How Annuities Play a Role in Medicare Planning
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July 30, 2025
When preparing for retirement, many people focus on Social Security, 401(k)s, and IRAs. There’s another financial tool that plays a growing role in the conversation: annuities. While annuities are not part of Medicare itself, they can have a direct impact on how you plan for and pay for your Medicare coverage, especially when it comes to premiums, out-of-pocket costs, and eligibility for programs.
Understanding how annuities interact with Medicare can help retirees make smarter financial decisions and avoid unexpected costs.
What Are Annuities?
An annuity is a financial product sold by insurance companies. It provides a stream of income, either for a set period or for life, in exchange for a lump sum or a series of payments. Annuities are often used to create a predictable source of income in retirement.
There are different types of annuities; fixed, variable, indexed, and immediate, each with its own rules and benefits. Some annuities allow your money to grow tax-deferred, while others are designed to start paying out income immediately.
What role do annuities play in retirement planning?
Think of it as a pension that provides you with a fixed amount of money for a certain period, such as 10, 20 years, or for life. These payments can be tax-free depending on the money in and distributions.Medicare Does Not Include Annuities, But They Still Matter
Medicare, the federal health insurance program for people 65 and older (and some younger individuals with disabilities), does not offer or manage annuities. However, the income you receive from annuities can directly affect your Medicare costs.
Most notably, annuity income can increase your Modified Adjusted Gross Income (MAGI), which the government uses to determine how much you’ll pay for Medicare Part B and Part D premiums.
How Annuity Income Affects Medicare Premiums
Medicare premiums aren’t the same for everyone. If your income is above a certain level, you’ll be required to pay more through something called the Income-Related Monthly Adjustment Amount (IRMAA).
Here’s how it works:
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The Social Security Administration looks at your tax return from two years prior to determine your current year’s Medicare premiums.
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If your MAGI is above $103,000 for individuals or $206,000 for couples filing jointly in 2025, you’ll pay a higher monthly premium for Medicare Part B (doctor visits, outpatient care) and Part D (prescription drugs).
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Annuity payouts, depending on the structure, may count as ordinary income and be included in your MAGI.
This means that a person receiving income from a non-qualified annuity could inadvertently cross into a higher IRMAA bracket and face additional Medicare costs. These extra costs can range from a few hundred to a few thousand dollars per year.
Using Annuities to Plan for Medicare Costs
Despite the potential downside of increasing your Medicare premiums, annuities can still serve as a valuable tool for covering healthcare expenses in retirement. Many retirees rely on the steady, predictable income from annuities to manage the recurring costs associated with Medicare. This includes monthly premiums for Part B and Part D, Medigap plan premiums, and regular out-of-pocket expenses like deductibles and copays.
For individuals who lack a pension or are concerned about market fluctuations affecting their retirement savings, annuities can provide peace of mind by ensuring that healthcare costs are met consistently. Some people also use this income to help pay for services not covered by Original Medicare, such as dental, vision, and hearing care.
To get the most benefit, it's important to carefully consider the timing and structure of annuity payouts. If payments begin during the period used to calculate IRMAA surcharges, they could push your income over the threshold and trigger higher premiums. Working with a financial advisor can help align your annuity strategy with your Medicare planning, potentially minimizing tax implications and avoiding unexpected costs.
Should You Use Annuities in Your Medicare Plan?
Whether annuities make sense in your Medicare planning depends on several personal factors:
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Your current and expected income levels
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Your health status and likelihood of needing long-term care
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Your tax situation
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Whether you plan to enroll in Medicaid later in life
For some, annuities offer peace of mind and predictable income that can comfortably cover Medicare-related expenses. For others, they may trigger unintended costs, particularly through higher premiums.
Balance is Key
Annuities can be a helpful financial tool in retirement, but only if used strategically. Their role in Medicare planning is mostly indirect but significant. While they don’t provide healthcare coverage themselves, annuities can affect what you pay for that coverage and how you qualify for related programs like Medicaid.
If you’re nearing retirement or already enrolled in Medicare, it’s worth speaking to a qualified financial advisor and licensed Medicare broker who understands Medicare rules and how annuity income is treated for tax and premium purposes. With proper planning, annuities can complement your Medicare strategy and help you manage healthcare expenses throughout retirement.