I often hear when I first meet with someone that the only reason they are still working is to pay for health insurance until they can get on Medicare at age 65. No doubt health insurance when you are in your late 50s and early 60s is quite expensive. A private insurance plan through the marketplace (HealthCare.Gov) for a 62 year old couple living in Topeka runs from a whopping $21,420 a year to an astronomical $37,788 a year, depending on the plan chosen. That’s even the cheaper non smoker rates. If you smoke or are older than 62, the rates will be even higher. What might be even more outrageous than the price of the cheapest insurance possible is the deductible on it, which is a staggering $16,000! Seeing this kind of sticker shock it is no wonder that so many believe they can’t afford to retire early solely because of the exorbitant cost for private health insurance.
The thing is, though, that health insurance can actually be cheaper if you retire early if you do proper planning and it’s been that way now for over a decade. The key to cheap, or free, healthcare if you retire early is knowing how the tax credit subsidies work for health insurance and how to be strategic on where you get your income from before turning 65. With good planning, a 62 year old married couple could receive a massive $27,228 a year in free tax credit money to pay for their health insurance. That’s more than what many of the plans even cost in the health insurance marketplace, effectively making the health insurance completely free.
In order to be eligible for the full amount you need to have the amount of income that shows up on your tax return (but not necessarily the income you pay tax on or actually have) to be around $18,000. The higher your income goes up, the more this tax credit shrinks. In the past if your income got too high you would go from getting a large tax credit to nothing at all if your income was just $1 too high and over the threshold. One of the few good things (in our opinion) for retirees that came from the stimulus bill number 3 (called the American Rescue Plan) signed into law in March 2021 is the elimination of this threshold cliff. Instead of the subsidy suddenly ending it now slowly decreases as income goes up. Even if you have a six figure income, you’ll still get a subsidy of some sort now. The lower the income that shows up on your tax return, though, the larger the subsidy will be as long as it is not too low. If it is too low you get nothing at all.
Here is where smart tax planning ahead of time comes into play. If you were to take money from a pension buyout, IRA, 401k (or other company retirement plan like a TSP, 457 or 403b) and switch that money over to a Roth ahead of time you can still have a high actual income while having a low amount show up on your tax return. This will then allow you to get a larger health insurance tax credit subsidy that could fully pay for your insurance. The reason behind this is that any money that comes out of a Roth does NOT show up anywhere on your tax return. From the government’s perspective, it is as if the money no longer exists once it goes to a Roth. A person can take enough out of their investments that have taxes on them (like 401ks, IRAs, and pension buyouts) to get the maximum tax credit for insurance and take the rest of the income they want and need from the Roth. This is something we have been helping people do to allow them to retire earlier for years.
Great retirement planning is much more than just picking investments. There are many moving parts when it comes to income planning, tax reduction planning, tax credit planning, when to start Social Security, etc. that all interrelate and change when you go from working and earning paychecks to retiring and wanting playchecks. Far too many people end up paying more than their fair share in taxes (and/or miss out on tax credits) and work for longer than they actually need to just because they either don’t know about how best to navigate all of these complex topics or aren’t well informed. If you’re putting off retiring just because of potential health insurance costs you likely don’t have to. Schedule a time to talk with us at The Retirement Team if you’re in this situation, if you’d like to save on taxes in retirement, and/or need help with figuring out how to get the most out of Social Security. We strive to help people do the best they can in all financial aspects of retirement including, but not just, investments.
Material discussed is meant for general/informational purposes and is not intended to be used as the sole basis for any financial decisions, nor be construed as advice to meet your particular needs. Please consult a financial professional for further information.