IRS Limits on Pension Benefits
The IRS limits the annual pension benefit from a defined benefit plan to the lesser of: 100% of the participant’s final average compensation, or $280,000 per year (2025). The compensation limit caps the salary used in calculations at $350,000. These limits affect very few public employees — most reach maximum replacement rates (often 80–90% of salary) before hitting the IRS ceiling. The limits primarily affect highly compensated executives with very generous plan formulas.
The Medicare IRMAA Threshold
2025 Medicare IRMAA surcharges by income level — pension income counts toward MAGI
| MAGI (Individual) | Medicare Part B Premium (2025) | Part D Surcharge | Annual Extra Cost |
|---|---|---|---|
| Below $106,000 | $185.00/mo (standard) | $0 | $0 |
| $106,001–$133,000 | $259.00/mo | $12.90/mo | $888/yr extra |
| $133,001–$167,000 | $370.00/mo | $33.30/mo | $2,220/yr extra |
| $167,001–$200,000 | $480.90/mo | $53.80/mo | $3,575/yr extra |
| $200,001–$500,000 | $591.90/mo | $74.20/mo | $4,885/yr extra |
| Above $500,000 | $628.90/mo | $81.00/mo | $5,335/yr extra |
A retired fire captain with a $8,000/month ($96,000/year) pension plus Social Security benefits of $18,000/year has MAGI of $114,000 — triggering $888/year in Medicare premium surcharges. A pension of $120,000/year combined with $24,000 in Social Security puts MAGI at $144,000, triggering $2,220+/year in additional Medicare costs.
Social Security Taxation by Income Level
Up to 85% of Social Security benefits become taxable when combined income exceeds $44,000 for married couples ($34,000 for individuals). Pension income counts fully toward this threshold. A retired teacher with $3,500/month pension ($42,000/year) plus $1,800/month Social Security ($21,600/year) has combined income of $63,000 — meaning up to 85% of her Social Security is taxable. This effectively reduces the value of Social Security as pension income grows.
Pre-retirement Roth IRA conversions reduce future taxable income because Roth withdrawals don’t count toward IRMAA MAGI or Social Security taxation thresholds. Converting Traditional IRA/457b funds to Roth in your 50s at lower rates can save thousands annually in Medicare premiums and Social Security taxes.
Calculate Your After-Tax Pension Income
Project your pension, add estimated Social Security, and model your actual take-home income after federal taxes and Medicare premiums.