One of the most common misconceptions is the belief that you have to work until age 65 solely due to the cost of healthcare coverage in retirement. Although the full out-of-pocket costs can be quite expensive, advanced premium tax credits (APTCs) can dramatically lower the cost of healthcare coverage during retirement if you understand how to properly maximize this benefit.
Advanced Premium Tax Credits
When the Affordable Care Act (ACA) was passed in 2010, APTCs were included in the legislation, for the purpose of making health insurance affordable for individuals and families. Originally, these credits were only available if your income was between 100% and 400% of the federal poverty level, which for the 2024 tax year was between $14,580 and $58,320. The system was historically punitive, because you received a substantial credit if your income was at 399% of the poverty level, but at 401% you lost the entire credit.
However, under the Inflation Reduction Act (IRA), there is no maximum income limit to receive premium tax credits through tax year 2025. Once your income is over 400% of the federal poverty level you must contribute 8.5% of your income towards your premiums.
Retirees and pre-retirees should assume the Inflation Reduction Act will sunset as scheduled in 2025, and plan accordingly. If you earn 400% of the poverty level after the Inflation Reduction Act expires, you’re only going to be able to use the Affordable Care Act marketplace. The only other way to lower your out-of-pocket costs up front will be to choose a Bronze health plan (which has lower costs than Silver, Gold, and Platinum plans) or a high deductible health plan (HDHP)—but either way, you need to be prepared to have to pay out-of-pocket expenses. These lower-premium plans are wonderful when you’re healthy, but they come with higher copays and deductibles.
Income Planning
For retirees under age 65, a key financial goal is to keep their taxable income as low as possible. This means deferring the start of distributions from Social Security and available pension plans, as well as IRA distributions/Roth IRA conversions.
Although low-income years may seem like a prime time to convert some or all of your IRA to a Roth IRA, it may be best to reserve the conversion for the years between ages 65 and 70, when you are eligible for Medicare, but not yet receiving Social Security payments.
These pre-65 years are a good time to use some of your after-tax dollars for living expenses, but you still have to be weary of capital gains. Make sure you have built up a war chest of loss carryovers to offset gains. You can also focus on selling assets with lower capital gain exposure as these gains can push up your income, and lower your credit eligibility.
Another tricky item to understand is that the government uses your Modified Adjusted Gross Income (MAGI) and not your Adjusted Gross Income (AG) to determine your income. MAGI takes into account your tax-exempt interest, foreign earned income, and the non-taxable portion of Social Security, and these additional sources of income need to be kept top of mind when planning your income distributions necessary to meet healthcare expenses.
Reducing Your Income
If you are still working and qualify, you can still make a deductible IRA contribution to lower your taxable income. Although you may be in a lower tax bracket, negating a big tax break, the real goal at this stage is simply to reduce income in order to qualify for additional healthcare credits.
Enrolling in a HDHP would make you eligible for a Health Savings Account (HSA), allowing you to lower your income through an HSA contribution. In 2024, individuals can contribute up to $4,150 to their HSAs and families can contribute up to $8,300.
Planning Ahead
Depending on the U.S. state where you live, the maximum premium tax credit to which you are entitled can vary. Online calculators like this one can help you and your financial advisor understand how much you may be able to receive, based on the expected MAGI and the number of people in your household.
When planning for your retirement years, work with your advisor to understand how you can fully maximize a lower tax bracket and healthcare options. If healthcare costs were a significant concern to you, consider these strategies to potentially retire earlier than planned.
Bob Peterson, J.D., is a senior wealth advisor with Crescent Grove Advisors, an employee-owned boutique wealth management firm serving ultra-high-net-worth individuals and families, as well as institutions, foundations and endowments.