Retiring Before Age 65? Get a Larger Affordable Care Act Healthcare Subsidy!

Transcript: 

Hey guys, Mike Frontera here back with another Retirement Theory video! 

You know, one of the more interesting consequences of the pandemic is the surge of people looking more seriously at early retirement. Of course, one of the biggest challenges retirees that face, particularly those retiring before the Medicare age of 65, is securing affordable health insurance.

And that challenge however has become far more manageable since the advent of the Affordable Care Act, or ACA, and even more so since the recent passage of the American Rescue Plan Act. 

And since it’s now open enrollment for health insurance, what better time to plan for new coverage for the new year. So, let's talk about what you can do before year end to make your 2022 health insurance premiums more affordable.

Of course, one of the best ways of getting affordable coverage through the ACA is by getting a premium tax credit, otherwise known as a subsidy. And the size of your subsidy is based on your income. 

Let's start by defining what the ACA considers for income for purposes of providing a premium subsidy. So your premium subsidies are based on what is called your modified adjusted gross income or MAGI. Basically, that’s just your gross income for tax purposes, and modified by several items as listed below.

• So we take off 
  • Alimony paid (for divorces finalized before 1/1/2019)
  • Pre-tax traditional IRA and retirement plan contributions
  • Deductible educator expenses (for teachers)
  • HSA contributions
  • 1/2 of self-employment tax (for self-employed people, of course)
  • Self-employed health insurance deduction (for self-employed)
  • Student loan interest deduction
• And then we need to add back in
  • All Social Security benefits (including those non-taxable benefits), but not SSI
  • Tax-exempt interest from municipal bonds
  • And excluded foreign income

Now, I want to point out some things here. Notice that you can reduce your MAGI by making contributions to a retirement plan, an IRA, SEP IRA or solo 401K. Note too, HSA contributions. There’s a lot of plans in the ACA market place that are HSA eligible. So not only could the HSA get you a tax deduction, but you might qualify for more money off your premiums by contributing too!

On the other side, note the items that must be added back into your income. You early SS claimers, pay particular attention to note that your Social Security benefits in full are counted toward your income for ACA purposes, whether or not they are taxable on your returns.

Alright, now let’s see how ACA premiums correspond to various MAGI levels.

So what you're looking at here is a chart showing your MAGI on the left and the percentage of MAGI that you’ll be expected to pay toward your premiums on the right. You'll see a percentage for the income and a percentage of FPL, which stands for federal poverty level, and I'll show you what those levels actually are in a minute. 

Here's a quick example based on a couple with an income at 300% of federal poverty level. You see here that in that scenario a couple would be required to pay 6% of their MAGI on premiums for what is known as a silver benchmark plan. 

Now I'm not going to get too deep into the weeds on what the different insurance plan levels available, but they basically follow a precious metals theme starting with the lowest benefits and premiums known as a bronze plan, then climbing to a silver, gold and finally a platinum plan. 

A benchmark silver plan is basically the second lowest cost plan at a silver level. And that is what those income percentages are based on.

So now, let's take a look at the federal poverty level, or FPL, guidelines for the 2022 plan year. You'll see that for a couple, you reach 300% of FPL at $52,260 of MAGI. Converting that to premiums, your contributions of 6% is $3135.60 or about $260 per month. 

One of the things you’ll notice are the American Rescue Plan enhancements that are currently in effect for just the 2021 and 2022 plan year. The percentage of your income that you’ll pay toward an ACA plan has dropped AND check this out – previously, once your income was over 400% of FPL, you got zero subsidy. Now, regardless of your income, you won’t pay more than 8.5% of your MAGI on a benchmark silver plan. Alright, so then how then do we manage that income level in order to qualify for the biggest subsidy possible? 

Well, let’s pull up the income criteria once more and make some plans, with our pals Ernie and Carol! 

• Ernie and Carol are both retiring at the end of 2021 and will be 64 years old in 2022
• They need to net $72,000 per year (or $6000 per month) to make ends meet
• They have $700,000 saved in an IRA assets and $50,000 in a savings account
• Finally, they both have SS benefits, that if collected next year would be $2,000 per month each

Ernie and Carol realize that if they keep their MAGI to $52,260, they can get a great plan for both of them at a very reasonable cost. So how do they do that and still net out $6,000 per month? Well, there are many ways to get it done, so let’s look at a couple:

1. Well first, they could draw completely off of their savings account. That would get them a little over $4,000 per month. Then their income would be very low and they could pull the remaining roughly $2,000 per month from their IRA assets. The $24,000 from their IRA is actually lower than their standard deduction for taxes, so they wouldn’t even owe tax on the IRA withdrawal. Problem there is then they’ve spent all of their emergency savings.
2. Or – what if Ernie and Carol planned ahead a little bit? They notice that in 2021 their $75,000 of income from working has them in the relatively low 12% tax bracket. So they’ve decided to accelerate some IRA withdrawals this year to be used next year. They see that they have enough room in that 12% bracket to pull an extra $27,272, which after withholding 12% for taxes, nets them $24,000. So now, in 2022, they draw out of those proceeds $2,000 per month. They also claim Carol’s SS of $2,000 per month, and draw another $2,000 per month from their IRA funds. The IRA withdrawals are low enough that they pay no income taxes, plus they keep their $50,000 in emergency funds. And of course, they end up with affordable health insurance for both of them and live happily ever after!

Now, a word of warning on this strategy. You can easily do yourself more harm than good by messing around with your income without knowing the consequences. There is often a long-term tax tradeoff for keeping your income artificially low in a given year, and this should be weighed against the premium subsidy benefit. Or perhaps worse, if you’re in one of the 12 states without expanded Medicaid and you end up with an income level that’s too low, you could end up actually not being eligible for any ACA subsidies and instead being pushed to Medicaid. Of course, Medicaid has an asset test, which you may very well not qualify for either. 

So, do you have questions for me? Come visit me at www.retirementtheory.com or send me an email at mike@retirementtheory.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning. Once again, thank you for joining me, we’ll see you next time.