His Inflation-Protected Bonds Added $10,000 to Principal. Medicare Could Raise His Premiums Before He Cashes Out
A retiree who never sold a single bond could still face a surprise Medicare surcharge two years later, and the culprit is income he never actually received in cash.
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Imagine a 66-year-old retiree holding Treasury Inflation-Protected Securities (TIPS) in a taxable brokerage account. He hasn’t sold any, but inflation has added $10,000 to their principal in 2026. The Internal Revenue Service (IRS) generally treats that increase as income he must report for the year. His bonds pay interest every six months, but the added principal stays invested. It could still raise his Medicare premiums in 2028.
Whether this matters depends on where your income already sits. The Centers for Medicare & Medicaid Services (CMS) says income-related surcharges affect roughly 8% of people with Part B. In 2026, they begin above $109,000 for single filers and $218,000 for married couples filing jointly. Those figures illustrate the risk; the 2028 thresholds haven’t been announced. An inflation adjustment can push someone into a surcharge for the first time or move an existing surcharge higher.
How TIPS Create Taxable Income Without a Sale
TIPS principal adjusts with inflation, measured by the CPI, which rose 3.7% in the year through September 2026. In a taxable brokerage account, an increase generally counts as taxable interest for that year, even though the added principal stays in the bond. The IRS calls this original issue discount, or OID, and the amount is reported on Form 1099-OID.
He receives the adjusted principal when the bond matures, or he can sell earlier at its market price. Meanwhile, the amounts he reports as income increase his cost basis: the investment amount used to calculate his taxable gain or loss. That keeps the same increase from being taxed again when he sells or the bond matures.
A $10,000 Adjustment Can Trigger a $1,148 Surcharge
Social Security bases the income-related monthly adjustment amount (IRMAA) on modified adjusted gross income (MAGI): adjusted gross income plus tax-exempt interest. Taxable TIPS inflation adjustments enter that calculation as interest income. Social Security generally looks back two tax years, so his 2026 income would ordinarily determine his 2028 surcharge.
Suppose he files single and has both Part B and Part D. His income for Medicare purposes totals $105,000 before the inflation adjustment, including his pension, taxable Social Security benefits, IRA withdrawals and regular bond interest. The $10,000 adjustment raises it to $115,000. Using 2026 brackets for illustration, that moves him across the first surcharge threshold.
| Scenario | MAGI | Total Part B premium (monthly, per person) | Part D surcharge (monthly, per person) |
|---|---|---|---|
| Without TIPS adjustment | $105,000 | $202.90 | $0.00 |
| With $10,000 adjustment | $115,000 | $284.10 | $14.50 |
| Next level | Over $137,000 through $171,000 | $405.80 | $37.50 |
At 2026 rates, crossing that line costs him $1,148.40 a year in surcharges. IRMAA works as a cliff: going one dollar over $109,000 triggers the full first-tier charge (one of several Medicare surcharges we mapped in a free guide to the program’s hidden bills). A married couple filing jointly faces the same cliff at $218,000, and each spouse on Medicare pays the surcharge.
The inflation adjustment alone gives him no grounds for relief through Form SSA-44. A separate qualifying event, such as retirement, reduced work hours or a spouse’s death, could support a request if it lowers the income Social Security uses. He can also seek a correction if the agency used incorrect tax information. Simply receiving taxable income without cash does not qualify.
Inside an IRA, the Same Bonds Stay Off Your Return
Inside a traditional IRA or 401(k), the annual TIPS adjustment generally creates no current taxable income for the account owner. Taxable withdrawals can raise his Medicare income later, and required minimum distributions eventually limit his control over the timing. Holding the bonds there postpones the income; it doesn’t necessarily eliminate the surcharge.
Series I savings bonds offer another timing option. Owners can generally defer reporting interest until redemption or final maturity, whichever comes first, though they can choose annual reporting. Newly issued I bonds bought from May through October 2026 earn a 4.26% annualized composite rate for their first six months. Older I bonds can have different rates.
Act Before December 31 Locks In Your 2026 Income
- Estimate your taxable adjustment now. Ask your brokerage for a year-to-date estimate rather than waiting for Form 1099-OID in early 2027. Include it, without double-counting, in your projected adjusted gross income, then add tax-exempt interest. The 2026 thresholds can help illustrate your exposure, but they cannot tell you exactly what your 2028 premiums will be.
- Review other income before year-end. If you don’t need the cash now, consider whether an optional IRA withdrawal or investment sale can wait until January. Capital losses can offset capital gains, but they don’t offset unlimited amounts of TIPS interest: net losses generally reduce other income by no more than $3,000 a year. Qualified charitable distributions require age 70½, so this 66-year-old cannot use them yet.
- Project 2027 before your next TIPS purchase. TIPS in a taxable account add income again in every year inflation rises. If your projection shows another trip over the cliff, compare buying future TIPS inside an IRA against the tax cost of selling the bonds you already own.
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Gerelyn Terzo is the author of dividend investing handbook "Dividend Investing Strategies: How to Have Your Cake & Eat It Too." A veteran financial journalist, she covers agri-finance for outlets like Global AgInvesting and the broader stock market and personal finance for 24/7 Wall Street. She began at CNBC and later helped launch Fox Business in New York. Gerelyn currently resides in Woodland Park, Colorado and dabbles in nature photography as a hobby.
