Retiring Early? Here’s How to Keep Your Health Insurance Affordable
By Mark Yatros
Many of us dream of saying “Goodbye!” to the 9-to-5 grind before we reach the traditional retirement age. However, a concern I hear routinely from my clients is the rising cost of health insurance and how to pay for it between when they retire and when they reach Medicare age.
My experience is that while retiring before you’re eligible for Medicare can make managing healthcare costs challenging, it’s possible to keep those expenses in check. My colleagues and I at Allegiant Wealth Strategies often advise our clients on how to do this. (FYI: We also can advise retirees on how to keep their income low to avoid higher Medicare premiums.)
For example, we advised one couple with more than a million dollars in assets (including inherited assets) who wanted to retire by the time they were both 58. In their first year of retirement in 2022, we suggested they each take $12,000 in taxable income from their retirement accounts.
The couple’s $24,000 income, along with $5,000 earned by one of them from a small side job, meant they had a modest taxable income of $29,000. That $29,000 income allowed them to qualify for premium tax credits on the Affordable Care Act’s Marketplace that brought their insurance premiums down to just $116 a month.
Since 2022, we’ve guided the couple as they’ve taken strategic withdrawals from their retirement accounts. This strategy has kept their taxable income low while they still enjoy affordable healthcare coverage. Even though their premiums have risen since 2022, the savings from tax credits ensure they are still paying far less than many others in similar situations.
You may wonder how the couple got by on such a small income. Thankfully, since we’d been planning with them for some time, they could take withdrawals from accounts that had already been taxed, such as Roth IRAs, savings accounts, and investment accounts. Withdrawals from these accounts do not count as taxable income, allowing them to access additional funds without increasing their taxable income and jeopardizing their eligibility for premium tax credits on the ACA Marketplace.
By using funds from these tax-free sources in combination with their taxable income, they can maintain a higher standard of living while keeping their reported income low enough to benefit from ACA subsidies. This strategy helps them manage both their cash flow and their healthcare costs effectively.
Can you do this, too? I can’t say until we look at your situation, but following is an overview of how you may be able to manage your income to maximize tax credits for Medicare and the ACA Marketplace.
Understanding income-based tax credits
A fundamental part of the Affordable Care Act is income-based tax credits to help you pay for health insurance. For Medicare and the ACA Marketplace, these tax credits are designed to make healthcare more affordable by basing the amount of help you get on how much money you make each year. The less you earn, the more help you can potentially receive.
To qualify for these tax credits, your income needs to be within a specific range, which is determined by your Modified Adjusted Gross Income (MAGI). MAGI is a measure of your income that includes your adjusted gross income (AGI) plus certain deductions like tax-free foreign income and student loan interest. The government uses your MAGI to decide if you’re eligible for tax credits and how much you can get.
Marketplace income limits
Marketplace income limits generally increase each year. For 2024, households with incomes within 100% to 400% of the Federal Poverty Level are eligible for premium tax credits that lower the cost of health insurance purchased through the Marketplace. The income range for a single person is approximately $14,580 to $58,320 annually. For a family of two, the income range is roughly $19,720 to $78,880 annually.
You may also qualify for tax credits if you have a higher income. Under the American Rescue Plan Act (extended by the Inflation Reduction Act through 2025), people with incomes above 400% of the Federal Poverty Level can still qualify for tax credits if the cost of their healthcare plan exceeds a certain percentage of their income, usually around 8.5%.
Medicare income limits
For Medicare, your income primarily affects the premiums you pay for Medicare Part B (medical insurance) and Part D (prescription drug coverage). These are adjusted through the Income-Related Monthly Adjustment Amount (IRMAA). Standard Medicare Part B and D premiums apply for individuals with a MAGI up to $103,000 and couples with a MAGI up to $206,000.
As your income increases, so do Medicare Part B and D premiums. The income levels that apply to Medicare premiums can get complicated, so it is best to seek the assistance of an experienced financial professional like the advisors at Allegiant Wealth Strategies. Please contact us here or call (269) 218-2100 to schedule a no-strings-attached consultation.
Strategies for managing your income in retirement
As I explained above, managing your MAGI in retirement becomes a key strategy for keeping healthcare costs low, especially when qualifying for tax credits on the ACA Marketplace.
One way to lower your MAGI is by carefully managing withdrawals from tax-advantaged accounts like IRAs or 401(k)s. Instead of taking large distributions at once, you can spread out smaller withdrawals over several years. This lowers your taxable income and helps you stay within the income limits to qualify for premium tax credits. Also, if you have a Health Savings Account, you can tap into those funds for qualified medical expenses without affecting your taxable income.
Timing your income is also essential in retirement. For example, if you’re taking Social Security benefits or withdrawing from retirement accounts, it’s necessary to consider the best time to take those distributions. Deferring withdrawals or adjusting the timing of when you take certain payouts can help you stay under the income thresholds that qualify you for healthcare tax credits. Careful planning ensures you don’t inadvertently push your income too high, which could cause you to lose those valuable credits.
Additionally, charitable contributions can be an excellent tool for lowering your taxable income in retirement. If you make donations to qualified charities, you can deduct those from your income, potentially increasing your eligibility for premium tax credits. If you have significant assets, this is a smart way to give back to causes you care about while keeping your healthcare costs down.
Get guidance for your best way forward
Determining how to keep your taxable income low is as individual as you. It’s best to meet with an experienced financial advisor who can assess your situation and advise you on what’s best for you.
My colleagues and I at Allegiant Wealth Strategies are happy to meet with you for a free, no-strings-attached consultation. Please contact us here or call (269) 218-2100 for an appointment.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
Allegiant Wealth Strategies offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Allegiant Wealth Strategies has offices in Battle Creek and Portage, Michigan, from which we serve Calhoun County, Kalamazoo County, and Kent County (Grand Rapids). The Allegiant Wealth Strategies team offers no-obligation financial planning consultations; call 269-218-2100 or contact us here.