. Two things you can’t avoid. And when it comes to your retirement accounts, the IRS makes sure you pay the latter long before the former.
Withdrawals from pre-tax accounts, such as traditional IRAs and 401(k)s, are taxed as ordinary income. Therefore, the amount withdrawn affects everything else, including your tax bracket, Medicare premiums, and how much of your Social Security is taxed, among other factors.
That’s why taxes are often a key part of a retiree’s withdrawal strategy, advisors say. Once required minimum distributions (RMDs) begin at age 73, they can easily push your income past multiple thresholds.
RMDs are based on your account balance and life expectancy. And while the age for starting them has been pushed back under the SECURE Act 2.0, this can result in even bigger balances — and potentially larger distributions — later on.
Other sneaky phaseouts and taxes
Even modest increases in income can quietly disqualify you from valuable tax breaks and credits like the Saver’s Credit or deductions for medical expenses and charitable contributions.
One big surprise? The loss of the ACA premium tax credit. If you get health insurance through the marketplace, your premium is based on income. Go above a certain threshold, and you’ll owe some or all of the subsidy back at tax time. “Not a fun surprise to have,” Haggard says.
He also points to the Net Investment Income Tax as another pitfall. Once a couple’s modified adjusted gross income exceeds $250,000, a 3.8% surtax kicks in on investment income such as capital gains, dividends and interest.
How to plan around the ‘Rule of $1 More’
“Being strategic and actually doing the planning could save you six figures over the course of your retirement,” says Bill Shafransky, CFP® and senior wealth advisor at Moneco Advisors.
That can mean meeting with a tax professional or financial advisor once a year to review your goals, discuss strategies and make any appropriate adjustments.
For instance, Shafransky suggests using taxable accounts before tapping pre-tax ones early in retirement to take advantage of the lower, 0% capital gains rate.
Haggard highlights another key tactic: Roth conversions. Converting some of your pre-tax savings in lower-income years, before RMDs start, can reduce future tax burdens. “This would allow you to save money over the course of your retirement,” he says, “but it’s important to be mindful of year-end incomes relative to IRMAA limits.”
Don’t need your full RMDs? A qualified charitable distribution (QCD) lets you donate up to $100,000 directly from your IRA to a qualified nonprofit. The amount doesn’t count toward your income, but it still satisfies your RMD.
Asset location can also play a role. “Having a mix of tax-deferred, taxable and Roth accounts gives you flexibility,” says Caro. “You can pull from a Roth in high-income years to avoid crossing a costly threshold.”
She encourages retirees to “treat even modest earnings as part of a broader income plan.” Part-time work can be great for lifestyle or purpose, but if it’s not accounted for, it can throw off your tax strategy.
There’s at least one other thing Americans share: a dislike for taxes. The Tax Foundation found that as many people want tax reform as would gladly pocket an extra dollar.
But until Congress agrees, your best defense is a good plan.
You don’t want the tax tail to wag the dog. But in retirement, you also don’t want to step off a cliff just because of $1 more.
More Retirement Rules
Source link
:max_bytes(150000):strip_icc()/GettyImages-103576185-76c104f43c994e2e86c2cba7b6df2f7d.jpg?w=390&resize=390,220&ssl=1 "What You Should and Shouldn’t Do Right Now")
:max_bytes(150000):strip_icc()/GettyImages-2161897341-9a67d8a9dc524c2c80b257a40e29ab5b.jpg?w=390&resize=390,220&ssl=1 "Consumers Embrace Early School Shopping Amid Prime Day and Other Marquee Sales")
:max_bytes(150000):strip_icc()/GettyImages-2223600329-29ac9d990e2844d3948d424e1c19b052.jpg?w=390&resize=390,220&ssl=1 "Trump Signs ‘One Big Beautiful Bill’ Into Law")